Doctrine of Ultravires01/03/2020
The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association, can be departed from only to the extent permitted by the Act. Hence, if the company does an act, or enters into a contract beyond the powers of the directors and/or the company itself, then the said act/contract is void and not legally binding on the company.
Memorandum contains the rules regarding constitution and activities of the company. It is a fundamental charter of the company. It defines the extent of powers of the company, beyond that it cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond the memorandum is ultra vires the company. Such acts are void.
Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.
The purpose of this doctrine is to helps the shareholders , creditors and every third person dealing with the company to ensure that their investment are not diverted to unauthorized objects.
The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the acts performed in excess of the legal powers of the doer. This works on an assumption that the powers are limited in nature. Since the Doctrine of Ultra Vires limits the company to the objects specified in the memorandum, the company can be:
Restrained from using its funds for purposes other than those specified in the Memorandum
Restrained from carrying on trade different from the one authorized.
The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a company supplies goods or offers service or lends money on an ultra vires contract, then it cannot obtain payment or recover the loan.
However, if a lender loans money to a company which has not been extended yet, then he can stop the company from parting with it via an injunction. The lender has this right because the company does not become the owner of the money as it is ultra vires to the company and the lender remains the owner.
Further, if the company borrows money in an ultra vires transaction to repay a legal loan, then the lender is entitled to recover his loan from the company.
Sometimes an act which is ultra vires can be regularized by the shareholders of the company. For example:
If an act is ultra vires the power of directors, then the shareholders can ratify it.
If an act is ultra vires the Articles of the company, then the company can alter the Articles.
Remember, one cannot bind a company through an ultra vires contract. Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intravires’.
Doctrine of Ultra Vires features:
- An act, legal in itself, but not authorized by the object clause of the Memorandum of Association of a company or statute, is Ultra Vires the company. Hence, it is null and void.
- An act ultra vires the company cannot be ratified even by the unanimous consent of all shareholders.
- If an act is ultra vires the directors of a company, but intra vires the company itself, then the members of the company can pass a resolution to ratify it.
- If an act is Ultra Vires the Articles of Association of a company, then the same can be ratified by a special resolution at a general meeting.