What is Ultra Vires?
The term “Ultra” means beyond and “Vires” means powers. The term, therefore, means the doing of an act, which is beyond the legal power, and authority of the company. It is considered as an act outside the scope of the object of the company.
Doctrine of Ultra Vires
The Memorandum, being the constitution of the company sets out the principal objectives, powers, scope and its area of operation, both internal and external. A company, therefore, can do anything within the scope of the powers specified in the Memorandum.
It has also an implied power to do all such things that are fairly incidental to its main objects. If the company does anything which is beyond the powers specified in the Memorandum it shall be construed as an Ultra Vires act.
Why the Doctrine?
The objective of the Doctrine of Ultra Vires is to ensure the shareholders and the creditors that the fund and assets of the company will not be used for any purpose other than those specified in the Memorandum. Especially the creditors, while dealing with the company can make themselves aware of the fact whether his transaction with the company is ultra vires or not. If it is found ultra vires, he can avoid such transaction and thereby safeguard his interest.
Effects of an Ultra Vires Act
The effects of an ultra vires act can be summed up as follows:
1. An ultra vires act will be wholly void and it will not bind the company; neither the company nor the outsider can enforce the contract.
2. Any member of the company can bring injunction against the company to prevent it from doing any ultra vires act.
3. The directors of the company will be personally liable to make good the funds used for the ultra vires acts.
4. Where a company’s money has been used ultra vires to acquire some property, the right of the company over such property is held secure.
5. Since Ultra Vires contracts are treated as invalid from the outset, it cannot become Intra Vires by reason of estoppel or ratification.
6. Ultra Vires borrowing does not create the relationship of debtor and creditor. The only possible remedy in such case is in rem and not in personam.
Can an Ultra Vires Act be Ratified?
An ultra vires act cannot be ratified even by the whole body of the shareholders and make it binding on the company. In other words, even the shareholders cannot do an ultra vires act. This is the peculiar feature of this doctrine.
The principles of law on this subject were first enunciated by Lord Cairons, L.J., in Ashbury Railway Carriage & Iron Co. Ltd. V. Riche. In that case, a company was formed with the following objects:
- to make, sell, lend or hire, railway carriages and wagons, and
- to purchase, lease, work and sell mines, minerals and land and buildings.
The directors contracted to finance the construction of a railway line in Belgium with Mls Riche. The Court held that the contract was ultra vires the company and void, so that even the subsequent assent of the whole body of the shareholders could not ratify it.
However, later on, the House of Lords held in other cases that the doctrine of ultra vires should be applied reasonably and unless it is expressly prohibited, a company may do an act, which is important for, or incidental to attainment of its objectives.
Types of Ultra Vires Acts
There are three types of ultra vires acts. They are-
- ultra vires the Memorandum or the company,
- ultra vires the Articles but intra vires the company, and
- ultra vires the directors but intra vires the company.
Ultra Vires the Memorandum or the Company
If the act done or contract made by the company is beyond the powers given in the objects clause of the Memorandum, it is called an act, which is ultra vires the Memorandum. The act is good to the extent of the authority of the company and bad as to the excess. But, where it cannot be separated from the authority conferred on the company by the Memorandum, the whole of the transaction shall be void. However, there is nothing in law to prevent a company from protecting its property, though it is ultra vires the company.
Ultra Vires the Articles but Intra Vires the Company
The acts done or contracts made beyond the powers given by the Articles but are within the powers of the Memorandum are called ultra vires the Articles but intra vires the company. The shareholders can ratify these acts by making an alteration in the Articles to that effect.
Ultra Vires the Directors but Intra Vires the Company
These are acts done or contracts made by the directors, which are ultra vires the directors, but intra vires the company. These acts can be ratified by the company and can make it binding.
Reference: Company Law