The doctrine of ultra vires is an abecedarian law of the Indian Companies
Act. It lays down that if any act of the company or any contract entered into by
the directors, on behalf of the company, is beyond the powers vested in the
directors and company by the object clause of the MOA, it's considered null and
void. Similar null and void acts/ contracts aren't fairly binding on the
company. The term 'ultra vires' applies to those acts that are performed beyond
the legal powers quested under the objects clause.
The doctrine of ultra vires limits the acts of the company within the boundaries
set by the objects clause of the MOA. Hence the company:
- Must use the finances of the company only for purposes specified in the
- Must carry on a business/ trade that has been specified in the MOA
The doctrine of ultra vires acts as a safeguard for the creditors and
investors of the company as it prevents the company from using the plutocrat of
the investors for any purpose other than those mentioned under the objects
clause. The creditors are also assured of the fact that the finances of the
company won't be employed in any unauthorized trade/ business or exertion. It
also acts as a check on the conditioning of the directors who must act within
the compass of powers given to them by the MOA.
Legal List on the Company as per the Ultra Vires Law
Any acts or contracts that are extremist vires can't be held fairly binding for
the company. The company can'tpursue legal expedient to recover any plutocrat
for any goods or services offered under an ultra vires contract. An ultra vires
adopting won't be fairly binding upon the company and can't be executed by an
stranger in the court of law.
Estoppel, the lapse of time, compliance, detention or ratification can't turn
extremist vires act into 'intra vires' in all cases.
It's believed that it would be helpful to our thinking in this subject if a
isolation were made between the generalities power and honour it's submitted, if
this were done, that a great numerous of the incidents which we now call powers
would be plant to be boons, and that this discrimination would clarify and
render further comprehensible numerous of our problems. The generalities honour
and power are used in this study as defined by Hohfeld.1
There's no desire nor necessity, how- ever, because of that fact, of being drawn
into a Hohfeldian controversy. Hohfeld's good operation of the terms has simply
been plant useful in making demarcation, and, after all, he has simply given
these words a meaning formerly in common use. The conception honour will
hereafter in these runners be used as denoting authorization.
When it's said that a person is privileged in a certain line of conduct, the
meaning will be that he may do without fear of being punished. The conception
power will be used to denote a situation where one person has a legal control,
through the voluntary exercise of which he can change the legal relations being
between him and another or between that other and a third person.2
Our thinking in this field would be simplified further, if a realistic view were
taken of the nature and incidents of a pot. Under such a view this unnoticeable,
impalpable critter. After all, a private pot is but a group of individualities
who have plant it accessible to con- conduit a business through certain legal
means and channels which have been made possible through the authorization of
that association we call the state.
Through this association colourful new legal connections are made. The legal
situation has come more complicated, as new boons and powers have been conferred
on the group through the nod of assent of that potent association, the state.
But the general scheme remains the same.
Strangely enough, in speaking of the powers of a pot, we impute their origin to
the state, without allowing that all the powers, boons, etc., held by a natural
person are secured in a suchlike manner X, an individual, has the honour of
making a contract, of defending himself, of smoking a cigar, without fear of
being punished for so doing by organized society.
The point is, an individual maty do what the state permits him to do; he can
produce new legal scores only as long as the state warrants them; he has legal
boons and powers only through the grace of organized society. The state
association can circumscribe or extend his boons and 3"When all is said and
done, a pot is just an association of natural persons conducting business under
legal forms, styles, and procedure that are subgeneric.
It's true that a pot is a critter of the law; but so, too, are all legal rights
and duties brutes of the law; and when the law creates a pot, an artificial
being, why should it not, so far as its nature permits, be able of enjoying, and
being affected by, all the rights and duties which have been preliminarily
created by the law? Why assume the necessity of another special creation of
rights and duties for the corporation, supplementary to the creation of the pot,
and of rights and duties in general.
Also, and this has important bearing on the discussion to follow in connection
with the boons and powers of corporations, the existent may have the legal power
to do an act with-out the honour. Conduct is privileged when the existent may do
free from restraint; when he may act without incurring the disapprobation of the
state. With this meaning of the conception honour before us, clearly it would
not be contended that the existent is privileged in the commission of a crime or
The moue on the countenance of the state association is apparent However, it
must also be clear that the existent can commit a tort or a crime and therefore
beget new legal scores, If in the conception power there lies the answer to what
the existent can do to bring himself into new legal relations. The individual,
in other words, has the legal power to produce crime and tort scores, but not
the legal honour.
The doctrine of ultra-vires first time began in the classic case of Ashbury
Railway Carriage and Iron Co. Ltd. v. Riche
, (1878) L.R. 7H.L. 653, which
was decided by the House of Lords. In this case the company and M/s. Riche
entered into a contract where the company agreed to finance construction of a
road line. Latterly on, directors repudiated the contract on the ground of its
being ultra-vires of the memorandum of the company. Riche filed a suit demanding
damage from the company. According to Riche, the words "general contracts" in
the objects clause of the company meant any kind of contract.
Therefore, according to Riche, the company had all the powers and authority to
enter and perform similar kind of contracts. Latterly, the maturity of the
shareholders of the company ratified the contract. Still, directors of the
company still refused to perform the contract as according to them the act was
ultra-vires and the shareholders of the company can'tconfirm any ultra-vires
When the matter went to the House of Lords, it was held that the contract was
ultra-vires the memorandum of the company, and, therefore, null and void. Term
"general contracts" was interpreted in connection with antedating words
mechanical masterminds, and it was held that then this term only meant any
similar contracts as related to mechanical masterminds and not to include every
kind of contract.
They also stated that indeed if every shareholder of the company would have
ratified this act, also it had been null and void as it was ultra-vires the
memorandum of the company. Memorandum of the company can't be amended
retrospectively, and any ultra-vires act can't be ratified.
Need or purpose of the doctrine of ultra-vires
This doctrine assures the creditors and the shareholders of the company that the
finances of the company will be employed only for the purpose specified in the
memorandum of the company. In this manner, investors of the company can get
assured that their plutocrat won't be employed for a purpose which isn't
specified at the time of investment. However, also it may affect into the
bankruptcy of the company, which in turn means that creditors of the company
won't be paid, If the means of the company are wrongfully applied.
This doctrine helps to help similar kind of situation. This doctrine draws a
clear line beyond which directors of the company aren't authorized to act. It
puts a check on the conditioning of the directors and prevents them from
departing from the ideal of the company.
Difference between an Ultra-Vires and an Illegal act
An ultra-vires act is entirely different from an illegal act. People frequently
inaptly use them as a reverse to each other, while they're not. Anything which
is beyond the objects of the company as specified in the memorandum of the
company is ultra-vires. Still, anything which is an offense or draws civil
arrears or is banned by law is illegal. Anything which is ultra-vires, may or
may not be illegal, but both of similar acts are void-ab-initio.
The doctrine of ultra-vires in Companies Act, 2013
Section 4 (1) (c) of the Companies Act, 2013, states that all the objects for
which objectification of the company is proposed any other matter which is
considered necessary in its headway should be stated in the memorandum of the
Whereas Section 245 (1) (b) of the Act provides to the members and depositors a
right to file a operation before the bench if they've reason to believe that the
conduct of the affairs of the company is conducted in a manner which is
prejudicial to the interest of the company or its members or depositors, to
restrain the company from committing anything which can be considered as a
breach of the titles of the company's memorandum or papers.
Introductory principles regarding the doctrine:
- Shareholders cannot confirm an ultra-vires sale or act indeed if they
wish to do so.
- Where one party has entirely performed his part of the contract,
reliance on the defence of the ultra-vires was generally forestalled in the
doctrine of estoppel.
- Where both the parties have entirely performed the contract, also it
cannot be attacked on the base of this doctrine.
- Any of the parties can raise the defence of ultra-vires.
- Still, a suit can be brought for the recovery of the benefits conferred,
if a contract has been incompletely performed but the performance was
inadequate to bring the doctrine of estoppel into the action.
- Still, the company cannot defend it from its consequences by saying that
the act was ultra-vires, if an agent of the pot commits any dereliction or
tort within the compass of his employment.
Exceptions to the Doctrine of Ultra Vires:
- Any act that's done in an irregular manner but is else intra-vires the
company, can be validated/ ratified by the shareholders of the company
- Any act which ultra-vires the directors of the company but is else
intra-vires the company can be ratified by the shareholders of the company.
- If any act is extremist vires the papers of the company, also the papers
of association of the company can be altered by a special resolution to
validate the act.
- Indeed if a property accession by the company is ultra-vires, the right
of the company over similar property will stay secured.
- Any incidental or consequential effect of the ultra-vires act won't be
invalid unless explicitly banned by the Companies Act.
- If any action is intra vires the Company's Act, it'll not be considered
ultra-vires indeed if it isn't expressly stated in the memorandum.
Types of Ultra Vires Acts and Their Ratifications
There are primarily four Types of Ultra Vires Acts:
Ley v The Positive Government Security Life Assurance Company, Limited,
- Acts that are extremist vires to the Companies Act-Similar acts are
void-ab-initio and cannot be ratified in any situation.
- Acts that are extremist vires to the Memorandum of the company-They
cannot be ratified indeed by shareholders as they're void-ab-initio.
- Acts that are extremist vires to the Papers of the company but intra-vires
the company-They can be ratified by the shareholders by making differences
in the papers to that effect.
- Acts that are extremist vires to the directors of the company but intra-vires
the company-They can be ratified by the company and will also come list.
(1875-76) L.R. 1 E.D. 88
It was held that the papers aren't a matter between the company and the
complainant. They may either bind the members or dictate the directors, but they
don't produce any contract between complainant and the company.
The Directors, & C., of the Ashbury Railway Carriage and Iron Company
(Limited) v Hector Riche
, (1874-75) L.R. 7H.L. 653.
The objects of the company as per the memorandum of association were to supply
and vend some material which is needed in the construction of the railroads.
Then the contract was for construction of railroads which wasn't in the
memorandum of the company and therefore, was contrary to them. As the contract
was ultra-vires the memorandum, it was held that it couldn't be ratified indeed
by the assent of all the shareholders. However, that would have been sufficient
to make the contract intra-vires, If the permission had been granted by passing
a resolution before entering into the contract. Still, in this situation, a
permission cannot be granted with a retrospective effect as the contract was
ultra-vires the memorandum.
Shuttleworth v Cox Sisters and Company (Maidenhead), Limited, and Others
(1927) 2K.B. 9
It was held that if a contract is subject to the statutory powers of revision
contained in the papers and similar revision is made in good faith and for the
benefit of the company also it'll not be considered as a breach of the contract
and will be valid.
Re New British Iron Company, (1898) 1Ch. 324
It was held that in this particular case the directors will be ranked as
ordinary creditors in respect of their remuneration at the time of the
winding-up of the company. This was stated because generally papers aren't
considered as a contract between the company and the directors but only between
shareholders. Still, in this particular case, the directors were employed, and
they had accepted office on the footing of the papers of association. So at the
time of winding-up of the company they were considered as the creditors.
Rayfield v Hands and Others, (1957R.No. 603)
Field-Davis Ltd. was a private company carrying on business as builders and
contractors, The complainant, Frank Leslie Rayfield, was the registered holder
of 725 of those shares, and the defendants, Gordon Wyndham Hands, Alfred William
Scales and Donald Davies were at all material times the sole directors of the
There was a provision in the Papers of association of the company where it was
needed that if he wants to vend his shares, he'll inform the directors, who'll
buy them inversely at a fair valuation. Still, when he informed the directors,
they refused to buy them by saying that there's no similar liability assessed by
the papers upon them.
The complainant claimed that fair value of the shares must be determined and
directors must be ordered to buy them at a fair value. It was held that papers
of the company needed the directors to buy the shares at a fair price, but the
relationship between them wasn't as a member and director but as a member and a
No company can be imagined to run without borrowings. Still, at the same time,
it's necessary to cover the interest of the creditors and investors. Any
irregular and reckless act may affect in bankruptcy or winding up of the
company. This may beget considerable losses to them. So to cover the interest of
the investors and the creditors, specific vittles' are made in the memorandum of
the company which defines the objects of the company.
Directors of the company can act only within the horizon of the authority handed
to them under these objectives. However, it'll be considered as ultra-vires, If
any borrowing is made beyond the authority handed by these objective mentioned
in the memorandum. Any borrowing which is made through an ultra-vires act is
void-ab-initio, and hence, directors are responsible for these acts. Still, if
similar borrowings are ultra-vires only to the papers of the company or ultra-vires
directors, also they can be ratified by the shareholders. Also, after similar
ratification, they will be considered valid.
Therefore, directors must be veritably conservative while adopting finances, as
it may not only make them tête-à-tête liable for the consequences of similar
acts but also may affect in considerable losses to investors and creditors.
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