Explanation of Doctrine Of Ultra Vires with Landmark Case Law
Doctrine of Ultra Vires
‘Ultra’ means ‘beyond’ and ‘vires’ means ‘powers’. The term ultra vires for a company means acts
which are beyond the legal power and authority of the company, if an act is ultra vires it does not
create any legal relationship and such an act is absolutely void and cannot be binding even if the
whole body of shareholders ratifies it, this rule is called as the doctrine of ultra vires. When there is
any deviation from the object clause will prove to be ultra vires and hence void. Any act which is
beyond the scope of object of the company as stipulated in the Memorandum of Association (MOA)
is ultra vires and the same is void as ultra vires acts cannot be ratified by the members of the
company and all such acts would be treated as null and void. Nonetheless the company may carry
out acts which are necessary and incidental to attain the objects of the company. A company has the
power to do all such acts which are, essential to the attainment of its objects specified in the
memorandum, authorised by the Companies Act, 2013 and reasonably and fairly incidental to its
objects and everything beyond this is ultra vires the company.
The following important points are also required to be considered in this regard
- An act which is ultra vires the AOA but intra vires to MOA can be ratified by amending the Articles.
- An act which is ultra vires the powers of the director but intra vires the powers of the company can be ratified by the company.
- The act which falls within the powers and object of the company but has been done irregularly can be validated by the shareholders.
The rule of ultra vires was for the first time laid down by the House of Lords in Ashbury Railway
Carriage Company case.
Ashbury Railway Carriage and Iron Co. Ltd V Riche
In Ashbury Railway Carriage and Iron Company was incorporated and in its memorandum the objects of the company were as to make and sell or lend on hires railway carriage and wagons, to carry on the business of mechanical engineers and general contractors and to purchase, lease, work and sell mines, minerals, land and buildings. The company entered into the agreement for financing the construction of a railway line in Belgium with Riche and all the members ratified the agreement.
Later on the company repudiated the contract and subsequently stopped the funds on the ground that it was ultra vires the company and consequently Riche instituted a suit for damages for the breach of contract against the company. Contentions raised by Riche were that the contract was well within the meaning of words ‘general contractors’ and therefore within the power of the company and the contracts were ratified by the majority of the shareholders.
It was Held by the House of Lords that the contract was beyond the objects stated in the
Memorandum of Association. The term general contractors indicate those contracts which are
connected with the business of mechanical engineers. Even if all the shareholders or members agree
or desire to make contract valid it would amount to go beyond the objects of the memorandum.
Hence, the court held it to be ultra vires.
Exceptions to the Doctrine Of Ultra Vires
- 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 shareholders of the company.
- If the company acquires property in a manner which is ultra vires of the contract and the right of the company over such property will still be secured.
- If any act is deemed to be within the authority of the company by the Companies Act and then it 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.
- Any incidental or consequential effect of the ultra vires act will not be invalid unless the Companies Act expressly prohibits it.