Doctrine of Ultra Vires: Meaning, Applicability, Cases and Exceptions

Every company formed under the Companies Act, 2013 or any previous company law has the object clause in the Memorandum of Association of the company. This object clause includes all the purposes or objects for which the company is established. A Memorandum of Association (MoA) is a supreme document. In other words, a Memorandum of Association (MoA) is the constitution of a company and no act can go beyond the object clause as stated in the Memorandum of Association. It has been presumed by the law, that powers in nature are restricted and limited. Any act outside the scope of the Memorandum of Association is considered void and such an act will be ultra vires.

Geeky Takeaways:

• A Memorandum of Association is considered a supreme document, and any act done beyond the object clause will be treated as void.
• The term Ultra Vires is made up of two terms, ultra means beyond, and vires means power or authority. Thus, the expression refers to any act which is done by the company outside the powers as conferred by the object clause.
• Any act done outside the scope of the Memorandum of Association (MoA) shall not be legally binding on the company.
• The Doctrine of Ultra Vires has been established for the protection of the investors and creditors of the company.
• The Doctrine of Ultra Vires draws a clear line beyond which directors and officials of the company are not authorized to act or perform any contract.

Doctrine of Ultra Vires

The Doctrine of Ultra Vires is a fundamental rule established in the Company Law. The doctrines state that the objects of a company, which are specified in its Memorandum of Association, can be performed only to the extent permitted by the act. Hence, if the company does any act, or enters into a contract that is beyond the powers of the directors or the company itself, then the said act or contract will be declared void and it will not be legally binding on the company.

The Doctrine of Ultra Vires has been established for the protection of the investors and creditors of the company. The Doctrine of Ultra Vires prevents a company from deploying the money of the investors for a purpose other than those stated in the objects clause of its Memorandum of Association (MoA). With this doctrine, the investors and the company are assured that their investment will not be employed for any objects or activities that are not conferred to them. If any act is done outside the powers the same shall be ultra vires and considered as void.

It is worth noting that such an act cannot be resolved even if all the shareholders of the company wish to resolve the act. Even the rectification of the act is not possible even if the company passes a special resolution. As the Doctrine of Ultra Vires limits the company only to the objects specified in the memorandum, the company can be:

• Restrained from using its funds for purposes other than those specified in the Memorandum of Association.
• Restrained from carrying on trade different from the one authorized by the powers of the Memorandum of Association.

Furthermore, neither a company can sue on an ultra vires transaction nor it can be sued upon an ultra vires transaction. If a company supplies goods or offers services or the company lends money on an ultra vires contract, then it cannot obtain the payment for the supplied goods or services and can neither recover the loan. However, if a party lends loan money to a company that has not been extended yet, then such a party can stop the company from parting with it via an injunction. The lender party has this right because the company has not yet become the owner of the money as it is ultra vires to the company and the lender remains the owner of the amount. If in a case, the company borrows money to repay a legal loan through an ultra vires transaction, then in such a case, the lender party can recover the loan amount from the company.

Applicability of Companies Act, 2013 on Ultra Vires Transaction

The provisions laid down under Section 4(1)(c) of the Companies Act 2013, state that the memorandum of association should include all the matters to which the incorporation of the company is proposed and all the other incidental matters which are necessary for its furtherance.

Further, provisions laid down under Section 245 of the Companies Act, 2013 state that the members and depositors have the right to file an application before the tribunal. If depositors and members have reasons to believe, that the affairs of the company are conducted in a manner which are prejudicial to the interest of the company and its members or depositors, it can be considered as a breach of the object clause of the company’s memorandum or articles.

Landmark Cases

In the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1878), the company and M/s. Riche entered into a contract to finance the construction of a railway line. Later on, the directors rejected the contract on the grounds of it being an ultra vires transaction. Riche filed a suit to demand damages from the company. Riche claimed that the words “general contracts” in the objects clause of the company would include all kinds of contracts, and he argued that the company had all the powers and authority to enter into such kinds of contracts. Later, the majority of the shareholders of the company ratified the contract for financing the railway line. However, the directors of the company still refused to perform the contract, as according to them, the act was an ultra vires transaction, and even the shareholders were not in a position to rectify the same.

When it went up to the House of Lords, it was held that the contract was ultra vires the memorandum of the company, and it would be considered null and void. The term “General Contracts” was interpreted in connection with the words mechanical engineers, and it was held that the term only meant any such contracts that are related to mechanical engineers and it does not include every kind of contract. The House of Lords also stated that even if every shareholder of the company had ratified the act, it would be considered null and void as it was ultra vires the memorandum of the company.

Difference between an Ultra Vires and an Illegal Act

An ultra-vires act is different from an illegal act. Ultra vires and an illegal act can’t be used as synonyms for each other, as they are not. Anything that is outside the scope of the object clause of the company as specified in the memorandum of the company is ultra-vires. However, anything that is an offense of law and is considered a civil liability or is prohibited by law is considered an illegal act. An act that is ultra-vires may or may not be illegal, but both ultra-vires and illegal acts are void ab initio.

Exceptions to the Doctrine of Ultra Vires

1. An action or conduct that is within the scope of the object clause of the Memorandum of Association of the company, but, that is outside the authority of directors can be ratified by the shareholders.

2. The shareholders can rectify an intra-vires act that was not performed regularly in that specific company.

3. If the company acquires any property under the principle Doctrine of Ultra Vires, even then the company’s right over that acquired property shall be secured.

4. The consequential effect of an act shall not be taken into consideration as “ultra vires” unless it is expressly prohibited by the law.

5. If any act is deemed to be within the authority of the company as conferred by the Companies Act, then it will not be considered ultra vires even if it is not expressly stated in the Memorandum of Association (MoA) of the company.

6. Articles of Association (AoA) of the company can be altered with retrospective effect to rectify an act that is ultra vires of the Articles of Association.

Conclusion

The Doctrine of Ultra Vires has been established for the protection of the investors and creditors of the company. The Doctrine of Ultra Vires prevents a company from deploying the money of the investors for a purpose other than those stated in the objects clause of its Memorandum of Association. This doctrine draws a clear line beyond which directors and officials of the company are not authorized to act or perform any contract. It puts scrutiny on the activities of the directors and prevents them from acting beyond the objectives of the company as stated in the Memorandum of Association. In the landmark case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1878), it was held that an ultra vires act can’t be ratified by the shareholders and that the contract ultra vires the memorandum of the company, and hence, it will be considered null and void.

Frequently Asked Questions (FAQs)

1. What do ultra vires mean?

Answer:

The term Ultra Vires is made up of two terms: Ultra means beyond, and Vires means power or authority.

2. What is the Doctrine of Ultra Vires?

Answer:

The Doctrine of Ultra Vires is a fundamental rule established in company law. The doctrines state that the objects of a company, which are specified in its Memorandum of Association, can be performed only to the extent permitted by the Act. Hence, if the company does any act or enters into a contract that is beyond the powers of the directors or the company itself. Then the said act or contract will be declared void and will not be legally binding on the company.

3. Can a company be sued for an ultra vires transaction?

Answer:

No, neither a company can sue for an ultra vires transaction, nor can it be sued for an ultra vires transaction.

4. What is the difference between an ultra vires act and an illegal act?

Answer:

Anything that is outside the scope of the object cause of the company as specified in the memorandum of the company is ultra-vires. However, anything that is an offense of law and is considered a civil liability or is prohibited by law is considered an illegal act.

5. Can members report an ultra-virtual transaction?

Answer:

Section 245 of the Companies Act, 2013 states that the members and depositors have the right to apply to the tribunal if depositors and members have reasons to believe that the affairs of the company are conducted in a manner that is prejudicial to the interests of the company and its members or depositors, to prevent the company from committing anything that can be considered a breach of the object clause of the company’s memorandum or articles.