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.
Origin of Doctrine of Ultra vires
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.
Doctrine of Ultra Vires
The object clause of the Memorandum of the company contains list of the object for which the company formed. Company must not act beyond the object clause of memorandum of association. If company acts beyond the object clause then its ultra vires. If the contract entered into is a ultra vires contract, then it becomes void and cannot ratified by shareholders also. This known as Doctrine of Ultra Vires.
This doctrine got its roots firm in 1875 in case of Ashbury Railway Carriage and Iron company ltd. v. Riche. Thus the expression ultra vires means an act beyond the powers. An ultra vires act is void and cannot ratified even by majority of shareholders. Even if special resolution passed by shareholder with majority of votes, then also its ratification cannot happen. Where a company exceeds its power as conferred by objects clause, its not bound by it because it lacks legal capacity to incur responsibility for the action.
Basic principles included the following:
- An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified.
- The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction fully performed by one party
- A fortiori, a transaction fully performed by both parties could not attacked.
- The contract fully executory, the defense of ultra vires might also raised by either party.
- If the contract partially performed, and the performance held insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred available.
- If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.
EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES
Following are the exceptions to Doctrine of Ultra Vires:
- An act intra vires of the company but outside the authority of the directors may ratified by the shareholders.
- An act intra vires of the company but done in an irregular manner. It can turn into valid by shareholders consent.
- If the company has acquired any property through an investment, ultra vires of the contract, the company’s right over such a property shall still secured.
- While applying doctrine of ultra vires, the effects incidental or consequential to the act shall not invalid unless they expressly prohibited by the Company’s Act.
- There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For example, a business company can raise its capital by borrowing.
- If an act of the company is ultra vires the articles of association, the company can alter its articles in order to validate the act.