Doctrine of Ultra Vires

Ultra vires means beyond powers i.e. any act done by the company beyond its legal powers and authority.

An act ultra vires the company: It has been observed that company has an Independent legal existence and is a separate body corporate distinct from its members. The company can therefore perform acts on its own. The acts which the company performs are authorized by:

1) Objects specified in the Memorandum of Association of the company with which it is registered. Objects include incidental objects also and
2) The Companies act

Any act done by the company which is neither authorized by its object nor by the Companies act that acts is called ultra vires the powers and authority of the company. An act which is ultra vires the company is void and cannot bind the company Since the act is void it cannot be ratified by the shareholders either.

The leading case on the point was held that the contract of ultra vires, the company was void and not even the subsequent assent of the whole body of the shareholders could ratify it. An ultra vires contract being void abinitio cannot become intra vires by reasons of estoppel lapse of time, ratification acquiescence or delay. In this case the objects of the company provided to make and sell, or lend or hire railway carriage and wagons and all kinds of railways plants, to carry on the business of mechanical engineers and general contractors; etc. The company contracted with Riche to finance the construction of railways line in Belgium and on repudiation of contract by the company. Riche claimed damages contending that the contract fell within the scope of the words general contractors and further the contract was ratified by a majority of shareholder. It was observed that the Memorandum of Association has two fold effect – an affirmative that it states the ambit and extent of powers of the company and negative that nothing shall be done beyond that ambit. It is to be specific and the terms of general contractors therefore cannot be so widely interpreted. The contract of the company to finance the construction of railway line was ultra vires the act of company. Since the act was ultra vires the power and scope of objects of Memorandum it cannot be ratified either.

The directors though authorized to make payments towards any charitable or any benevolent object made payment to a trust, the payment was held to be ultra vires. It was held that the directors could spend for the promotion of only such charitable objects as would be useful for the attainment of the company’s objects. Earlier it has been held in Eastern Countries Rly that no company can devote any part of neither its funds to an object which is neither essential nor incidental to the fulfillment of its object howsoever beneficial that object might be.

Act Ultra vires the powers of directors and ultra vires the articles but intra vires the Memorandum: The act can be ultra vires, the powers and authority of the directors also. Directors of the company, may act beyond the powers and authority assigned to them. The directors derive their powers through:

1) Articles of Association
2) Specific authority through resolutions.
3) Companies Act

An act ultra vires the powers of directors but not ultra vires the company can be ratified by the share holders. Similarly an act ultra vires the articles of company but within the powers of the Memorandum (intra vires the memorandum) can be ratified by altering the articles . In short, an act ultra vires the company is void and cannot be ratified. An act ultra vires the powers of directors and ultra vires the articles but intra vires the Memorandum can be ratified as, such an act is irregular

Relief: The aggrieved party has following reliefs:

1) Directors can be made liable to the outsiders for breach of an implied warranty of authority
2) Any member of the company can get an injunction restraining the company from performing a ultra vires act or from proceeding with it.
3) If a director makes an ultra vires, payment he can be compelled to refund the money to the company.

Source: Business Law