Doctrine of Ultra-Vires

Introduction:             A company, which owes its incorporation to statutory authority, cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the statute or memorandum of association.  The company should devote itself only to the objects set out in the memorandum and to no others. It is the function of the memorandum. "to delimit and identify the object in such plain and unambiguous manner as that the reader can identify the field of industry within which the corporate activities are to be confined" Any purported activity beyond such powers will be ineffective even if agreed to by all the members.  This rule is commonly known as doctrine of Ultra Vires.

Meaning:                    The word 'Ultra' means beyond and the word 'Vires' means the powers. Ultra Vires therefore means beyond the powers, so when used with reference to a company, it means beyond the powers of the company.  The powers of a company are essentially derived from the statute, constituting it and the memorandum of association. The rule of Ultra vires was for the first time laid down by the House of Lords in Ashbury Rly. Carriage & Iron Company v. Riche, 1875.

Ashbury Rly. Carriage & Iron Company v. Riche, 1875:                In this case the company had been formed with the object of carrying on business as Mechanical Engineers and General Contractors. The contractor entered into an agreement for financing the construction of a railway in Belgium and there was evidence that all the members had ratified the agreement. The company repudiated the agreement and was sued for breach of contract.  The other party i.e. plaintiff brought an action for damages for breach of contract. His contention were firstly, that the contract  in question came well within the meanings of the words 'general contractors' and was therefore within the powers of the company and secondly that the contract was ratified by the majority of the shareholders.

                        The Court held that the term 'general contractors' must be taken to indicate the making generally of such contracts as were connected with the business of mechanical engineers. If the term 'general contractors' were not so interpreted, it would authorize the making of contracts of any kind and every description.  Hence, the contract was entirely beyond the object in the Memorandum of Association.

Cotman V. Brougham:                     In this case the main objects rule was excluded by a declaration in the objects clause that "every clause should be construed as a  substantive clause and not limited or restricted by reference to any other sub-clause or by the name of the company and none of the, should be deemed as merely subsidiary or auxiliary".  The House of Lords expressed strong disapproval of the inclusion of such a clause, but their Lordships held that it excluded the "main object rule" of interpretation.

                        Thus the rule has failed to prevent the evasion of ultra-virus. And now the decision of the court of appeal in Bell Houses Ltd. V. City Wall Properties Ltd. has stamped its approval upon another technique of evasion.  In this case a company's objects clause authorized it to carry on any other trade or business which in the opinion of the board of directors could be carried on advantageously in connection with the company's general business.  The court held that clause of this kind does not state any objects at all.  Rather, it leaves the objects to be determined by the directors' bona fides.

Author – Sumit Sanjay Ekbote.