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Key takeaways

  • The Latin phrase "beyond the powers of" is the root of the English word "Ultra Vires." Therefore, it indicates beyond the company's control when used in a corporate context.
  • Ultra vires is when a company, or its directors and members, behave in a way that goes beyond the scope of their expressly granted powers under the object clause.
  • The ultra vires doctrine's primary goal is to shield the company's creditors and investors from experiencing any losses that the business is liable to cover

Critical Analysis of the Doctrine of Ultra Vires

A company's memorandum outlines its authority because it is an artificial person. The Memorandum of Association (MOA) serves as the company's charter. The name, address, objectives, and scope of the company are listed in section 4 of the Companies Act of 2013, and it also outlines the directors' authority. The purpose for which the company is created is stated in the Object Clause of the firm's memorandum. Ultra vires is when a company, or its directors and members, behave in a way that goes beyond the scope of their expressly granted powers under the object clause.

The Latin phrase "beyond the powers of" is the root of the English word "Ultra Vires." Therefore, it indicates beyond the company's control when used in a corporate context. The statute that created the corporation and the memorandum of association are essentially where the company's authority comes from. Even if the directors decide to do so later, an ultra vires act is void and cannot be approved.

Purpose of Doctrine of Ultra Vires

The goal of law is to control how people behave. The purpose of law is to strike a balance between a person's rights and obligations. Organizations are given personalities. It is a distinct legal entity with legal obligations and rights that govern its operations. Every company is founded with the intention of achieving a specific set of goals. The object clause identifies the company's purpose and the area in which it operates. The clauseused in the act must specify the purpose for which the company is intended to be constituted as well as any actions deemed required to achieve that purpose. Any action taken by a firm outside of such boundaries will be ultra vires, void, and unable to be approved even by the unanimous consent of all shareholders.

However, the corporation may take any action that is related to and affects the designated items, and it won't be considered an ultra vires action. An Act of Parliament gave permission for a company to build a railroad in the case of Attorney General v. G.E. Rly. Co. The first company entered into a deal with two more businesses to supply rolling stock. An injunction was filed to try to prevent this, claiming that none of the Acts creating the companies expressly authorised for such a contract. The Acts supported the contract, making it not extra vires.Whatever may reasonably be regarded as incidental to, or consequential upon, those things which the Legislature has authorised, unless expressly prohibited to be held, by judicial construction, to be ultra vires; powers conferred by statute are taken to include, by implication, a right to take any steps which are reasonably necessary to achieve the statutory purpose. The company's goal must not be against the law, immoral, contrary to public policy, or in violation of the Act.

Development of Doctrine of Ultra Vires

The Ashbury Rly. Carriage & Iron Company v. Riche case, in which the company's directors contracted with Riche to provide financing for the company's building of a railway line, is where the doctrine of ultra vires first emerged. The contract was eventually revoked by the directors due to the memorandum of association's excess vires, nevertheless. The House of Lords ruled that the contract was supra vires since it could not be confirmed later and was therefore void ab initio at the moment it was made.

The purpose of the doctrine in this case, according to Lord Justice Cairns, is to protect creditors by ensuring that the company funds, to which they must look for payment, are not wasted on unauthorised activities, as well as to protect investors by allowing them to understand the purposes for which the money is to be used.

The subscribers to the memorandum of association have the choice of object, and they have nearly complete freedom in this regard. The only clear limitations are that the objectives cannot be in conflict with local laws or the regulations of the Companies Act. For instance, gambling is prohibited by law. No business may be organised with this goal in mind. Because operating a lottery is against the law, it was, therefore, ordered that any company that had been formed for that purpose be shut down.

According to the Companies Act, the memorandum must include any information deemed necessary for achieving the stated objectives. However, even if they are not expressly mentioned, the principle of reasonable construction would still permit them.

The doctrine of ultra vires was first used in India in the landmark decision of Jahangir R. Modi v. ShamjiLadha, where the Bombay High Court determined that the directors' acquisition of a joint stock company violated the company's memorandum of association because the purchase had not been authorised by the charter. The doctrine's goal is to inform creditors and shareholders that the company's assets and resources may only be used in accordance with the MOA procedure, and not in any other way. The creditor must make sure that his interactions with the corporation do not transcend the goals of the MOA. The creditor could always protect its interest by cancelling the transaction if it is ultra vires.

Any agreement entered into based on an ultra vires act is null and void, and neither the company nor the other party may ever be bound by it. To stop the company from participating in any ultra vires acts, the company's members could file a lawsuit for an injunction against it. Any ultra vires contract cannot become an intra vires contract through estoppel or ratification since it is inherently invalid. The company will always retain its ownership of any property acquired using its assets in an ultra vires manner. Any debtor-creditor relationship that is extra vires is incapable of offering a remedy in personam.

Conclusion

Since the company is an artificial person, its memorandum of association outlines its purposes and authority. The Memorandum is a company's most important document. It has an object clause that enables the business to fulfil the reason it was founded.

Although an Ultra Vires act differs from an illegal one, both are invalid. Even if a conduct is illegal, it will be void if a firm and its members go beyond the object clause in the memorandum. Additionally, a prohibited act will not be legal even if it falls under the company's object clause.

The ultra vires doctrine's primary goal is to shield the company's creditors and investors from experiencing any losses that the business is liable to cover. This doctrine forbids the company from using investor and creditor funds for purposes other than those specified in the object clause of the company's memorandum. By monitoring their finances and the actions of the directors on the company's behalf, it enables people to understand the goals of the organisation.


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