This article is written by Suprava Samanta from Sister Nivedita University, BBA-LLB (Hons) 4th Year, during her internship with LeDroit India.
Keywords: Ultra vires, memorandum of association, objects clause, unauthorized transactions, corporate accountability.
ABSTRACT: The doctrine of ultra vires is a fundamental principle in company law that governs the scope of a company’s activities. It is a Latin term which means “beyond powers,” this doctrine basically restricts a company’s actions to those specified in its memorandum of association. Actions beyond these defined powers are deemed ultra vires and therefore, it is invalid or unenforceable. Initially it developed to protect shareholders and creditors by ensuring companies operate within their defined objectives, the doctrine has evolved with the modern corporate practices and statutory reforms. The Companies Act, 2013 in India and similar legislation globally have mitigated its strict application by allowing broader corporate flexibility through clauses like the “objects clause.” However, ultra vires remains relevant for cases of unauthorized transactions, especially in nonprofit organizations or when protecting the interests of third parties. This doctrine continues to play a crucial role in ensuring corporate accountability and lawful business operations.
Introduction: The Doctrine of Ultra Vires is a fundamental rule that’s established in the Company Law. This doctrine states that the objects of a company, which are specified in its Memorandum of Association, can be performed only to the extent permitted by the act. So, basically if the company does any act, or enters into a contract that’s beyond the powers of the directors or the company itself, then the said act or contract will be declared void and thus it will not be legally binding on the company.
The Doctrine of Ultra Vires has been established so that the investors and creditors of the company get protection. The Doctrine of Ultra Vires prevents a company from utilising the money of the investors for a purpose other than those stated in the objects clause of its Memorandum of Association (MoA). So, in this doctrine, the investors and the company are assured that their investment will not be employed for any objects or activities that are not conferred to them. If any act that is done outside the powers the same shall be ultra vires and will be considered as void.
Doctrine of Ultra Vires
The Memorandum of association is considered to be the company’s constitution. It defines the internal and external range and area of the company’s operation along with its objectives, powers and scope. A company is permitted to undertake only those actions that falls within the scope of the powers granted to it by the memorandum. A company may also do anything which is incidental to the main objects provided by the memorandum. Anything which is beyond the objects authorized by the memorandum is considered as an ultra-vires act.
What is the need or purpose of the doctrine of ultra-vires?
The doctrine of Ultra Vires assures the creditors and the shareholders of the company that the funds of the company will only be utilized for the purpose specified in the memorandum of the company. In this manner, the investors of the company can get assured that their money will not be utilized for a purpose which is not specified at the time of investment. If the company assets are wrongfully applied, then it may result into the insolvency of the company, which in turn means that the creditors of the company will not be paid. This doctrine helps to prevent such kind of situation, and this doctrine draws a clear line beyond which the directors of the company are not authorized to act. It puts a check on the director’s activities and therefore, it prevents them from departing from the objective of the company.
The doctrine of ultra-vires in Companies Act, 2013
Section 4 (1)(c) of the Companies Act, 2013,1 basically states that all the objects for which incorporation of the company is proposed and any other matter which is considered necessary in its furtherance has to be stated in the memorandum of the company.
1 The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India) s. 4(1)(c)
Whereas, Section 245 (1) (b)2 of the Act provides to the members and depositors a right to file an application before the tribunal if they have reason to believe that the conduct of the affairs of the company is conducted in such a manner which is prejudicial to the interest of the company or its members or depositors, to restrain the company from doing anything which can be considered as a breach of the provisions of the company’s memorandum or articles.
Basic principles regarding the doctrine:
1. Shareholders cannot confirm an ultra-vires transaction or act even if they wish to do so.
2. Where one party has entirely performed his part of the contract, reliance on the defence of the ultra-vires was generally precluded in the doctrine of estoppel.
3. When both the parties have entirely performed the contract, then it cannot be attacked on the basis of this doctrine.
4. The parties from any of the side can raise the defence of ultra-vires. 5. If a contract has been partially performed, and the performance is insufficient to bring the doctrine of estoppel into the action, a suit can be brought for the recovery of the benefits conferred.
6. If an agent of the corporation commits any type of default or tort within the scope of his employment, then the company cannot defend it from its consequences by saying that the act was ultra-vires.
Exceptions to the Doctrine:
1. Any act which is done irregularly, however it is intra-vires the company can be validated by the shareholders of the company by giving their concurrence.
2. Any act which is outside the authority of the directors of the company however it is intra-vires the company can be ratified by the shareholder of the company.
3. If the company acquires property in a manner which is ultra-vires of the contract, the company’s right over such property will still be secured. 4. Any incidental or consequential effect of the ultra-vires act won’t be invalid unless the Companies Act expressly prohibits it.
5. If any act is supposed to be within the authority of the company by the Company’s Act, then they will not be considered as an ultra-vires even if they are not expressly stated in the memorandum.
2 The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India) s. 245(1)(b)
6. Articles of association can be changed with retrospective effect to validate an act which is ultra-vires of articles.
Types of Ultra Vires acts and when can an ultra-vires act be ratified? There are generally four types of Ultra Vires and they are:
• Acts that are ultra-vires to the Companies Act.
• Acts that are ultra-vires to the Memorandum of the company. • Acts that are ultra-vires to the Articles of the company but intra-vires the company.
• Acts that are ultra-vires to the directors of the company but intra-vires the company.
1. Acts that are ultra-vires to the Companies Act
Any act or agreement undertaken by a company that exceeds the power granted under the Companies Act, is considered to be void-ab-initio, even if memorandum or articles of the company authorized it. Such an act cannot be ratified in any situation. Similarly, some acts are considered to be intra-vires for the company even if they are not mentioned in the memorandum or articles as the Companies Act authorizes them.
2. Acts that are ultra-vires to the memorandum of the company
An act is called ultra-vires the memorandum of the company only if it is done beyond the powers provided by the memorandum to the company. If a part of the act or agreement is within the authority provided by the memorandum and remaining part is beyond the authority, and both the parts can be separated, then only that part which is beyond the powers is considered to be as ultra-vires, and the part which is within the authority is considered to be as intra-vires. However, if they cannot be separated then the whole contract or act will be considered as ultra-vires and hence, void. Such acts will not be ratified even by shareholders as they are void-ab-initio.
3. Acts that are ultra-vires to the Articles but intra-vires to the memorandum
All the acts or agreements which are made or done beyond the powers provided by the articles but are within the powers and the authority that is given by the memorandum are called ultra-vires the articles but intra-vires the memorandum. Such acts and contracts can be ratified by the shareholders (even retrospectively) by making changes in the articles to that effect.
4. Acts that are ultra-vires to the directors but intra-vires to the company
All the acts or agreements which are made by the directors beyond the powers provided to them are referred to as ultra-vires the directors but still intra-vires the company. The company can ratify such acts and then they will be considered as binding.
Case Laws
1. Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875)3 Facts:
A company formed under the Companies Act entered into a contract with Riche to finance the construction of a railway line. The memorandum of association specified the company’s objectives as manufacturing railway carriages and wagons. Financing a railway line was beyond the scope of the company’s objects clause. Riche filed a suit to enforce the contract after it was breached.
Judgment:
The House of Lords held that the contract was ultra vires the company’s memorandum and, therefore, void. Since the company lacked the capacity to undertake such acts, even shareholder approval could not validate the contract. This case laid the foundation for the doctrine of ultra vires, which has been adopted in Indian company law.
2. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India (1963)4
Facts:
The directors of a company used company funds to donate to a trust formed in memory of a former chairman. The company’s memorandum of association did not provide for making such donations. A shareholder challenged the validity of the donation on the grounds that it was beyond the company’s powers.
Judgment:
The Supreme Court of India held that the donation was ultra vires the company’s memorandum and void. The court emphasized that the funds of the company must
3 Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, 1875 LR 7 HL 653
4 A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185
only be applied to objectives specified in the memorandum, and any act beyond these objectives is invalid, even if all shareholders consent.
Conclusion
So, basically the doctrine of ultra vires remains a cornerstone of company law, ensuring that companies operate strictly within the scope of their memorandum of association and the provisions of the Companies Act. It serves as a vital safeguard for shareholders and creditors, offering protection against unauthorized or improper use of company funds and resources. By describing the limits of a company’s powers, this doctrine reinforces corporate accountability and lawful business conduct.
Modern statutory reforms, such as the Companies Act, 2013, have introduced flexibility by broadening corporate objectives and providing mechanisms to ratify certain ultra vires acts, the principle still holds significant relevance. It prevents the misuse of authority by directors and ensures adherence to the company’s foundational objectives.
Ultimately, the doctrine plays a dual role: Firstly, it protects stakeholders from potential financial mismanagement and secondly, it ensures that the company adheres to its stated purpose, thereby promoting trust, transparency, and stability in corporate governance.
