The Memorandum of association serves as a constitution for a company and includes the object clause among other regulations. The object clause lays down the objectives for which the company has been formed and defines the scope and area of the company’s operations. Any act of the company that is beyond these objects is called ultra vires, or null and void. Such an act cannot be ratified by the directors even if they wish to and this is called the doctrine of ultra vires. The word ‘ultra’ means beyond and ‘vires’ means power. Hence ‘ultra vires’ meaning is an act of the company which is beyond the powers given to the company via the objects specified in the MOA of the company. Let’s explain the doctrine of ultra vires in detail.
The doctrine of ultra vires is a fundamental law of the Indian Companies Act. It lays down that if any act of the company or any contract entered into by the directors, on behalf of the company, is beyond the powers vested in the directors and company by the object clause of the MOA, it is considered null and void. Such null and void acts/contracts are not legally binding on the company. The term ‘ultra vires’ applies to those acts that are performed beyond the legal powers stipulated under the objects clause.
The doctrine of ultra vires limits the acts of the company within the boundaries set by the objects clause of the MOA. Hence the company
Must use the funds of the company only for purposes specified in the MOA
Must carry on a business/ trade that has been specified in the MOA
The doctrine of ultra vires acts as a safeguard for the creditors and investors of the company as it prevents the company from using the money of the investors for any purpose other than those mentioned under the objects clause. The creditors are also assured of the fact that the funds of the company will not be utilized in any unauthorized trade/business or activity. It also acts as a check on the activities of the directors who must act within the scope of powers given to them by the MOA.
Any acts or contracts that are ultra vires cannot be held legally binding for the company. The company cannot pursue legal recourse to recover any money for any goods or services offered under an ultra vires contract. An ultra vires borrowing will not be legally binding upon the company and cannot be enforced by an outsider in the court of law.
Estoppel, the lapse of time, acquiescence, delay or ratification cannot turn ultra vires act into ‘intra vires’ in all cases.
Any act that is done in an irregular manner but is otherwise intra-vires the company, can be validated/ratified by the shareholders of the company.
Any act which ultra-vires the directors of the company but is otherwise intra-vires the company can be ratified by the shareholders of the company.
If any act is ultra vires the articles of the company, then the articles of association of the company can be altered by a special resolution to validate the act.
Case Law: Shuttleworth vs Cox Brothers and Company, Limited, and Others
Even if a property acquisition by the company is ultra-vires, the right of the company over such property will stay secured.
Any incidental or consequential effect of the ultra-vires act will not be invalid unless explicitly prohibited by the Companies Act.
If any action is intra vires the Company’s Act, it will not be considered ultra-vires even if it is not expressly stated in the memorandum.
There are primarily four Types of Ultra Vires Acts :
Acts that are ultra vires to the Companies Act- Such acts are void-ab-initio and cannot be ratified in any situation.
Acts that are ultra vires to the Memorandum of the company- They cannot be ratified even by shareholders as they are void-ab-initio.
Acts that are ultra vires to the Articles of the company but intra-vires the company- They can be ratified by the shareholders by making alterations in the articles to that effect.
Acts that are ultra vires to the directors of the company but intra-vires the company- They can be ratified by the company and will then become binding.
Q1. Is an Ultra Vires Act considered illegal?
Ans: There is a difference between an ultra vires act and an illegal act although both are considered void. Any act of the company which is beyond the objects clause will be considered void even though the act by itself may be legal. On the other hand, an illegal act that is not ultra vires will still be considered void.
Q2. What is the origin of the Doctrine of Ultra Vires?
Ans: The doctrine of ultra vires came into being with the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche that is considered an excellent example of ultra-vires. In this case, the company had entered into a contract with M/s Riche for financing the construction of a railway line. Later the directors repudiated the contract as being ultra vires. Though the shareholders of the company ratified the contract, it was still held null and void. The term ‘general contracts’ in the MOA of the company was deemed to be related to mechanical engineers and not to every kind of contract. The contract was declared null and void on this ground.
Q3. What are the effects of Ultra Vires?
Ans: The effects of the Doctrine of Ultra Vires are :
They are null and void-ab-initio ( from the inception)
An ultra-vires cat cannot be made intra-vires through estoppel or ratification
The members can restrain a company from undertaking an ultra-vires act (like an ultra-vires borrowing) by getting an injunction from the court
If the funds of the company are utilized for purposes other than those specified in the MOA, the directors of the company can be held personally liable. Such an action can also be initiated by a shareholder.
An example of an ultra vires act can be understood through the case law Jehangir. R. Modi vs Shamji Ladha.