What is ‘ULTRA VIRES’?

     Going by the very terms, the meaning of the term ‘ULTRA’ is beyond and ‘VIRES’ is power. Thus, this Latin term translates to ‘beyond power’.

    A company is incorporated under the Companies Act, 2013 and in accordance to the terms set out in its Memorandum of Association (MOA). Thus, a company which owes its incorporation to a statutory authority cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the Statute or the MOA. In simple terms, a company is bound by the provisions of the Companies Act, 2013 and that agreed and enlisted in the MOA. Any act or transaction conducted beyond such powers will be ineffective and void. This is known as the ‘Doctrine of Ultra Vires

    Ultra Vires in Company Law –

    The Memorandum of Association (MOA) is the constitution of the company.

    Section 4 [1] of the Companies Act, 2013 contains the name, address, object and scope of the company and sets out the power for the directors of the company. The Object Clause in the memorandum of the company contains the object for which the company is formed. If the company or the directors and members of the company act beyond their authority determined in the object clause then that will amount to ultra vires.

    Section 4(1)(c) [2] of the Companies Act states that any matter which is considered to be necessary must be mentioned in the object clause of the memorandum because if at a later stage the directors or the company presumes that such an act/transaction comes under their power and act and commit breach of the contract then section 245 (1)(b) comes into play which prevents the company from doing so.

    Section 245(1)(b) [3] of the Act – states that the members and depositors have the right, and they can exercise such a right to file an application before the appropriate tribunal if they believe that the company is conducting its affairs prejudicial to the interests of :

    a.     The Company

    b.     The members          

    c.     The depositors

    And as such can restrain the company from acting in violation to the MOA.

    Basic Principles Regarding the Doctrine of Ultra Vires –

    • Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
    • Where one party has entirely performed his part of the contract, reliance on the defense of the ultra-vires was usually precluded in the doctrine of estoppel.
    • Where both the parties have entirely performed the contract, then it cannot be attacked on the basis of this doctrine.
    • Where the contract is fully executory, any of the parties can raise the defense of ultra-vires.
    • If a contract has been partially performed but the performance was insufficient to bring the doctrine of estoppel into the action, a suit can be brought for the recovery of the benefits conferred.
    • If an agent of the corporation commits any default or tort within the scope of his employment, the company cannot defend by saying that the act was ultra-vires.

    Origin of the Doctrine –

    The Doctrine of Ultra Vires originated in the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [4] which was decided by the House of Lords. The company and M/s. Riche entered into a contract where the company agreed to construct a railway line.

    The objects under the object clause of this company were to supply and sell the materials required to construct railways. It does not cover construction of railway lines. The contract here was to construct a railway which was contrary to the memorandum of association.

    As held by House of Lords that the contract was ultra vires not only of the director but also of whole company. Even if majority of the shareholders ratify such an act, then also it will remain null and void. It will still remain ultra vires of the whole company.

    Evolution of the doctrine of Ultra Vires in India

    In India, the concept of Ultra Vires was first traced in the case of Jahangir R. Modi v. Shamji Ladha [5] wherein the plaintiff had purchased 600 shares of a company. The directors who were also the defendants had purchased a certain number of shares in the same company. The object clause of the memorandum of the company however, did not allow its directors to sell or purchase the shares of the company. The plaintiff sued the directors and asked compensation for the loss incurred due to such purchase from the court. The Bombay High Court held that “a shareholder can maintain an action against the directors to compel them to restore to the company the funds to it that have been employed by them in a transaction that they have no authority to enter into, without making the company a party to the suit”.

    The Doctrine in India puts emphasis on its need to control and prevent malpractices of business in the companies undertaken by the directors or other members of the company. Moreover, in a developing country like India if the corporations are allowed to expand their business by surpassing the object clause of the company’s memorandum then new business will find it very difficult to incorporate their company in the market for they will lack in new ideas because the established company would expand their business according to the ideas that promote their own business by exceeding their delegated power as per the object clause and eventually the new companies would not like to start a business that has already been undertaken by somebody else. So, in order to give equal opportunity and be fair and just to all players in the market the doctrine has to play an important role in India. Further, the doctrine, at the same time, by putting restrictions on the unscrupulous actions of the company helps in the country’s economic growth. Lastly, it also protects investors and creditors

    Difference between an Ultra-Vires and an Illegal act

    An ultra-vires act is entirely different from an illegal act. People often mistakenly use them as a synonym to each other, but they are not. Anything which is beyond the objectives of the company as specified in the memorandum of the company is ultra-vires. However, anything which is an offense or draws civil liabilities or is prohibited by law is illegal. Anything which is ultra-vires, may or may not be illegal, but both of such acts are void-ab-initio

    Exceptions to the Doctrine of Ultra Vires

    • Any act which is done irregularly, but otherwise it is intra-vires the company, can be validated by the shareholders of the company by giving their consent.
    • Any act which is outside the authority of the directors of the company but otherwise it is intra-vires the company can be ratified by the shareholder of the company.
    • If the company acquires property in a manner which is ultra-vires of the contract, the right of the company over such property will still be secured.
    • Any incidental or consequential effect of the ultra-vires act will not be invalid unless the Companies Act expressly prohibits it.
    • If any act is deemed to be within the authority of the company by the Companies Act, then it will not be considered as ultra-vires even if they are not expressly stated in the memorandum.
    • Articles of association can be altered with retrospective effect to validate an act which is ultra-vires of articles.

    Types of ultra-vires acts and when can an ultra-vires act be ratified?

    Ultra-vires acts can be generally of four types:

    1. Acts which are ultra-vires to the Companies Act

    Any act or contract which is entered by the company which is ultra-vires the Companies Act is void-ab-initio, even if memorandum or articles of the company authorized it. Such act cannot be ratified in any situation. Similarly, some acts are deemed to be intra-vires for the company even if they are not mentioned in the memorandum or articles because the Companies Act authorizes them

    • Ultra Vires to 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 to 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.

    [1] Companies Act, 2013 – Section 4

    [2] ibid

    [3] Companies Act, 2013 – Section 245

    [4] 1875 L.R. 7 H.L. 653

    [5] (1866-67) 4 Bom HCR 185