Ultra-Vires- Doctrine, Comparison with Illegal, Type & More

The Latin term Ultra-Vires is made of two words “ultra” which means beyond and “vires” which means power or authority. So anything beyond authority or power is called ultra-vires. In the context of the company, we can say that Any transaction or activity which is done by the company or its directors which is beyond their legal authority/power or which was outside the preview of the object of the company is ultra-vires.

Doctrine Of Ultra-Vires:

A company is an artificial person, its powers are mentioned in its Memorandum of Association (MOA). The Memorandum of Association (MOA) is the constitution and charter of the company. It contains the name, address, objects, liability, and scope of the company and sets out the power of the directors of the company. The Object Clause in the memorandum of the company contains the object for which the company is being incorporated. If the company or the directors and members of the company act beyond their authority or power enumerated in the object clause then that will amount to ultra vires. 

The main purpose of the doctrine of ultra vires is to protect the investors and the creditors of the company from suffering any kind of loss or damage for which the company is responsible to pay. This doctrine prevents the company from utilizing the money of the investors and creditors elsewhere which is outside the preview of the object clause of the memorandum of the company. 

THE DOCTRINE OF ULTRA-VIRES IN COMPANIES ACT, 2013:

Section 4 (1)(c) of the Companies Act, 2013, prescribed that all the objects for which the company is proposed to be incorporated and any other object which is considered necessary in furtherance of the main object should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act specifies that the members and depositors have the right to apply for form of a class action suit before the tribunal if they have reason to believe that the affairs of the company are being conducted in a manner which is prejudicial to the interest of the company or its members or depositors, to restrain the company from committing any act which can be considered as a breach of the provisions of the company’s memorandum or articles.

ULTRA VIRES VS. ILLEGAL:

We often use ultra vires and illegal acts as a synonym for each other, but both are entirely different from each other. 

Anything which is beyond the scope of the object clause of the MOA of the company is the ultra-vires Act. 

However, anything which is prohibited by law or an offense draws civil liabilities or is illegal Activity. 

Anything which is ultra-vires, may or may not be illegal, but both are the void-ab-initio.

Types Of Ultra-Vires Acts:

1. Ultra-Vires To The Companies Act:

Any act or transaction which is done by the company which is ultra-vires or against the Companies Act, is void-ab-initio, even if the MOA or AOA of the company authorized it. 

Such an act cannot be ratified in any situation even if it is authorized by all shareholders of the company. 

The Acts are deemed to be intra-vires for the company if they are authorized by the Companies Act and not mentioned in the memorandum or articles of the company.

1. Ultra-Vires To The Memorandum Of The Company

An act that is done beyond the powers provided by the memorandum to the company is called ultra-vires the memorandum of. If a part of the act or transaction is within the authority or power provided by the memorandum and the remaining part is beyond the authority or power, both parts can be separated. Then only that part that is beyond the powers or authority is considered ultra-vires, and the part which is within the authority or power is considered intra-vires. However, if both parts cannot be separated then the whole act or transaction will be considered ultra-vires and void. Such acts cannot be ratified even by all shareholders as they are void-ab-initio.

1. Ultra-Vires To The Articles But Intra-Vires To The Memorandum:

All the acts or transactions which are made beyond the powers provided by the articles (AOA) but are within the powers or authority given by the memorandum (MOA) are called ultra-vires the articles but intra-vires the memorandum. Such acts or transactions can be ratified by the shareholders retrospectively by making alterations to the articles of the company.

1. Ultra-Vires To The Directors But Intra-Vires To The Company

All the acts or transactions which are made by the directors of the company beyond the powers provided to them are called ultra-vires the directors but intra-vires the company. The company may ratify such acts and then they will be binding.

Basic Principles Concerning the Doctrine of Ultra-Vires

• Shareholders of the company cannot ratify an ultra-vires act or contract.
• Where one party of the contract has completely performed his part of the contract, reliance on the defence of the ultra-vires was usually precluded in the doctrine of estoppel.
• Where both parties have completely performed the contract, then it cannot be attacked based on this doctrine.
• Any of the parties of the contract can raise the defence of ultra-vires.
• If a contract or act has been partially performed but the performance was insufficient to bring the doctrine of estoppel, then a suit can be brought for the recovery of the benefits conferred.

Exception To The Doctrine Of Ultra Vires

• An act that is within the preview of the object clause of MOA the company but outside the authority of directors can be ratified by the shareholders of the company.
• The shareholders have the authority to rectify an intra-vires act performed in an irregular manner in the company.
• If the company purchases any property through an ultra vires investment, even then the company's right over that property shall be protected.
• A consequential effect of an act or contract shall not be considered ultra vires unless it is expressly prohibited by the statute or Law.

Landmark Judgment Related To The Doctrine Of Ultra Vires

1. Jahangir R. Modi V Shamji Ladha

Facts of this case:

The plaintiff (shareholder of the company) has purchased 601 shares in a particular company. The defendants (director of the company) in this case- purchased 1422 shares of the company. The object clause of the MOA of the company did not allow the directors to purchase and sell shares of the company. However, the defendants went ahead and purchased shares anyway. The shareholder filed a suit against the directors in Court and asked for compensation for the losses suffered by him due to such a purchase.

Judgment/order

The Bombay High Court exercised the Doctrine of Ultra Vires in this case. It was held that a shareholder can maintain an action against the directors of the company to compel them to refund to the company the funds to it that have been used by them in a transaction that they have no authority to enter into, without making the company a party to the suit. It was also held that the defendants(director) had acted outside of the scope of the object clause of the memorandum. Since the memorandum was the most essential document of any company, an act or transaction overriding the document will be completely void. Thus, the director was held guilty as per the doctrine of ultra vires.

1. A. Lakshmanswamy Mudaliar vs Life Insurance Company

 Facts of the case:

The memorandum of the company provided that the directors were empowered to donate a part of the company’s profit to a charitable organization that would help the general public or any benevolent object. Following this, the directors have donated Rs. 2 lacs to a charitable organization for promoting technical and business knowledge with shareholders’ resolution. During this period, LIC had taken over the said business and questioned the charitable donation which was out of the scope of the object clause of the memorandum.

Order/Judgement:

• The court held it to be ultra vires stating that the directors cannot spend the company’s money on any charitable trust of their choice. They could only spend such an amount on the charitable trust that a cause is related to the business in some manner or furthers the business objectives of the company. The company’s business has been taken over by the LIC, it had no business left to promote. Then, the Courts deemed the charity as an ultra vires act and not an intra vires act. Further, the court ordered the directors of the company personally liable for the payment made by them. 
• The supreme court also enacted guidelines for the same:

1. The fund of the company cannot be diverted to every kind of charity even if there is an unrestricted power to that effect in the company’s memorandum”.

2. The objects must be distinguished from powers. And objects must be mentioned in the memorandum, but not powers. Even if the powers are mentioned, they can be used only to effectuate the objects of the company”.

3.  There must be a proximate connection between the gift and the company’s business interests”

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