The emergence of the Ultra Vires concept has brought about a noteworthy legal
development within the Indian judicial system, leaving a lasting impact. This
study takes a comprehensive look into the intricacies surrounding the Doctrine
of Ultra Vires in the context of India. The paper seeks to unravel the essence
and scope of the doctrine while providing insights from a legal standpoint. By
charting its journey in India, from its inception to its changing significance
over time, the research explores how businesses have conspire around or evaded
the Ultra Vires doctrine.
Moreover, the study highlights the consequences and effects of this doctrine,
shedding light on the challenges that businesses encounter while balancing their
societal obligations. Within the article, we also delve into the various
exceptions associated with the doctrine that hold importance. Overall, this
research provides a holistic understanding of the Doctrine of Ultra Vires and
its multifaceted implications in the Indian context.
The term "Ultra vires" comes from Latin and essentially means "beyond the
powers." In legal terms, if an action requires proper authorization and is
carried out with that authorization, it is considered "intra vires," which
translates to "within the powers." On the other hand, if an action is performed
without the necessary authority, it is labeled as "ultra vires." In simple
terms, actions that fall within the authorized scope are regarded as "valid,"
while those outside this scope are termed "invalid."
The concept of ultra vires mainly applies to entities like corporations, be it a
limited company, a government department, or a local council. If any action
taken by such an entity goes beyond its legally granted capacity, it is
considered null and void. While a corporation is legally recognized as a
separate entity, similar to a person, there are inherent differences. Some
attributes that apply to individuals, such as race or sex, don't apply to
corporations. Additionally, certain actions that individuals can perform, like
getting married, are not feasible for corporations. The doctrine of ultra vires
adds further restrictions beyond these natural limitations, specifically for
corporations established by statutes.
The evolution of the law of ultra vires has emerged as a potent tool for the
courts to oversee and regulate instances where executive or legislative
authorities exceed their powers, resulting in unfairness and injustice that
impinge upon the rights of citizens.
In a wider sense, as per professor Wade, the ultra vires doctrine is not
confined to cases of plain excess of power; it also governs abuse of power,
as where something is done unjustifiably, for the wrong reasons or by the wrong procedure. In law the consequences are exactly the same; an
improper motive or a false step in procedure makes an administrative act
just as illegal as does a flagrant excess of authority. Unless the courts are
able to develop doctrines of this kind, and to apply them energetically, they cannot impose limit on the administrative powers which Parliament confers,
so freely, often in almost unrestricted language.
History Of The Doctrine Of Ultra Vires:
The roots of the Ultra Vires Doctrine can be traced back to a pivotal point in
history - 1855, which coincided with the introduction of the concept of limited
liability. This shift transformed the landscape of shareholders' financial
obligations, moving away from unlimited liability that used to protect
creditors. This change exposed creditors to higher risks as a result of limited
liability. To address this growing concern, the Ultra Vires Doctrine emerged as
a safeguarding measure. Interestingly, its influence extended beyond the realm
of corporations, impacting various domains, including legislative affairs.
While not formally enshrined in laws, the doctrine establishes crucial
benchmarks for evaluating the legitimacy of actions. The first notable
application of the Doctrine of Ultra Vires unfolded in the landmark case of
Ashbury Railway Carriage and Iron Company (Ltd.) v. Hector Riche
This case centered on Ashbury Railway Carriage and Iron Company, a business
involved in railway carriage construction. The company ventured beyond its
authorized scope by providing a loan for a railway project in Belgium.
Subsequently, the company backed out of the contract, arguing that it clashed
with its Memorandum of Association. The Doctrine of Ultra Vires was invoked as
the company's defense.
In the face of Riche's contention that the board's
approval validated the contract, the court held that even board endorsement
couldn't salvage an inherently void and unenforceable agreement. This principle
was reaffirmed in Attorney General V. Great Eastern Company, where the court
underlined the need for fairness and reasonableness alongside the doctrine.
In India, the introduction of the Ultra Vires Doctrine took place through the
case of Jahangir R. Modi V Shamji Ladha, gaining prominence through the
landmark ruling of Laxman Swami Mudaliar v LIC of India[
6]. This legal precedent
established that shareholder consent couldn't legitimize an ultra vires act. In
response, companies devised strategies to navigate around the doctrine. They
often formulated broad object clauses encompassing a plethora of businesses.
This strategic drafting aimed to avoid the doctrine's application by ensuring
that ancillary goals didn't solely hinge on the principal objective.
Rationale Behind This Doctrine:
The foundation of the doctrine is rooted in the understanding that while a
company holds legal status as a distinct entity, it lacks the cognitive and
moral attributes inherent to individuals. Essentially, a company is an
artificial creation, and this recognition shapes the boundaries of its
contractual capabilities. Unlike individuals, companies don't possess a
universal ability to engage in various contracts. Instead, their business
activities are confined to specific areas meticulously detailed in their
"objects clause," found in their Memorandum of Association. This careful
specification ensures that a company's actions stay within the intended scope
defined for it.
Moreover, allowing a company to go beyond its authorized boundaries has the
potential to adversely affect shareholders and creditors. Diversifying into
unfamiliar realms could lead to the misdirection of funds, possibly allocating
resources to endeavors that stakeholders and creditors never approved or were
even informed about during the funding phase. The doctrine of ultra vires is
anchored in the core belief that any granted authority, regardless of its
nature, should have limits. Every action should adhere to well-defined
In essence, this doctrine is a protective measure aimed at upholding the
integrity of a company's operations. It does so by constraining its actions
within the bounds of its designated powers. This approach underscores the values
of transparency, accountability, and responsible resource management, ensuring
that a company's activities remain true to its intended purpose.
Purpose And Scope Of This Rule:
In 1866, the concept of Ultra Vires became an official part of the Indian legal
system following a judgment by the Bombay High Court. Before this, the need for
the doctrine was minimal due to the prevalent business structures of that time -
mainly sole proprietorships and partnerships. These setups shared a common
trait: unlimited liability. This meant that the business owners were personally
liable for the business's debts, and creditors had a strong assurance of loan
repayment even if it meant using the owner's personal assets.
However, in 1855, the Limited Liability Act was passed in the United Kingdom,
introducing the concept of Limited Liability Partnerships. This legal change
marked a clear distinction between partners and the businesses they were
involved in. Partners' liability was now limited to their capital contributions
or the share of profits they received.
This limited their responsibility for
company debts. The Limited Liability Act raised concerns among creditors about
the security of loans provided to Limited Liability Partnerships. To address
these worries, the doctrine of ultra vires was created. Its purpose was to
prevent companies from engaging in activities beyond their designated scope,
making such actions null and void.
It's important to understand that the Doctrine of Ultra Vires doesn't cover all
unlawful activities or instances of authority misuse. Instead, it specifically
applies to actions that go beyond a company's authorized capabilities. The
object clause within the Memorandum of Association defines the company's goals,
intentions, and objectives. If a company crosses the boundaries set by this
object clause, it falls under the scope of the Doctrine of Ultra Vires.
As was stated by Browne-Wilkinson L.J. in Rolled Steel Products (Holdings) Ltd v
British Steel Corporation
"The question whether a transaction is outside the capacity of the company
solely upon whether, on the true construction of its memorandum of association,
transaction is capable of falling within the objects of the company."
In common law, the doctrine operates independently of whether the other party
involved is aware of the company's lack of authority; their familiarity with the
company's objectives is not a determining factor. Several cases have highlighted
that if a company possesses a clear authority but uses it for a purpose beyond
its authorized scope, and if the party interacting with the company is aware of
this intention, the resulting contract would be considered ultra vires. This
happens because the company is exceeding its designated capacity, rendering the
Directors hold a fiduciary duty, and engaging in an ultra vires transaction
constitutes a breach of this duty. They are obligated to follow the limitations
imposed by the company's authorized capacity, as outlined in its objectives.
The reform of the ultra vires principle, aimed at ensuring secure transactions,
does not require altering a director's responsibility to operate within the
company's specified goals. Section 171(a) mandates directors to conduct
themselves in accordance with the company's established constitution.
Judicial View Of The Doctrine
The Doctrine of Ultra Vires, much like the principle of natural justice, didn't
arise from written laws but evolved through court rulings. Despite not being
directly legislated, this doctrine holds substantial contemporary importance,
especially given the changing landscape of constitutional law and the
introduction of various socio-economic legislations in India.
Over time, there has been a noticeable shift in how the judicial system
approaches this doctrine. Initially, it wasn't a major concern. Before 1855,
businesses mainly operated as sole proprietorships and partnerships. Courts
believed the existing rules for these structures adequately protected the
interests of investors and creditors, making the doctrine seem unnecessary.
However, a significant change occurred after 1855. This shift was linked to
statutory companies and the transformative developments happening during that
The introduction of limited liability played a pivotal role in this shift.
Limited liability allowed company members to be accountable only up to their
invested capital, a departure from the previous regime of unlimited liability.
As this change took place, creditors and investors faced new challenges. To
safeguard their interests, the focus turned to finding a mechanism that
eventually led to the Doctrine of Ultra Vires gaining prominence.
The evolution of the Judicial stance on the Doctrine of Ultra Vires is
reminiscent of developments in British law. For instance, Chief Justice Nawal
Kishore succinctly defined " "ultra vires only means something has been done by
a person or by a body of persons which was beyond his or their powers".
Justice Satish Chandra J. in the case of Anand Prakash & Others v. Asst.
"The essence of the doctrine of ultra vires is that the act
is done in excess of powers possessed by the person in law. It acts as a check
on actions within legal limits, preventing overstepping. A subsequent case, P.
Janardhan v. Union of India, framed "The term ultra vires simply means beyond
the power or lack of power. An act is said to be ultra vires when it is excess
of the power of the person or authority doing it".
In essence, the Doctrine of Ultra Vires, similar to principles of natural
justice, grew through interpretations in court rather than being explicitly
written in laws. Its importance persists, especially given the evolving legal
frameworks in India. The Judiciary's perspective on this doctrine has
transformed over time, resulting in a well-defined understanding of actions
beyond authorized powers.
Exceptions To The Doctrine Of Ultra Vires:
There are specific situations where the Doctrine of Ultra Vires doesn't apply,
and these form exceptions to its general principles:
Fall Of The Doctrine:
- Shareholder Approval: If an action is within the company's authority but exceeds the directors' scope, shareholders can endorse it through proper channels.
- Validation of Irregular Actions: Actions within the company's authority that are executed irregularly can gain legitimacy with shareholders' consent.
- Property Acquisition: If a company acquires property through an ultra vires action, it retains its rightful ownership over that property.
- Incidental Consequences: Unintended outcomes resulting from an action under scrutiny by the doctrine aren't automatically invalidated unless expressly prohibited by the Companies Act.
- Implied Authority: Certain actions not explicitly mentioned in the Memorandum of Association but implicitly within the company's legal authority as per Company law aren't considered ultra vires.
- Amendment of Articles of Association: Acts conflicting with the Articles of Association can be validated by amending these articles.
The Doctrine of Ultra Vires has sparked significant debate, yielding unintended
adverse effects. Its application has led companies to exploit their Memorandum
of Association's objectives section. By cleverly broadening the language here,
they introduce ambiguity, encompassing a wide range of activities beyond their
main goals. While ancillary objectives are meant to bolster primary goals,
companies are now treating them as separate and comprehensive, enabling them to
diversify into various ventures. This tactic creates a loophole, allowing them
to sidestep the liability the doctrine was originally designed to enforce.
Consequently, this practice contributes to market turmoil and disorder.
In 1945, the establishment of the Cohen Committee marked a crucial step towards
phasing out the Doctrine of Ultra Vires. This decision was driven by the belief
that the doctrine provided deceptive protection to shareholders while ensnaring
third parties engaging in business transactions with the company. The committee
found no redeeming qualities in the doctrine. The Bhabha Committee, appointed by
the Government of India, held a similar standpoint.
Following the committee's recommendations, the outdated Companies Act of 1913
was replaced by the new Act of 1956. The committee's evaluation echoed concerns
about the doctrine's illusion of safeguarding shareholders and its potential to
trap third parties involved with the company.
In the current legal framework, Section 245(1)(a) of the Companies Act, 2013,
empowers company members and depositors to approach the Tribunal with an
application invoking the doctrine of ultra vires. This provision allows them to
seek court intervention to prevent the company from surpassing the limits
established by its memorandum of association.
At the heart of the Ultra Vires doctrine lies a fundamental principle: to
confine a company's actions within the boundaries of its authorized powers. This
doctrine dictates that a company's activities must align with the specific
objectives outlined in its Memorandum of Association (MOA). Consequently, any
action or endeavor that goes beyond these designated objectives is deemed null
The emergence of the Ultra Vires doctrine gained significance in conjunction
with the introduction of the Limited Liability Act, firmly embedding itself
within the framework of English law. Upon closer examination of the doctrine's
impact on company management, shareholders, and investors, its pivotal role in
company law becomes apparent. Yet, it's imperative to periodically assess its
application to effectively address the evolving challenges and needs encountered
by companies when dealing with court cases involving Ultra Vires requirements.
Although a cursory glance may suggest a modest influence, there has been a
substantial shift in attitude towards the doctrine. This shift bears significant
weight due to the doctrine's considerable impact on the operations of companies
and corporations. The reach of the Ultra Vires doctrine extends to cover all
actions and transactions undertaken by a company. Its prominence remains
undiminished despite its absence from formal codification. This study
compellingly demonstrates the rise of the Ultra Vires doctrine in India and
offers a thorough analysis of its relevance in the country.
The author further suggests the incorporation of specific amendments into the
Companies Act of 2013, formally recognizing the Ultra Vires doctrine and
enhancing its significance. The undeniable role of the doctrine in safeguarding
investor interests against unjustified corporate actions solidifies its enduring
importance for the times ahead.
- The Law of Ultra Vires, B.C. Sarma, Eastern Law House, Calcutta, 2004, p. 1
- Wade, H.W.R.: Administrative Law, ELBS, OUP, Oxford, 1985
- (1874-75) L.R. 7 H.L. 653
- (1880) 5 AC 473
- (1866-67) 4 Bom HCR 185
- 1963 AIR 1185
- Rolled Steel Products (Holdings) Ltd v British Steel Corp  Ch 246
- Re Lee, Behrens & Co  2 Ch. 46; Re Jon Beauforte (London) Ltd  Ch. 131. cf. Insolvency Act 1986 s.238(5); Westdeutsche Landesbank Girozentrale v Islington LBC  A.C. 669.
- Re Faure Electric Accumulator Co (1889) 40 Ch D 141; Ferguson v Wilson (1866) L.R. 2 Ch. 77; Northern Counties Securities Ltd v Jackson & Steeple Ltd  1 W.L.R. 1133; Bowstead and Reynolds on Agency,
- State v Nanga and Others AIR (1951) Raj page 25 Para 3
- AIR (1970) Mysore Page 171