Company’s Corporate Legal Capacity: Problems of the Ultra Vires Rule, Modern Shift and Position of Bangladesh

Abstract

The traditional ultra vires rule has been applied to restrict the corporate capacity of an incorporated entity. It is a ‘legal person’ that can function only within the defined objects of its constitution. Long experience of applying this rule shows that the doctrine served no positive purpose (e.g. limiting the company’s transactions to some precise line of the stated objectives in its constitution), rather it produced many unsatisfactory states of affairs and difficulties like operating as a fetter on company’s new business opportunities, risk of company’s transaction being treated as void in court’s proceedings interpreting it “outside the company’s constitution” and is unenforceable. Thus, the parties in a corporate transaction are always at risk to suffer irremediable loss if at any stage either of the parties renounces the contractual obligation. For the said and many other unsatisfactory results of the traditional ultra vires rule, many developed countries have either completely abolished it from their company law or greatly limited its applications to some statutorily defined cases only. But Bangladesh still retained the century’s old outmoded tradition, even though recently the Companies (Amendment) Act 2020 passed. In the array of the vast literature on this particular issue and a great number of legislative reform proposals in many other countries and instances of their legislative reforms, it is not understandable in the legislative policy of Bangladesh for retaining it. This article analyses the historical factors behind applying this rule, the irrationality of those considerations, and its present time irrelevance.