Doctrine of Ultra Vires

Introduction:  

This doctrine applies in relation to the joint-stock companies, where some objects of the  particular company have been ascertained under the Memorandum of Associations and to  ascertain the validity of its act, such an act should have complied with the Companies Act (which  is in force at the time) and the other related documents such as MoA, Article of Association.  Thus, if any act done beyond the power enshrined under the object clause of the MoA, is held  Ultra Vires act and with the enforcement of the doctrine of Ultra Vires, it is held as void ab  initio. 

Related Sections of the Companies Act: 

• Sec. 2(20): “Company” means a company incorporated under this act (Companies Act,  2013) or any previous company law. 

• Sec. 2(56): “Memorandum” means the MoA of a Company as originally framed as  altered from time to time in pursuance of any previous company law or this act.  • Sec. 4(1)(c): The MoA of a company shall state the objects for which company is  proposed to be incorporated and any matter considered necessary in furtherance thereof. 

Additional Section to be considered: 

• Sec. 6(b): Save as otherwise expressly provided in this Act, any provision contained in  the memorandum, article, agreement or resolution shall, to the extent to which it is  repugnant to the provisions of this Act, become or be void, as the case may be. 

Meaning:

The words ‘Ultra’ and ‘Vires’ denotes to the ‘beyond’ and ‘power’ respectively. Thus, an action  acted upon beyond the power enshrined under the object clause of MoA is Ultra Vires.  

Case Study: 

• Cases which provides reasons to implement the doctrine: In Port Canning & Land  Investment Co, re,i where it was stated that ‘it is the function of the courts to see that the  company does not move in a direction away from that field.’ And this case is further read  with the case Cotman v. Broughamii, which provides understanding on the function of  the memorandum i.e. ‘to delimit and identify the objects by which one can identify the  field of the industry within which the corporate activities are to be confined.’ 

Thus, to check up on the regulations on the reasons for which object rule is inserted, this  doctrine applies. 

• Cases in which this doctrine was applied: For the first time, this doctrine was  demonstrated in the Ashbury Railway Carriage and Iron Co. Ltd. v. Richeiii, where the  House of Lords held the contract questioned in case as ultra vires, wherein the substance  of the judgement, the Lord held that ‘the subscribers are to state the objects for which the  proposed company is to be established and then the company comes into existence for  those objects and those only. Later, this doctrine was maintained under the Attorney  General v. Great Eastern Railway Co.iv, but during its application, it was added, ‘this  doctrine ought to be reasonable and not unreasonably understood and applied and that  whatever may be fairly regarded as incidental to the objects ought not to be held as ultra  vires, unless it is expressly prohibited.  

➢ Application in India: In 1866 under the Jehangir R Modi v. Shamji Ladhav,  where Bombay High court based on facts recognized this doctrine and held ‘an  act done unless expressly authorised in the MoA is Ultra Vires.’ Later, by S.C.  this doctrine was affirmed in the case A Lakshmanaswami Mudaliar v. LIC.vi

Consequences of Ultra Vires Act: 

1. Void ab initio: The basic consequence of this doctrine is to nullify the act from the beginning.  It is presumed that such an act never been acted upon and neither the company can sue nor the  company can be sued for such an act.vii 

➢ It is also stated in the Ashbury case, that an ultra vires contract, being void ab initio,  can’t become intra vires by any reason of estoppels, lapse of time, ratification,  acquiescence, delay or any performance by either party. 

➢ Exception:  

Ultra Vires acquired Property: It is found that this situation leads to exception  to the above rule, where if any property is acquired by the company’s money and  to spend the capital of the company is prohibited on such property leads to,  obviously, an ultra vires act. But, in such circumstance also, the company can  seek its legal right over such property if the acquisition was legally and done by  formal transfer.viii 

2. Injunction: Since any member of the company can seek knowledge about the objects of the  company, which already registered via MoA, upon finding an ultra vires can also seek an  injunction to restrain it from proceeding with it. [For reference, see also, 1958 Mad LJ 55] 

3. Personal Liability of Directors: As per duty enshrined under Sec. 166 of the Companies act,  2013, the director is imposed with the duty to work with due diligence and this also imposes the  duty to check that the corporate capital is used for the objects of the company, it is found from  the no. of cases that in such a situation, the director is held personally liable.ix 

4. Breach of Warranty of Authority: Circumstances where an agent is appointed to deal with  the third party in relation to matters of the company and in holding that position act beyond the  scope authorised, such an agent shall be personally liable to the loss caused to the third party.x 

Here, this is to be noted that liability is found only in case of misrepresentation of fact  irrespective of the law. 

Additional related Facts: 

1. The English Company Law Revision Committee (Known as Cohen Committee, 1945)  recommended for abolition of this doctrine.xi 

2. European Communities Act, 1972 has been amended based on the above stated  recommendation. 

3. English Companies Act, 1985 has also been amended in 1989, based on above-stated  recommendation. 

4. The U.K. Act, 1996 has not made compulsory to state the object in MoA. And, if one finds it  necessary to state, may provide it under AoA, which indirectly provides the non-application of  this doctrine at present. 

Conclusion: 

While concluding the nature and scope of this doctrine, it is found that other rules like ‘main  object rule’, ‘rule of constructive notice’ are to be ascertained. And this doctrine helps to certain  a degree of protection to the members and third parties against the ascertained purpose of the  company, which is also the ultimate object of the ‘object clause’ stated under MoA.  

Payal Agrawal 

S. S. Jain Subodh Law College, Rajasthan University, Jaipur