by The doctrine of ultra-vires is a legal concept that is used to determine the scope of the powers of a company. The term ultra-vires is derived from the Latin phrase “Beyond the powers.” The doctrine of ultra-vires holds that a company cannot undertake any activity that is beyond the powers granted to it in its Memorandum of Association. In this article, we will provide a detailed explanation of the doctrine of ultra-vires, its significance, and its application in the corporate world.
The doctrine of ultra-vires was first introduced in the United Kingdom in the mid-19th century. It was a response to the growth of joint stock companies, which were granted legal personality and the power to enter into contracts and undertake business activities. The doctrine sought to limit the power of companies and ensure that they operated within the legal framework provided by their Memorandum of Association.
Meaning of Ultra-vires
The term ultra-vires is derived from the Latin phrase “ultra vires,” which means “beyond the powers.” In the context of company law, it refers to any activity or transaction that is outside the scope of the powers granted to the company in its Memorandum of Association.
The Memorandum of Association is a legal document that sets out the objectives, powers, and scope of the activities that the company can undertake. It is a public document that is filed with the Registrar of Companies during the incorporation process. The Memorandum of Association is a key document that defines the legal framework within which the company must operate.
Significance of Ultra-vires
The doctrine of ultra-vires is significant for several reasons.
- It ensures that the powers of the company are clearly defined and that it operates within the legal framework provided by its Memorandum of Association. This helps to protect the interests of the shareholders, creditors, and other stakeholders of the company.
- The doctrine helps to prevent the company from engaging in activities that are outside the scope of its powers, which can lead to legal complications and financial losses. For example, if a company engages in an activity that is not authorized by its Memorandum of Association, it may not be able to enforce contracts related to that activity. In addition, the company may be liable for any losses or damages that result from the unauthorized activity.
- The doctrine of ultra-vires ensures that the company operates within the legal framework provided by the Companies Act, 2013, and other applicable laws. This helps to maintain the integrity of the corporate sector and ensures that companies operate in a transparent and accountable manner.
Application of Ultra-vires
The doctrine of ultra-vires has several applications in the corporate world. Some of the key applications are discussed below:
Protection of Shareholders’ Interest
The doctrine of ultra-vires is used to protect the interests of the shareholders of the company. The Memorandum of Association specifies the objects for which the company is established and the powers that it can exercise to achieve those objects. The shareholders invest in the company based on the understanding that the company will operate within the scope of its powers. If the company engages in an activity that is outside the scope of its powers, it may not be able to enforce contracts related to that activity. This can lead to financial losses for the shareholders.
Limitation of Powers of Directors
The doctrine of ultra-vires places limitations on the powers of the directors of the company. The directors of the company are appointed by the shareholders to manage the affairs of the company. However, they are bound by the Memorandum of Association and cannot engage in activities that are outside the scope of the powers granted to the company. If the directors engage in an activity that is beyond the powers of the company, they may be liable for any losses or damages that result from that activity.
Enforcement of Contracts
The doctrine of ultra-vires is used to enforce contracts entered into by the company. If the company engages in an activity that is outside the scope of its powers, it may not be able to enforce contracts related to that activity. This is because the contracts are deemed to be ultra-vires and therefore void. However, if the activity is subsequently authorized by the shareholders, the contracts can be enforced.
Protection of Creditors
The doctrine of ultra-vires also protects the interests of the creditors of the company. If the company engages in an activity that is outside the scope of its powers and incurs debts as a result, the creditors may not be able to recover their debts from the company. This is because the debts are deemed to be ultra-vires and therefore void. However, if the activity is subsequently authorized by the shareholders, the creditors can recover their debts.
Alteration of Memorandum of Association
The doctrine of ultra-vires also governs the alteration of the Memorandum of Association. The Memorandum of Association can be altered by the company through a special resolution passed by the shareholders. However, the alteration cannot be ultra-vires, i.e., it cannot extend the objects or powers of the company beyond the scope of the original Memorandum of Association.
Exceptions to the Doctrine of Ultra-vires
There are certain exceptions to the doctrine of ultra-vires. These are as follows:
Acts of the Company within Ostensible Authority
The doctrine of ultra-vires does not apply to acts of the company that are within its ostensible authority. Ostensible authority refers to the authority that is implied from the conduct of the company or its agents. For example, if the company engages in an activity that is not authorized by its Memorandum of Association, but its agents have represented that they have the authority to undertake that activity, the company may be deemed to have acted within its ostensible authority.
Acts of the Company under the Doctrine of Indoor Management
The doctrine of indoor management is a legal principle that protects the interests of third parties who deal with the company in good faith. Under this doctrine, a third party dealing with the company is entitled to assume that the internal proceedings of the company have been regularly carried out. Therefore, if the company engages in an activity that is outside the scope of its powers, but the third party dealing with the company had no reason to suspect that the company was acting ultra-vires, the company may be deemed to have acted within its powers.
Doctrine of Ultra-vires relevant section and laws
The doctrine of ultra-vires has been recognized under the Companies Act, 2013 and several other laws in India. The following are the relevant sections and laws related to the doctrine of ultra-vires in India:
Companies Act, 2013
The Companies Act, 2013 recognizes the doctrine of ultra-vires under Section 4(1)(c) which defines the Memorandum of Association of a company. According to this section, the Memorandum of Association of a company shall state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. The section also provides that any act or activity undertaken by the company beyond the scope of its objects as specified in the Memorandum of Association shall be considered ultra-vires.
Indian Contract Act, 1872
The Indian Contract Act, 1872 recognizes the doctrine of ultra-vires in relation to contracts. According to Section 23 of the Act, any agreement that is made for an unlawful object or consideration shall be considered void. In the context of the doctrine of ultra-vires, any contract that is entered into by a company beyond the scope of its objects as specified in the Memorandum of Association shall be considered void.
Companies (Amendment) Act, 2015
The Companies (Amendment) Act, 2015 introduced several changes to the Companies Act, 2013, including the introduction of the concept of ultra-vires. Section 10A of the Act provides that a company may commence any business or exercise any borrowing powers only after filing a declaration with the Registrar of Companies stating that every subscriber to the Memorandum of Association has paid the value of the shares agreed to be taken by him and that the company has filed a verification of its registered office. This section ensures that companies do not engage in any activity that is beyond the scope of their objects as specified in the Memorandum of Association.
Indian Companies Act, 1913
The Indian Companies Act, 1913 was the first law in India that recognized the doctrine of ultra-vires. Under Section 18 of the Act, the Memorandum of Association of a company was required to state the objects for which the company was established, and any activity undertaken by the company beyond the scope of these objects was considered ultra-vires.
Judicial Precedents
Several judicial precedents have also recognized the doctrine of ultra-vires in India. For example, in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the court held that any contract entered into by a company that was beyond the scope of its objects as specified in the Memorandum of Association was considered void. Similarly, in the case of J. V. S. Iyengar v. J. R. Ullal and Co., the court held that a company could not undertake any activity that was beyond the scope of its objects as specified in the Memorandum of Association.
