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.

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.

Table of Content

  • Doctrine of Ultra Vires
  • Applicability of Companies Act, 2013 on Ultra Vires Transaction
  • Landmark Cases
  • Difference between an Ultra Vires and an Illegal Act
  • Exceptions to the Doctrine of Ultra Vires
  • Conclusion
  • Frequently Asked Questions (FAQs)

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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....

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....

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....

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....

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?...