The word “ultra” means beyond whereas the word “vires” means limits/powers/authority. Doctrine of ultra vires means the principle of acting beyond the specified limits, powers and authorities. This doctrine states that Memorandum of Association(MOA) clearly species its objects and limits beyond which a company can’t perform any contract. If a company has entered into any contract outside the scope of its object clause, such contract is void ab initio being ultra vires the company. And an outsider can’t sue the company for such ultra vires contract. But an outsider can held the directors personally liable (who has entered into contract).
The rectification of ultra vires 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.
PURPOSE OF ULTRA VIRES
- To safeguard the interest of creditors and investors
- Prevents the company from using the money of the investors other than those mentioned in the object clause of MOA
- Prevents the wrongful use of the company’s assets thereby protecting creditors
- Prevents directors from diverting the object
- Helps the directors to know within what lines of business they are eligible to act.
The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. Members can held the company as well as its Directors liable for entering into ultra vires contract. But outsiders can only sue on Directors & not company.
Company, members and directors are under legal obligations to observe the provision stated under MOA and AOA so members can sue both but outsiders can only sue director.
EXCEPTIONS TO 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.
EFFECTS OF ULTRA VIRES TRANSACTION
- 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.
RELEVANT CASE LAWS
Ashbury Railway Carriage and Iron Company Limited v. Riche[1874-80] All E.R. Rep. 2219 (HL)
Facts: The directors of the appellant company (Ashbury Railway Carriage) had contracted to obtain a concession from Gillon and Poeters Baerston, who obtained this right from the Belgian Government, to make a railway. For this purpose, the directors of the appellant company again entered into a contract with Riche, a contractor, the purpose of which was to establish a society anonyme, and as the plaintiff went on with the work, the appellant company had to pay into the hands of société anonyme, Earlier the shareholders permitted the accounts to pass. Later money difficulties arose in the appellant company, and the shareholders, becoming aware of the contract, appointed a committee of investigation, which reported that it was ultra vires altogether. The company repudiated the agreement and compelled the directors of the company to take the burden of the contract.
Issue: Whether the contract was valid? If not whether it could be ratified by the members of the
company?
Whether the company was competent to make an agreement beyond its MOA?
Judgement: The House of Lords, agreeing with the three dissentient judges in the Exchequer Chamber, pronounced the effect of the Companies Act to be the opposite of that indicated by Mr. Justice Blackburn. It held that if a company pursues objects beyond the scope of the memorandum of association, the company’s actions are ultra vires and void. Lord Cains LC said, It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter, having regard to this memorandum of association, into a contract of this description. The contract in my judgment could not have been ratified by the unanimous assent of the whole corporation. The company was not competent to make a contract beyond its objectives, hence it was void. A contract of this kind is not within the MOA. Carrying on the business of mechanical engineers and general contractors clearly doesn’t include the making of these contracts. Where there could be no mandate there cannot be any ratification, and the assent of all the shareholders can make no difference. Contracts for objects and purposes foreign to, or inconsistent with the memorandum of association are ultra vires of the corporation itself.
The House of Lords held that the contract was ultra-vires the memorandum of the company, and, thus, null and void and cannot be ratified by the members. Appeal Allowed. And the company is not liable to compensate the respondent.
Cotman v. Brougham[1918-19] All E.R. Rep. 265(HL)
Facts: Essequibo Rubber and Tobacco Estates Limited was a company registered under the Companies (Consolidation) Act 1908 in the United Kingdom. Essequibo Rubber and Tobacco Estates Limited’s memorandum of association contained a significant number of objects. The objects ranged widely, covering various areas of business activities that the company could potentially engage in. However, the memorandum also included a unique provision in its final clause. This clause stipulated that the listed objects should be read individually and not as sub-clauses subordinate to main clauses. The central issue in the case arose when the company was considering underwriting an issue of shares in another company called the Anglo-Cuban Oil Bitumen and Asphalt Company Limited. This action involved providing a financial guarantee for the value of the shares issued by the Anglo-Cuban Company. The question was whether Essequibo Rubber and Tobacco Estates Limited had the legal capacity to undertake this underwriting activity under the provisions of its objects clause.
Issue: Whether the company’s objects clause allowed it to underwrite shares in the Anglo-Cuban Oil Bitumen and Asphalt Company Limited?
Judgement: Clause 3,8 and 12 of the MOA are wide enough to cover the transaction made by the company.
The Act put a great responsibility on registrar in registering an MOA and giving incorporation certificate to the company. The registrar can refuse registration if he finds that the Act have not been complied with. S.17 of Company (consolidation) Act, 1908 makes the certificate of incorporation as conclusive evidence.The narrower the objects expressed in MOA, less is the subscriber’s risk. A MOA not specifying or disclosing the real object or objects with the intent to include every conceivable form of activity is of worst kind and non-compliant to the Act. The Act provides a model forms of MOA in Schedule 3 that should be used in all matters to which those forms refer. When a substratum of the company is gone, a winding up order may be issued under S. 129(vi) The winding up of a company by the reason of failure of substratum is a question of equity between a company and its shareholders. Whereas whether a transaction is ultra vires or not is a question of law between company and third party.
There should be a main purpose in a MOA which mention a variety of acts.
Agreed with both the lower Courts and held that the transaction was intra vires. Dismissed the appeal with costs.
In re Jon Beauforte (London) Ltd.[1953] 1 Ch. 131
Facts: The company carries on a business of costumiers, gown makers, etc. Then company decided to manufacture veneered panels, which were admittedly ultra vires, and accordingly entered into an oral contract with Grainger Smith & Co. Ltd. (Builders) to construct a factory. But the company went into liquidation and builders sued them for £ 2078. Application by way of appeal and order was given to a company that they will pay £ 2000 in four equal installments and if the company made default in payment, the builders might sign judgment for the sum of £ 2078.
The company defaulted in the first instalment and the builders signed a judgment for £ 2078. Another firm supplied veneer to the company and claimed 1011 pounds. A firm sought to prove a simple contract debt of 107 pounds in respect of fuel supplied to the factory. The builders of the factory had obtained a consent judgment like a compromise. It was conceded that applicants had constructive knowledge of the company’s memorandum and that they had no actual knowledge that their contracts were ultra vires the company.
Issue: Whether the act was ultra vires or intra vires?
Judgement: The court found that both parties consented to do the manufacturing and supplying of veneered panels which makes a contract between them. Even if the parties consent to do a contract, pass a decree in the court and the contract is ultra vires the company, will be void and does not make it intra vires.
Court held, dismissing the applications, that no judgment founded on an ultra vires contract could be sustained unless it embodied a decision of the court on the issue of ultra vires, or a compromise of that issue
A. Lakshmanaswami v. Life Insurance Corporation of India AIR 1963 SC 1185
Facts: In this case, United Life Insurance Co. was authorized by its MoA to carry on the business of life insurance . The Company had an extraordinary general meeting where a resolution has been passed to sanction a donation of 2,00,000 Rs. from out the share for promoting technical or business knowledge. Later, the business was taken over by the Life Insurance Corporation (LIC).The LIC called upon the appellant to refund the amount as it was beyond the scope of the company’s objectives. They applied with the Tribunal to get back their amount of Rs. 2,00,000 and Tribunal directed the appellants to pay the amount of Rs 2 lakhs with interest. Dissatisfied with this decision, the appellants filed for special leave.
Issue: Whether the donation was an ultra vires act of the company?
Whether the appellant is personally liable to pay a refund?
Judgement: The Court emphasized that a company must operate within the confines of its MoA, adhering strictly to its stated objects. It clarified that the MoA, like any legal document, should be interpreted reasonably and fairly, without rigid constraints.Directors, as outlined in Clause III, possess the authority to invest and manage company assets as prescribed by the Articles of Association. Regarding the MoA, the Court found its terms unambiguous, particularly in Clause III delineating the company’s objects and powers.While the Articles can elucidate the MoA, they cannot expand its scope. Notably, Clause III(v) permits activities incidental to the specified objects. The Court deemed the resolution to donate funds ultra vires, rendering it void and non ratifiable, regardless of shareholder consensus. Directors involved in such actions incur personal liability, necessitating reimbursement to the company. Referencing Section 15 of the Life Insurance Corporation Act, 1956 the Court underscored the Tribunal’s authority to demand refunding of unjustly disbursed amounts, holding responsible parties accountable based on their involvement and benefit derived.
The Court dismissed the appeal and held that resolution was beyond the MoA and ultra vires and the company will be personally liable to refund the amount.
PRESENT CASE
Q. 2/2022. Without passing special resolution — If the object clause of the MOA does not permit the disposal of such an asset, it could also be challenged as ultra vires.
With passing special resolution — If the special resolution is passed as required under section 180(1)(a) and the disposal is incidental to or ancillary to the company’s main object, the shareholder’s challenge would likely fail.
Q. 1/2020. Since the power to borrow was not part of the object clause of MOA, the borrowing is ultra vires the company. The company is not liable to repay the loan. However, the lender may recover the amount from Mr. Liddle (the director), as he acted beyond his authority.
Q. 2a/2019. The MOA authorised directors to make payment towards any charitable and benevolent object. However, the main object was to construct houses which is wholly different from the purpose/object of donation. The interest of company cannot be elbowed out and therefore, the donation is ultra vires and hence void (A. Laxminarayan vs LIC supra ).
Q. 2/2018. The investment in construction of roads and railway lines, even with unanimous ratification, cannot be held to be intra vires. Hence, the act of the company is ultra vires.
