DOCTRINE OF ULTRA VIRES UNDER COMPANY LAW

INTRODUCTION

Every company must borrow funds for completing various projects. Borrowing is an indispensable part of a company day to day transactions. It's quite hard to find any company whose balance sheet does not have the borrowings in the liability clause. Borrowings can be of two types. Legal borrowings and illegal borrowings. There is a very thin line difference between illegal borrowings and borrowings beyond powers deemed as the doctrine of ultra vires. Many people confuse the doctrine of ultra vires is a synonym of illegal borrowings. But it's not true. This doctrine of ultra vires is legal in nature.

DOCTRINE OF ULTRA VIRES

Anything which is beyond the power of authority is called ultra vires. It is a Latin word, ultra means beyond and vires means power. In the context of the company, anything which is done by the directors of the company which is beyond their legal authority or outside the scope of the object of the company is ultra vires.

For the functioning of a country, the constitution is required. Likewise, for the systematic working of a company memorandum of association is required as it is the constitution of the company. It sets out the internal and external scope of a company’s operation along with the objectives, scope, and powers.

People often confuse between the doctrine of ultra vires and illegal act is same, while they are not. Anything which is beyond the power of the company but still legal in nature as mentioned in the memorandum of the company is ultra vires. Whereas anything which is offensive in nature or attracts civil liabilities or prohibited by law is illegal.

ASHBURY RAILWAY CARRIAGE AND IRON COMPANY (LIMITED) V HECTOR RICHE,[i]

The company was incorporated under the Companies Act, 1862. The object clause of the memorandum of association was:

• To manufacture, sell, or lend on hire, railway carriages, and wagons,
• All kinds of railway plant, fittings, machinery, and rolling stock,
• To carry on business on two grounds “general contractors” and “mechanical engineers”
• Lease, purchase, work, and sell minerals, lands and buildings, and mines,
• To purchase and sell, timber, coal, metal, and other materials.

The contract was between the Ashbury Railway Carriage and Iron Company and Richie. Director agrees to enter a contract to construct a railway line in Belgium.

After coming into the contract company realizes that the contract is ultra vires. The company enters a contract with Richie for financing the construction of a railway line. Richie brings a suit for breach of contract with two main arguments:

1. The term general contractor is wide enough to include all aspects.
2. The majority of shareholders were present and ratified the contract as its formation.

The object under the clause was to supply and sell materials to construct railways. It doesn’t cover the construction of railway lines, but the contract was for the construction of railway lines only. This was against the memorandum of association. So the contract was ultra vires to the company.

EFFECTS OF ULTRA VIRES

• Estoppel or ratification cannot change ultra vires act into intra vires act.
• The ultra vires acts are null and void ab inito which means to be treated as invalid from the outset.
• The company cannot sue or sue on these acts of ultra vires have not taken place at all.
• A remedy in injunction can be sought against the company preventing it from acting ultra vires the memorandum.
• It does not create a creditor-debtor relationship even though ultra vires is an act of borrowing or lending money.
• Personal liabilities of directors to see whether the investors’ money is utilized for the purpose laid down in a memorandum of associations.

EXCEPTIONS OF ULTRA VIRES

• The Authority of the directors may ratify by the shareholders.
• An act intra vires of the company done in a regular manner. It can turn into valid by shareholder’s consent.
• If the company acquired any property through an investment by ultra vires means, then the company’s right over such property still be secured.
• If the act of the company is ultra vires, the company can alter its articles of association to validate the act.

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.