A Brief Introduction on Doctrine of Ultra Vires
The term Ultra Vires is derived from the Latin word meaning “ beyond the powers of”. The object clause of the Memorandum of Association of the company includes an object for which the company is established. An act of the company should not be beyond the clause else it will be ultra vires and therefore void and cannot be resolved even if all the shareholders of the company wish to resolve. The rectification is not possible even if the shareholders pass a special resolution with the majority of the votes. The doctrine of Ultra vires is said to have originated intending to protect the interest of the shareholders of the company.
What does Doctrine of Ultra Vires Mean?
The term Ultra Vires is derived from the Latin word meaning “ beyond the powers of”. Any transaction or activities beyond the scope of the company or the authority endowed upon the custodian of the company will come under the scope of the doctrine of ultra vires and can be criticized accordingly.
The concept of the doctrine of ultra vires was first introduced in the United Kingdom in 1612. The concept of the doctrine of ultra vires enables the men to determine whether the action is legitimate or illegitimate. This concept has been elaborated by the judges in various judgments over a given period. In the case, of Sutton Hospital of the year, it was stated that the doctrine of ultra vires will not be applied for any action or transaction of chartered accountant, even though such corporations are corporate personalities with a separate and distinct identity.
In 1612, the companies used the documents known as the “royal charters' ' to incorporate the company and give them a separate and distinct identity from its owners in the eyes of law. Such a royal charter retains similar rights as a natural human being such as the right to sue or to be sued without any physical exhibition. Therefore in the case of Sutton Hospital of the year, even though the company had a separate legal existence in the eyes of law, the doctrine of ultra vires did not apply. This case is considered as an exception to the doctrine of the ultra vires and its scope.
What is the Purpose of Doctrine of Ultra Vires?
The Doctrine of Ultra Vires is introduced to safeguard the creditors and investors of the company. The doctrine of Ultra vires prevents the company from using the money of the investors other than those mentioned in the object clause of the memorandum. Hence, both the investors and company must be assured that their investment will not be used for the objects or activities which they did not have specified at the time of investing money in the company. This ensures that the funds of the investors won't be dispersed in unauthorized activities by the company. The wrongful use of a company's assets may result in the insolvency of the company, a situation where the creditors of the company are not being paid.
The doctrine of the company prevents the wrongful use of the company’s assets thereby protecting the creditors. Also, the doctrine of ultra vires prevents directors from diverting the object for which the company has been formed out, and hence constantly examining the activities of the directors. It helps the directors to know within what lines of business they are eligible to act.
Scope of Doctrine of Ultra Vires
The doctrine of ultra vires applies only to those companies that have been incorporated or have a separate existence in the eyes of law. All those companies that have not been registered such as sole proprietorship or partnership will not fall under the scope of the doctrine of ultra vires. Only the companies that are incorporated or have a separate existence in the eyes of law come under the scope of the doctrine of ultra vires.
Every illegal transaction or abuse of power by directors or employees of a company will not come under the scope of the doctrine of ultra vires. Only the transactions that are beyond the scope of what a company can do will be liable under the scope of the doctrine of ultra vines. What a company can do or the purpose of the company is always mentioned in the object clause of the Memorandum of Association of the company. Therefore, if the company is exceeding the authority it has mentioned itself in the object clause of the Memorandum of Association will be criticized under this doctrine.
What are the Exceptions to the Doctrine of Ultra Vires?
Following are the few exceptions to the doctrine of ultra vires:
Any act which is within the scope of the object clause of the company but outside the authorities of directors can be authorized by the directors.
The shareholders retain the authority to approve an ultra vires act performed in an irregular way in the company.
If the company acquires any property using an ultra vires investment, even then the company's right over that property can be defended.
Any incidental or serious effects of an act shall not be considered as ultra vires unless it is expressly prohibited by the statute.
What are the Consequences of Doctrine of Ultra Vires?
The Doctrine of Ultra Vires's consequence states that any act done or contract made by the company which goes beyond the powers of the directors and company is completely void and inoperative and hence not binding on the company. By Considering this all, a company can be restrained from using these funds for purposes other than those sanctioned by the memorandum. Also, it can be restrained from carrying out any trade different from the one it is authorized to carry out.
What are the Effects of Doctrine of Ultra Vires?
Following are the four effects of the doctrine of ultra vires:
Injunction
The members of the company can issue an injunction against the company to prevent it from engaging in any ultra vires activities.
Ultra Vires Contract
As we know that ultra vires contract is the void ab initio which implies that it cannot be provided with a legal status even by ratification or estoppel. The question here rests on the company's competency and authority regarding the contract but not its legality.
Liability of The Company
There are no principles regarding the company’s liability against the damages resulting from the ultra vires act. However, the tortious liability may arise if it is verified with the believable explanation that the activity in the duration of which the ultra vires act or the tort occurred falls within the scope of the Memorandum of Association. It occurred during the duration of employment.
Breach of Warranty
The acts that a company cannot perform as mentioned under Memorandum of Association., the directors being the agent of the company are also prohibited from performing such acts. Hence, the contracts that are regarded as ultra vires the company will be void. The directors must act within the scope of the company’s power as contrary actions could hold the directors personally liable for their breach of warranty.
FAQs on Doctrine of Ultra Vires: Explained
1. Where does the doctrine of ultra vires apply?
The doctrine of ultra vires applies to corporate organizations such as a government department or a local council, and a limited company, so that any act was done by the corporate organization beyond its capacity to act will be considered void. Although a corporate body is an entity identified by the law, having a separate legal personality, the similarity with a real person can straightforwardly never be completed.
2. What is the main aim of the doctrine of ultra vires?
The main aim of the doctrine of ultra vires is to protect the interest of the investors and creditors of the company from suffering from any kind of issues that the company is responsible to pay. In 1866, the doctrine of ultra vires was first accepted in the case of Jahangir R. Modi vs Shamji Ladha in India.
