12.3.3 (Doctrine of Ultra Vires)

We have mentioned earlier that a company cannot go beyond its objects mentioned in its memorandum. The company’s activities are confined strictly to the objects mentioned in its memorandum and if they go beyond these objects, then such acts will be ultra vires. The object of declaring such act as ultra vires is to protect the interests of shareholders and all other who deal with the company. Some points worth noting as regards doctrine of ultra vires are:

1. A company exists only for the objects which are expressly stated in its objects clause or which are incidental to or consequential upon these specified objects.

2. Any act done outside the express or implied objects is ultra vires.

1 Table C, Schedule I to the Companies Act, 1956; Also, Sec. 13(3).

2 See discussion under 'Lifting the Corporate Veil'.

3. The ultra vires acts are null and void ab initio. The company is not bound by these acts; and neither the company nor the other contracting party can sue upon it.

Examples. (i) A company with the objects, namely (a) to make and sell or lend on hire railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock; (b) to carry on the business of mechanical engineers and general contractors; (c) to purchase, lease, work and sell, mines, minerals, land and buildings; (d) to purchase and sell as merchants timber, coal, metals or other materials. The company contracted to finance the construction of a railway bridge in Belgium and there was evidence that the agreement had been ratified by all the members. Later, the company repudiarepudiated the agreement and was sued for breach of contract. In its defence the company repudiated its lack of capacity to enter into a contract which was outside the scope of its objects clause. The other party brought an action for damages for breach of contract. His contentions were that the contract in question came well within the meaning of the words 'general contractors' and, was, therefore, within the powers of the company and secondly, that the contract was ratified by the majority of the shareholders.

            Held, that the term general contractors must be taken to indicate the making           generally of such contracts as were connected with the business of mechanical   engineers. If the term 'general contractors' was so interpreted it would authorise the making of contracts of any and every description, such as, for            instance, of fire and marine insurance and the memorandum in place of    specifying the particular kind of business, would virtually point to the carrying             on of business of any kind whatsoever and would, therefore, be altogether             unmeaningful. Hence, the contract was entirely beyond the objects in the   memorandum of association . [Ashbury Railway Carriage and lron Co. v.   Richc (1875) LR 7 HL653].

            (ii) The objects clause of a company included making of costumes, gowns and       similar things within the clothing trade. However, it extended its activities to             the manufacture of veneered panels and became indebted to three parties (a)    builders of the veneered panels factory, (b) suppliers of veneers and (c) fuel             merchants. In the meantime the company went into liquidation and rejected           the claim of the three creditors. The creditors filed suits for the recovery of           money. HeId, the contention of the liquidator was correct as all the three             contracts were clearly ultra vires.
            4. In case a company is about to undertake an ultra vires act, the members of a company (even a single member) can get an order of injunction from the court restraining the company from going ahead with the ultra vires act.

            5. If the directors have exceeded their authority and done something then such matter can be ratified by the general body of the shareholders, provided the company has the capacity to do so by its memorandum of association.

            Example. The Company has the power to borrow money, but the Articles of           the company provide that in case the directors borrow more than Rs. 50,000,    they should get prior approval by the company in general meeting. However,      the directors can issue debentures to the extent of Rs. 75,000 without getting         the approval from the shareholders.

The company in general meeting may ratify the act of directors as it is intra vires the

company, though ultra vires the powers of the directors of the company.

            6. Any property acquired by a company under an ultra vires transaction may be protected by the company against damage by third persons.

            7. Directors and other officers can be held liable to compensate the  company for any loss occasioned to it by an ultra vires act.

            8. Directors and other officers shall be personally accountable  to the third parties

            9. Money or Property gained through an ultra-vircs  transaction available in specie or capable of being identified shall be restituted (restored) to the other party.

            10. ln case, an ultra-vires loan, taken by a company is used  for payment of its intra-vires debts, the lender of the ultra-vires loin is substituted  in place of the creditor who has been paid off and as such can recover the money.