Consequences of ultra vires transactions
When a company gets involved in an ultra vires transaction the question arises as to what are its effects.
- Injunction: In the first place, that members are entitled to hold a registered company to its registered object has been recognized long since. Hence whenever an ultra vires act has been or is about to be undertaken, any member of the company can get an injunction to restrain it from proceeding with it.[1]
- Personal liability of directors: It is one of the duties of directors to see that the corporate capital is used only for the legitimate business of the company. If any part of it has been diverted to purposes foreign to the company's memorandum, the directors will be personally liable to replace it. for example, the Bombay High Court in Jehangir R. Modi V. Shamji Ladha (1866-67) held that – A shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that have by them been employed in transactions that they have no authority to enter into, without making the company a party to the suit.
- Breach of warranty of authority: It is the duty of an agent to act within the scope of his authority. For if he goes beyond he will be personally liable to the third party for breach of warranty.
The directors of a company are its agent. As such it is their duty to keep within the limits of the company's power. If they induce, however innocently an outsider to contract with the company in a matters in which the company does not have the power to act, they will be personally liable to him for his loss.
- Ultra Vires acquired property: If a company's money has been spent ultra vires in purchasing some property the company's right over that property must be held secure. For that asset, though wrongly acquired, represents the corporate capital. Thus for example, the Madras High Court allowed a company to sue on a mortgage to recover the money lent in spite of the fact that the transaction was beyond the powers of the company. The court relied upon the following observation of doctrine of ultra vires; "Property legally and by formal transfer or conveyance transferred to a corporation is in law duly vested in such corporation even though the corporation was not empowered to acquire such property.
- Ultra vires contracts: A contract of a corporation; Observed Justice Gray which is ultra vires that is to say outside the object as defined by its memorandum is wholly void and of no legal effect. The objection to an ultra vires contract is not merely that the corporation ought not to have made it but that it could not make it. An ultra vires contract, being void ab initio, cannot become intra vires by reason of estoppel, lapse of time ratification, acquiescence or delay.
This are the Consequences of the ultra vires.
[1] Attorney-General V. Great Eastern Rly Co. (1880).
