¹ In the past this question was a source of controversy. It is interesting to note that the Israel Company Law Reform Committee which published its recommendations in 1953, did not propose that the ultra vires doctrine be abolished as “security must be given both to the shareholder and creditor of the company that their money will be used only for the purposes for which it was given”. (Report of the Company Law Reform Committee, 1953, p. 9.) For criticism of this recommendation see the excellent article of Dr.Yadin, , “Preliminary Contracts which Exceed the Powers of a Company” (1955–1956) 12 HaPraklit, 243, 250Google Scholar.

² According to this doctrine a company does not have the capacity to enter into a transaction which is ultra vires: see Ashbury Carriage Co. v. Riche (1875) L.R. 7, H.L. 653. This approach is closely linked to the idea that a company is a creation of the legislature which brings it into existence, an existence limited to those actions for which it was created: see Stevens, , Corporations, 2nd ed. (1949) 333.Google Scholar However, a partnership is also a creation of the legislature and the ultra vires doctrine does not apply to it. Similarly, a company founded in England by charter is a creation of the Crown and it has been held that the doctrine of ukra vires does not apply to such a company (see Sutton's Hospital (1613) 10 Co. Rep. la, 23a). It seems to me that a distinction must be drawn between a public corporation (such as a Municipal Corporation) and a commercial corporation. Public interest demands that a public corporation should not be able to exceed the powers given to it by statute and every act which exceeds these powers be void (see Het v. Haifa Municipality (1951) 5 P.D. 1557). The factor of public interest does not apply to the case of a commercial company.

³ For the difference between an excess in a company's powers and an excess in the powers of the directors see Malter v. Yoknam Cinema Co. Ltd. (1955) 10 P.D. 1494.

⁴ The real nature of the ultra vires doctrine is very often confused. It has been said, for instance, that it is ultra vires for a company to pay dividends out of capital or to buy its own shares. This is an incorrect use of the ultra vires doctrine: see Ashbury's Case, supra, p. 672. The fact that according to the ultra vires doctrine an innocent party cannot enforce his rights shows that the doctrine does not stem from the rules concerning an illegal contract. On the other hand, the law recog nizes application of quasi-contractual rights which are not recognized in the case ofan illegal contract.

⁵ See Yadin, cit., and the authorities quoted there.

⁶ See Gower, , Modern Company Law 2nd ed. (1957) 93Google Scholar; Gower, , “Company Law Reform” (1962) Malaya L.R. 36, 45Google Scholar; Lattin, , Corporations (1959) 176Google Scholar.

⁷ If the purpose of the doctrine is to protect the members of the company, this is inconsistent with the rule that a company cannot enforce an ultra vires transaction (see n. 46 infra). It has been argued that the purpose of the doctrine is to protect the creditors of a company as well (see Ashbury's Case, supra). If so it does not achieve its object, as a creditor of a company has no right to apply for an injunction to prevent a company from entering into an ultra vires transaction (see n. 69 infra).

⁸ See Carpenter, , “Should the Doctrine of Ultra Vires be Discarded?” (1923) 33 Yale L.J. 49CrossRefGoogle Scholar; Horrwitz, , “Company Law Reform and the Ultra Vires Doctrine” (1946) 62 L.Q.R. 66Google Scholar; Stevens, , “A Proposal as to the Codification and Restatement of the Ultra Vires Doctrine” (1927) 36 Yale L.J. 297CrossRefGoogle Scholar; Ballantine, , “Questions of Policy in Drafting a Modern Corporation Law” (1931) 19 Cal. L.R. 465, 473CrossRefGoogle Scholar.

⁹ See Ham, , “Ultra Vires Under Modern Corporate Legislation” (1958) 46 Ky L.J. 215Google Scholar.

¹⁰ In Ashbury's Case the emphasis was placed on the interpretation of the Companies Act as a basis for the ultra vires doctrine. The House of Lords was of the opinion that recognition of an ultra vires transaction would be inconsistent with the provisions of the Companies Act in force at the time, according to which there was no way of changing the objects of a company, laid out in its memoran dum of association. According to this line of thought, when the law relating to the alteration of the objects clause in the company's memorandum was modified, the approach towards the ultra vires doctrine should have been modified as well, but the courts did not take this line. It would seem, therefore, that the inter pretation of the Companies Act does not form the real basis of the ultra vires doctrine. This conclusion is of great theoretical importance when dealing with the question of the reception of English Law in Israel.

¹¹ See Stevens, op. cit. 347. As to the question whether the purpose of the doctrine is to protect the creditors see n. 7 supra and n. 72 infra.

¹² See n. 7 supra.

¹³ As to the creditors see n. 72 infra.

¹⁴ See the report of the Company Law Reform Committee under the chairmanship of Judge Zeltner. One must distinguish between this report and the previous report published in 1953 (see n. 1 supra) by a committee also headed by Judge Zeltner. The second Zeltner Committee will be referred to in this article as the Committee.

¹⁵ See generally Gross, , “New Trends in Company Law (In Light of the Zeltner Report)” (1966) 22 HaPraklit 490, 496Google Scholar. The recommendations of the Committee are largely based on the suggestions of Professor Gower for the reform of Company Law in Ghana (see Procaccia, , note on Bell Houses Ltd. v. City Wall Properties Ltd. (1967) 2 Is. L.R. 110)Google Scholar and on section 6 of the American Model Business Corporation Act.

¹⁶ The Committee's Report, sec. (a) p. 5.

¹⁷ Some of the suggestions were only accepted by the majority (see p. 6).

¹⁸ The Committee's Report, sec. (a) p. 5.

¹⁹ Ibid.

²⁰ Ibid.

²¹ See Carpenter, loc. cit.

²² See Stevens, op. cit. 331.

²³ See Horrwitz, loc. cit.

²⁴ Another question is that of a company's capacity to do acts which by its very nature it has no power to peprform: see Procaccia, , The Corporation: Its Nature and Its Formation, 1965, p. 41 (in Hebrew)Google Scholar.

²⁵ See Montrose, , “The Apparent Authority of an Agent of a Company” (1934) 50 L.Q.R. 224, 236Google Scholar.

²⁶ See Campbell, , “Contracts with Companies” (1959) 75 L.Q.R. 469, 471.Google Scholar

²⁷ See Stevens, loc. cit.

²⁸ Another example could well refer to the powers of a court to rescind a contract ultra vires the company. According to the Committee's recommendation(see n. 18 supra) a court may rescind a contract if it “seems right and just” to do so. May the court take into account as one of its considerations that the third party has constructive notice of the contents of the memorandum and articles of thecompany?

²⁹ See the Committee's Report, p. 5.

³⁰ The term “limited capacity” is used to mean capacity to do acts which are intra vires and these acts alone. For a different use of the term “limited capacity” see Procaccia, op. cit. p. 41–42.

³¹ As to the existing law see Ashbury's Case, supra.

³² A judge who accepts the doctrine of “limited capacity” may, in the future, resort to the grounds which in the past served as the basis for the ultra vires doctrine, and may rely on the fact that the amendment altered only the law concerning the case of a third party who did not know about the lack of authority. A judge who does not accept this doctrine will bring the reasons given in the past for rejecting it, and will point out that the proposed amendment is based on the assumption that the doctrine of “limited capacity” is no longer founded, since if it were foundedthere could be no explanation why the knowledge of a third party should influence the capacity of a company to enter into a contract. In this context the latter judge could pointout the difference between the old law according to which the third party's knowledge is of importance in border-line cases when the act may be intra vires or ultra vires, and between the (incorrect) view that a third party's knowledge gives capacity to thecompany where it does not exist.

³³ See n. 18 supra.

³⁴ For the application of the doctrine of constructive notice in the law of agency see Campbell, loc. cit.

³⁵ See Gower, , Modern Company Law 2nd ed. (1957) p. 141Google Scholar.

³⁶ This is not the place to deal with the question whether in addition to real and ostensible authority there is a third type of authority, namely, usual authority. Even if Gower is right when he says that this third type of authority is recognized, especially in the law of companies, and even if there is a basis for this type of authority in the Agency Law, 1965—which is highly doubtful—it should be remembered that one of the elements of this authority is that the third party who contracted with the company had no notice (either actual or constructive) that those acting on behalf of the company were exceeding their actual powers: see Powell, , The Law of Agency (1951) p. 82Google Scholar.

³⁷ See Thompson, , “Company Law Doctrines and Authority to Contract” (1956) 11 U. of Toronto L. J. 248, 252CrossRefGoogle Scholar.

³⁸ See Powell, op. cit. p. 66.

³⁹ See Malter's Case, n. 3 supra.

⁴⁰ This argument finds some support in a few sections of the Committee's report. The Committee point out that their recommendations as to the rejectionof the doctrine of constructive notice of the company's memorandum are confined to cases enumerated in section A, which refers to acts inconsistent with the company's objects, and not to an excess of authority by those acting on behalf of the company. Furthermore, the Committee state in this same section that rejection of the doctrine in the cases outlined in sub-section (a) constitutes “an exception to the doctrine of constructive notice, a doctrine generally accepted by the Committee.”

⁴¹ This is not the place for dealing with the question of constructive notice in company law. On the face of it there seems to be no justification for changing the rules of agency when dealing with a company. A third party who does not have actual notice of the lack of real authority, and is not deemed to have possessed such notice (i.e. was not negligent), may rely on the rule of ostensible authority. What justification is there for not applying this rule when the principal is a company? For the place of the doctrine of constructive notice in Company Law see Gower, , “Company Law Reform” (1962) 4 Malaya L.R. 36, 45Google Scholar; Stevens, , Corporations 2nd ed. (1949) 336Google Scholar.

⁴² In rejecting the idea of “limited capacity” it is, in my opinion, worthwhile adopting a provision similar to that of sec. 4 of the Draft Billfor a Company Law prepared by Dr. U. Yadin, Ministry of Justice (1957) (in Hebrew) which states: “From registration the company will be a legal entity capable of every duty, right and legal action”, or of sec. 7 of the American Uniform Business Corporation Act which states:

“A Corporation which has been formed under this Act, or a Corporation which existed at the time this Act took effect and of a class which might be formed under this Act, shall have the capacity to act possessed by natural persons, but such a Corporation shall have authority to perform only such acts as are necessary or proper to accomplish its purposes, and which are not repugnant to law.”The last part of the section is confusing and superfluous. As far as it refers to illegal acts it is superfluous. As far as it refers to acts which comply with the objects of the company, it is incorrect to say that the company does not have authority to act in a manner which is inconsistent with the objects laid out in its memorandum.

As far as constructive notice is concerned it is possible to adopt the provision of sec. 10 of the American Uniform Business Corporation Act which states:

“The filing or recording of the articles of incorporation, or amendments thereto, or of any other purpose pursuant to the provision of this Act, is required for the purpose of affording all persons the opportunity of acquiring knowledge of the contents thereof, but no person dealing with the corporation shall be charged with constructive notice of the contents of any such articles or papers by reason of such filing or recording”.

⁴³ See n. 40 supra.

⁴⁴ See n. 18 supra.

⁴⁵ See Furmston, , “Who Can Plead that a Contract is Ultra Vires” (1961) 24 M.L.R. 715CrossRefGoogle Scholar; Procaccia, op. cit. 112.

⁴⁶ [1965] 3 All E.R. 427.

⁴⁷ [1966] 2 All E.R. 674. Also see Procaccia, op. cit.

⁴⁸ See n. 18 supra.

⁴⁹ As to the correct phrasing of this principle, I think that it would be preferable to avoid the positive wording adopted by the Committee and to phrase itin the negative, following the line adopted by many States which have similar provisions in their law (see Ham, loc. cit.). If we accept the wording of the Committee we are likely to reach certain results which they had not intended. This may be illustrated bythe following examples: The memorandum of Company X states that the object of the Companyis trading in real estate. In practice the Company trades in motor spare parts. The Company's director makes a contract with a third party for the purchase of spare parts for the Company. The third party does not know that the Compapny is trading in a manner inconsistent with its objects, but he knows that the director who entered into the contract with him was not authorized to do so without the consent of the other directors and that this consent was not obtained. Logic demands that the Company should not be liable, and this was no doubt the intention of the Committee. However, from the language adopted by the Committee, this is by no means free from doubt as the Committee states that “an act done in excess of the objects contained in the memorandum will bind the company in itsrelationship with third parties”. The contract made by the director does not conform to the objects laid out in the memorandum, and it should therefore apparently bind the Company. In the same section mentioned above it is stated that an act will not bind the company if a third party has actual knowledge that the act does not conform to the objectsof the company, but this paragraph is not relevant in the present context, for in the example given the third party does not know that the Company has exceeded its powers. He imagines that the Company is acting within its powers. In order to avoid this undesirable result, it should be laid down that the fact that an act is ultra vires does not, of itself, exempt the company or the third party from the liability which would have been imposed upon it had the act been in compliance with the company's objects. Rejection of the ultra vires doctrine should not grant rights or impose duties which are not granted or imposed by the ordinary rules of agency.

⁵⁰ See n. 18 supra.

⁵¹ See Powell, op. ct. 97 et seq.

⁵² Ibid.

⁵³ See Gower, , Modern Company Law 2nd ed. (1957) 497et seq.Google Scholar

⁵⁴ Sec. 50 of the Civil Wrongs Ordinance, 1947.

⁵⁵ See Gower, op. cit. 90.

⁵⁶ It seems to me that this liability for damage should not be confined to the directors of the company, but should be imposed on any official or agent who acts on its behalf.

⁵⁷ Causing damage, by itself, is not a tort according to the existing law. On the other hand, from the wording adopted by the Committee it would seem that a new tort is to be recognized—causing damage to a company by an ultra vires act.

⁵⁸ See n. 18 supra. Pennington takes the view that the directors are liable towards the company even if they were not negligent. The authorities cited by him do not support this proposition. In these authorities the reference is to good faith and not to negligence: see Pennington, , The Principles of Company Law (1959) 339Google Scholar.

⁵⁹ It is often possible to overcome this result by phrasing the objects clause in the memorandum in a subjective manner, that is to say, by laying down that the objects of the company include, inter alia, any object which the directors think it fit to implement in order to attain the other objects. Such a clause was recognized as valid in Bell Houses Ltd. v. City Wall Properties Ltd. [1966] 2 All E.R. 674; and see the note in (1966) 83 S.A.L.J. 461. In the absence of such a clause liability will be imposed, according to the recommendation of the Committee, upon a director who was not negligent in recognizing that the act was ultra vires.

⁶⁰ See n. 18 supra.

⁶¹ See n. 83 infra.

⁶² See n. 18 supra.

⁶³ See n. 18 supra.

⁶⁴ See Gower, op cit. 498; Pennington, op. cit. 412.

⁶⁵ The difficulty arises because of the doctrine laid down in Houldsworth v. City of Glasgow Bank (1880) 5 App. Cas. 317; see Gower, op. cit. 538. For a view that in suitable circumstances there is room for compensation see Wedderburn, , “Shareholder's Right and the Rule in Foss v. Harbottle” [1957] C.L.J. 196, 211Google Scholar.

⁶⁶ See Procaccia, , “Problems of Legislation in Company Law” XVI Scripta Hiero-solymitana 155Google Scholar.

⁶⁷ See n. 18 supra.

⁶⁸ See Pennington, op. cit. 69 and the authorities cited by him.

⁶⁹ See Mills v. Northern Railway of Buenos Aires Co. (1870) 5. Ch. App. 621.

⁷⁰ See Lawrence v. West Somerset Mineral Rail Co. [1918] 2 Ch. 250; Cross v. Imperial Continental Gas Association [1923] 2 Ch. 553.

⁷¹ See Ashbury's Case, supra.

⁷² For another view see Stevens, op. cit. 345.

⁷³ See Mills' Case, n. 69 supra, p. 628.

⁷⁴ See, for example, sec. 20 of the new Australian Companies Act which limits the right to apply for an injunction to a secured creditor.

⁷⁵ See Cal. Corp. Code Am., sec. 303 (b) (Deering 1953). Also see Ballantine, , “Proposed Revision of the Ultra Vires Doctrine” (1927) 12 Cornell L.Q. 453Google Scholar; Ballantine, , “Changes in the California Corporation Laws” (1929) 17 Cal. L.R. 529, 532CrossRefGoogle Scholar; Ballantyne, , “Questions of Policy in Drafting a Modern Corporation Law” (1931) 19 Cal. L.R. 465, 473–75CrossRefGoogle Scholar.

⁷⁶ See n. 18 supra.

⁷⁷ If the third party knows that the company has exceeded its powers there is no need to apply to the court to rescind the contract, since the company may then raise the defence of ultra vires (see n. 18 supra). The provision with which we are dealing applies only when the third party did not know that the company was exceeding its powers.

⁷⁸ This state of voidability continues until the contract is executed. Once the contract has been executed the court no longer has the power to rescind it.

⁷⁹ See Ballantine, , “A Critical Survey of the Illinois Business Corporation Act” (1934) 1 U. of Chi. L.R. 357, 382CrossRefGoogle Scholar.

⁸⁰ This point is not free from doubt, but I think that our interpretation is the correct one. According to the wording of the Committee the court has power to rescind the contract and grant indemnity only as far as acts mentioned in sec. 5 are con cerned. This section applies to acts which the court has ordered the company to refrain from doing, on the application of a member of the company or of a creditor. The third party may not apply for an injuction, unless he is deemed to be a creditor of the company, an interpretation which seems far-fetched.

⁸¹ See the article of Ballantine referred to in n. 79 supra.

⁸² See n. 18 supra.

⁸³ See Procaccia, , in (1967) 2 Is. L.R. lll, 119Google Scholar.

⁸⁴ See n. 77 supra.

⁸⁵ Any sum which the company is forced to pay to a third party (both as present damage or future damage) is part of the company's damage which the company is entitled to recover from the director. According to the recommendation of the Committee a company is not liable for the future damage of the third party and the director is therefore not liable to indemnify it for this sum.

⁸⁶ See Procaccia, in (1967) 2 Is. L.R. lll, 118Google Scholar.

⁸⁷ See comment, “Liability Insurance for Corporate Executives” (1967) 80 H.L.R. 648; comment, “Public Policy and Director's Liability Insurance” (1967) 67 Col. L.R. 716.

⁸⁸ See Stevens, op. cit. 301 et seq.

⁸⁹ See Barak, , “The Status of a Corporation in the Law of Torts” (1966) 22 HaPraklit 198, 207Google Scholaret seq.

⁹⁰ The Committee speaks of liability for a “transaction” (Recommendations 1 and 2—n. 18 above) which would seem to imply that it does not refer to a large part of the law of torts. In another place the Committee refers to an “act” (Recom mendations 3, 4, 5 and 6—n. 18 supra), which may be interpreted to include a tort.

⁹¹ See Ham op. cit.