Chirag Bhalla (Student) 01 December 2012

Alteration of memorandum

I am just a student facing problem in this situation:

X. Ltd., a cotton textile company, enters into a contract with Y. Ltd. an adjacent cotton textile mill, to supply electricity from their power generation plant. After supplies have been made for 3 moths, it is discovered that this activity is beyond the scope of the objects clause of the Memorandum of Association of X. Ltd.

Shareholders of X. Ltd. ratify the contract in their general body meeting. Can Y. Ltd., which refuses to make payment on the ground that the contract is wholly null and void, be legally compelled to make the payment?

Now, from one point of view, it is clear that as the activity was ultra-vires the m.o.a. of the company, it was wholly void. So, Y Ltd. need not pay.

But, as the shareholders ratified the contract in their general body meeting, they could have very easily altered the clause in m.o.a.

So, what is the real answer?

Reply Follow

2 Replies

Goutam Prasad (Advocate) 05 December 2012

In the situation stated by you, there is no confusion over the issue that even if shareholders have ratified the contract, the same is ultra vires the MOA and is hence void.

In such situation, Y Ltd.have two options - 1. to move out of contractual liability or 2. suggest X Ltd. to get MOA altered and then again execute same contract after alteration of new MOA.

As far as payment for 3 months supply is concerned, if they received material and does not deny receipt of material, they are liable to make payment. Just because contract is not binding it does not means that they can escape from liabilty for payment of supplies which they have received. Only thing is that terms and conditions of the contract will not be binding.

https://www.aegisjurist.com

https://www.facebook.com/aegisjurist.com

Amritesh Mishra (Advocate) 07 December 2012

I agree with Mr. Goutam prasad. Anything beyond the power of the MOA is ultra vires will be ineffective even if agreed to by all members. The rule of ultra vires was first time laid down by the House of lords in Ashbury Rly.Carriage & iron company vs. Riche. The doctrine of ultra vires has been upheld in large number of Indian cases. In the case of Lakshmanaswami Mudaliar Vs LIC, the directors were authorised to make payments for charitable purposes. In accordance with the shareholders resolution, the directors paid 2 lakhs to a trust for promoting technical and business knowledge. The honourable Supreme Court held that the payment was ultra vires the company.