INTRODUCTION: 

A company is accustomed to act on the powers provided in its charter documents that are, Memorandum of Association and Articles of Association. So a company cannot do anything which is beyond the powers expressly or impliedly conferred by the memorandum of association and if a company does any act in contravention of powers prescribed then such act is considered null and void and is ultra vires act. This is popularly known as Doctrine of Ultra Vires.

In the case of Eastern Countries Railway v. Hawk(1885), Lord Cranworth explained the doctrine as, that a company incorporated by Act of Parliament for special purpose cannot apply its funds to any object which are unauthorized by terms of its incorporation, however desirable such application appears to be.

FACTORS ON BASIS OF WHICH IT CAN BE DECIDED WHETHER A TRANSACTION IS ULTRA VIRES THE COMPANY:

• If a transaction is outside the capacity of the company, such transaction is ultra vires.
• If a transaction is in excess or in abuse of the company’s powers, such transaction is ultra vires.

            But, a crucial point to be taken note of is that though the objects or power are not expressly provided or written in Memorandum, however, the power is incidental to express objects or power of Memorandum then such powers are implied powers and are consequently intra vires.

SHAREHOLDER’S RIGHTS IN RESPECT OF ULTRA VIRES ACT:

• An ultra vires contract is null and void;
• In respect of ultra vires allotment of shares, a shareholder can get back the money which he paid to the company ;
• Where an ultra vires act is undertaken or about to be undertaken, therein members can get an injunction ordered against the company.

EFFECTS OF ULTRA VIRES TRANSACTION:

• Such acts are void ab initio and the company is not bound by such acts, neither the company can sue nor can be sued upon.
• Directors will be held personally liable for all the ultra vires acts which are done by the company.
• An injunction order can be passed against the company to restrain it from undertaking such acts.

The doctrine of ultra vires has proved to be a dark cloud for adventurous directors and careless creditors and sometimes companies themselves seek to bypass it. As held in the famous celebrated case of Ashbury Railway Carriage and Iron Co. Ltd. V. Riche(1875) that a contract that is ultra vires the company is void ab initio having no legal effect. It cannot become intra vires under estoppel, a lapse of time, ratification, or delay. Moreover, an ultra vires contract cannot become intra vires even if every shareholder had ratified such contact.

Although the doctrine protects the investors in the company by assuring that their money will be utilized only in those activities which are specified in Memorandum. It also ensures the creditors of the company that assets will not be utilized in unauthorized activities but it results in occasional injustice also. The innocent creditors have to suffer due to this doctrine and it also prevents members from ratifying or changing its activities, even if they all agree.  

As in Re. Jon the Beaufort case, it was held that where the business carried on by the company is known to the third party, and even so, whether he knew it or not, such business is ultra vires and the third party would be unable to sue the company. It was also held that a company cannot do anything which is beyond its legal power simply by going to the court and consenting to the decree which orders that the thing shall be done.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.