‘Ultra’ means beyond and ‘vires’ means powers. The term ultra vires a company means that the doing of the act is beyond the legal power and authority of the company. The doctrine of ultra vires is important in defining the limits of the powers conferred on the company by its Memorandum of Association. According to this doctrine, the vires (power) of a company to enter into a contract or transaction is limited by the ambit of the Objects Clause of the Memorandum and the provisions of the Companies Act. Whatever is not permitted by the Objects Clause and the Act, is prohibited by the doctrine of ultra vires. If a company engages in any activity or enters into any contract which is ultra vires (outside the power conferred by) the Memorandum or Act, it will be null and void so far as the company is concerned and it cannot be subsequently ratified or validated even if all the shareholders give their consent. Thus under this doctrine, a company has powers to engage in only such activities or enter into such transactions:
- Which are essential to the attainment of the objects specified in the Memorandum;
- Which are reasonably and fairly incidental to the main objects; and
- Which are permitted by the provisions of the Companies Act.
The doctrine of ultra vires was first enunciated in the celebrated case Ashbury Railway Carriage and Iron Co. Ltd., vs Riche. The company was registered with the following objects:
- to make, and sell, or lend on hire, railway carriages and wagons;
- to carry on the business of mechanical engineers and general contractors;
- to purchase, lease, work and sell mines, minerals, land and buildings.
The directors contracted with M/s. Riche to purchase a concession for laying a railway line in Belgium. The contract was ratified by a special resolution. Later, the contract was repudiated by the company on the ground of its being ultra vires and Riche brought an action on the ground of breach of contract. It was held by the House of Lords that the contract was ultra vires the company so void ab initio. It was also held that, not even the assent of the whole body of shareholders can ratify such a contract, as the contract was ultra vires the objects clause.
Effects of Ultra Vires Transactions
If a company enters into transactions, which are ultra vires, it will have the following effects:
- Injunction: Whenever a company goes beyond the scope of the object clause, any of its members can get an injunction from the court to restrain the company from undertaking the ultra vires act.
- Personal Liability of Directors: If the transaction is ultra vires, for instance, if the funds of the company are misapplied, the directors will be held personally liable.
- Ultra Vires Contracts: Contracts entered into by a company, which are ultra vires, are void ab initio and unenforceable.
- Property Acquired Ultra Vires: If a company acquires any property under an ultra vires transaction, it has the right to hold the property and protect it against damage by other persons.
- Ultra Vires Torts: A company is not liable for torts committed by its agents or employees in the course of ultra vires transactions.
Credit: Business Law-CU