Doctrine of Ultra Vires in Memorandum of Association under company law
It is a Latin term made up of two words “ultra” which means beyond and “Vires” means power or authority. So we can say that anything which is beyond the authority or power is called ultra vires. Doctrine of ultra vires is a fundamental rule of Company Law. This concept was introduced in the United Kingdom in 1612. The Doctrine of Ultra Vires implies that the company should confine its activities within its stated objects. Thus it is meant to restrict the powers of the company to go beyond its object clause.
The doctrine of ultra vires was applied for the first time in India in Jahangir R. Modi v. Shamji Ladha. The Bombay High Court held that purchase of a joint stock company by directors was ultra vires the Memorandum of the Company. The Company had not authorised them to enter into such deals.
An act which is ultra vires, is void and does not bind the company. The Doctrine of ultra vires is defined in various cases. The Doctrine of ultra vires is well illustrated by the House of Lords decision in Ashbury Railway Carriage & Iron Company v. Riche AIR 1875 :
- The objective clause of the Railway Carriage company expressly stated that the company could make, sell or lend railway carriage and wagons.
- In the year 1864, the company got contract from the belgium government wherein they were required laying down railway tracks.
- The company already had many contracts. Therefore, it delegated the work to Riche.
- Riche was not having sufficient funds for the project. Therefore, the Railway carriage company contracted to finance Riche for the completion of the project.
- The company later refused to finance Riche for the project.
- Being aggrieved, Riche sued the Railway Carriage Company.
Judgment
The court decided the case in favour of the Railway Carriage Company. The court ruled that a company cannot exceed its Memorandum of Association (MOA) and enter contracts beyond its object clauses. It rejected Riche’s argument, stating that any contract outside the company’s objectives is void ab initio and cannot be ratified by the board. This made the contract between the Railway carriage Company and Riche invalid and unenforceable in court.
The Hon’ble Supreme Court of India upheld the Doctrine of ultra vires, in its decision in A. Lakshamanaswami Mudaliar v. Life Insurance company AIR 1963 SC 1185. In this case, the court emphasized that a company must operate within the confines of its MOA, adhering strictly to its stated objects. It clarified that the MOA, like any legal document, should be strictly to its stated objects. The court deemed the resolution to donate funds ultra vires, rendering it void and unratifiable, regardless of shareholders consensus. Directors involved in such actions incur personal liability, necessitating reimbursement to the company.
The court dismissed the appeal and held that resolution was beyond the MOA and ultra vires and the company will be personally liable to refund the amount.
The doctrine of ultra vires in Companies Act 2013
Section 4(1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated in the memorandum of the company.
Whereas Section 245(1)(b) of the Act provides to the members and depositors a right to file a application before the tribunal if they have reason to believe that the conduct of the affairs of the company is conducted in a manner which is prejudicial to the interest of the company or its member or depositors, to restrain the company from committing anything which can be considered as a breach of the provisions of the company’s memorandum or articles.
Exceptions to the Doctrine of Ultra vires
There are some exception to this doctrine which are as follows:-
- An act which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form.
- An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting.
- If the company has acquired any property through an investment which is ultra vires, the company’s right over such a property shall still be secured.
- While applying the doctrine of ultra vires the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Companies Act.
- If an act of the company is ultra vires the articles of association, the company can alter its articles in order to validate that act.
When can an ultra vires act be ratified?
- 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.
- 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 power 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 or void.
- 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 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.
Consequences of ultra vires Transactions
- Injunction
When there is a possibility that company has taken or is about to undertake an ultra vires act, the members can restrain it from doing so by getting an injunction from the court. (Attorney General v. London County Council AIR 1907).
- Directors may be held personally liable
The directors have a duty to ensure that all corporate capital of the company is used for a legitimate purpose only. If such funds are diverted for a purpose which is not authorized by the memorandum of the company, it will attract a personal liability for the directors. (Trevor v. Whitworth).
- Ultra Vires Contracts
It has been stated earlier that ultra vires contracts are void ab initio and therefore cannot become valid by ratification or by estoppel. In such cases the question involved is not as to the legality of the contract but that of the competency and power of the company to make it. In case of any ambiguity in the memorandum of a company, it should be interpreted against the company and in favour of public in general. (National Telephone Company v. The Constable of St. Peter Port).
- Property acquired through ultra vires dealings
Where company’s money has been utilized in ultra vires dealings in order to acquire certain property, the company’s right over such property shall remain secured.
- Breach of Warranty
The directors being the agents of the company can do nothing which the company itself cannot do under its memorandum of association and therefore, any contract which is ultra vires the company will be void and without any effect whatsoever. as such, directors must act within the limits of the company’s powers. If they do not, they would personally liable for breach of warranty. (Weeks v. propert).
- Liability for ultra vires acts under Tort law
A company liable in torts if it is shown that the activity in course of which the alleged tort has been committed falls within the ambit of memorandum of the company and the tort was committed by the servant within the scope of his employment.
Conclusion
It is necessary to protect the interest of the creditors and investors. Any irregular or winding up of the company. This may cause considerable losses to them. So to protect the interest of the investors and the creditors, specific provisions are made in the memorandum of the company which defines the objective of the company.
