Doctrine of Ultra Vires

Section 2 (20) of Companies Act, 2013” “Company” means a company incorporated under companies Act. The company has different and distinct personality from its members. It also has no strictly technical or legal meaning. A body corporate or corporation includes a company incorporated outside India, but does not include a co-operative society registered under the law relating to co-operative societies, and any body corporate which the Central Government may, by notification, specify for this purpose. “Company” word derived from two words: “com”- group and “panies”- bread. Therefore, it means group that eat their bread together. Company has two important documents and they are memorandum and Articles of Association. In memorandum of association of the company, there is a object clause. If company goes beyond its object then the act is Ultra Vires in eyes of law.

Doctrine of ultra vires has provides protection to the investors and creditors o the company. The doctrine of ultra vires could not established its roots. It established its roots in 1875 when the Directors, and Company, of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 as decided by the House of Lords. A company called “The Ashbury Railway Carriage and Iron Company,” incorporated under the Companies Act, 1862.
 Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653
A company called “The Ashbury Railway Carriage and Iron Company,” incorporated under the Companies Act, 1862. The objects listed in the object clause of memorandum of association were :
to make, and sell, or lend on hire, railway carriages and waggons,
and all kinds of railway plant, fittings, machinery, and rolling-stock;
to carry on the business of mechanical engineers and general contractors ;
purchase, lease, work, and sell mines, minerals, land, and buildings;
to purchase and sell, as merchants, timber, coal, metals, or other materials,
and also to buy and sell any such materials on commission or as agents.

The directors agreed to enter into contract to construct a railway line in Belgium. The contract was between The Ashbury Railway Carriage and Iron Company and Hector Riche. The contract was for supplying the materials required for construction of Railway lines.

The objects under the object clause of this company were to supply and sell the materials required to construct railways. It does not cover construction of railway lines. The contract here was to construct a railway. That was contrary to the memorandum of association. So the contract was Ultra Vires to the company.

As held by House of Lords that this contract was ultra vires not only of the director but also of whole company. Even if majority of shareholder ratify it, then to it can not change. It will still remain ultra vires of the whole company.

Memorandum of association is considered to be the constitution of the company. It sets out the internal and external scope and area of company’s operation along with its objectives, powers, scope. A company is authorized to do only that much which is within the scope of the powers provided to it by the memorandum. A company can also do anything which is incidental to the main objects provided by the memorandum. Anything which is beyond the objects authorized by the memorandum is an ultra-vires act.

Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
Where one party has entirely performed his part of the contract, reliance on the defense of the ultra-vires was usually precluded in the doctrine of estoppel.
Where both the parties have entirely performed the contract, then it cannot be attacked on the basis of this doctrine.
Any of the parties can raise the defense of ultra-vires.
If a contract has been partially performed but the performance was insufficient to bring the doctrine of estoppel into the action, a suit can be brought for the recovery of the benefits conferred.
If an agent of the corporation commits any default or tort within the scope of his employment, the company cannot defend it from its consequences by saying that the act was ultra-vires.

Ultra-vires acts can be generally of four types:
Acts which are ultra-vires to the Companies Act.
Acts which are ultra-vires to the Memorandum of the company.
Acts which are ultra-vires to the Articles of the company but intra-vires the company.
Acts which are ultra-vires to the directors of the company but intra-vires the company.
Acts which are ultra-vires to the Companies Act-
Any act or contract which is entered by the company which is ultra-vires the Companies Act, is void-ab-initio, even if memorandum or articles of the company authorized it. Such act cannot be ratified in any situation. Similarly, some acts are deemed to be intra-vires for the company even if they are not mentioned in the memorandum or articles because the Companies Act authorizes them.
Acts which are ultra-vires to the memorandum of the company-
An act is called ultra-vires the memorandum of the company if, it is done beyond the powers provided by the memorandum to the company. If a part of the act or contract is within the authority provided by the memorandum and remaining part is beyond the authority, and both the parts can be separated. Then only that part which is beyond the powers is considered as ultra-vires, and the part which is within the authority is considered as intra-vires. However, if they cannot be separated then whole contract or act will be considered as ultra-vires and hence, void. Such acts cannot be ratified even by shareholders as they are void-ab-initio.

Acts which are ultra-vires to the Articles but intra-vires to the memorandum-

All the acts or contracts which are made or done beyond the powers provided by the articles but are within the powers and authority given by the memorandum are called ultra-vires the articles but intra-vires the memorandum. Such acts and contracts can be ratified by the shareholders (even retrospectively) by making alterations in the articles to that effect.

Acts which are ultra-vires to the directors but intra-vires to the company-
All the acts or contracts which are made by the directors beyond the powers provided to them are called acts ultra-vires the directors but intra-vires the company. The company can ratify such acts and then they will be binding.

If the borrowed funds of the company are used for any ultra-vires purpose, then directors of the company will be personally liable to make good such act. If the company acquires any property from such funds, the company will have full right to such property.
No estoppel or ratification can convert an ultra-vires borrowings into an intra-vires borrowings, as such acts are void from the very beginning. As no debtor and creditor relationship is created in ultra-vires borrowings only a remedy in rem and not in personam is available.

Any act which is done irregularly, but otherwise it is intra-vires the company, can be validated by the shareholders of the company by giving their consent.
Any act which is outside the authority of the directors of the company but otherwise it is intra-vires the company can be ratified by the shareholder of the company.
If the company acquires property in a manner which is ultra-vires of the contract, the right of the company over such property will still be secured.
Any incidental or consequential effect of the ultra-vires act will not be invalid unless the Companies Act expressly prohibits it.
If any act is deemed to be within the authority of the company by the Company’s Act, then they will not be considered as ultra-vires even if they are not expressly stated in the memorandum.
Articles of association can be altered with retrospective effect to validate an act which is ultra-vires of articles.

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