This article on ‘The Doctrine of Ultra Vires under the Companies Act‘ was written by Monika Yadav, an intern at Legal Upanishad.
An abecedarian rule from the Indian Companies Act is the concept of excess vires. It stipulates that anything the company does or agrees beyond the scope of the authority granted to the company and its directors by the MOA’s objective clause is deemed void and null. Such void acts or contracts are not fairly enforceable against the business. Acts that are carried out over the legal authority questioned by the purposes clause are referred to as “ultra vires” in legalese.
In this article, we will discuss the term ultra-vires, the needs of the doctrine of Ultra Vires, and its applicability to the Companies Act. Also talking about the exceptions of the doctrine, we will conclude the article by discussing a few case laws.
In Latin terms “ultra” means “beyond” and “vires” means “power”. So, anything which goes beyond the control is termed ultra-vires. An act done by the corporation or the directors which goes beyond the legal limits or out of the scope of the aim of the business will be considered ultra-vires in the view of the organisation.
The Doctrine of Ultra Vires
The company constitutes through the MOA. It describes the goals, authority, and operational area of the company internally as well as externally. The company is permitted to act in consideration of the powers granted as per the memorandum. A company could also perform any other steps that are unrelated to the memo’s main objectives. Any act which violates the limits of the MOA should be considered ultra-vires.
Requirements for the Doctrine of Ultra Vires
This doctrine guarantees the firm’s shareholders and investors as its funds would be useful for purposes outlined in the company’s memorandum. By doing this, shareholders of a firm can be sure as the plutocrats won’t be utilized for things that weren’t made clear when they decided to invest. If firm resources were used inappropriately, it may potentially result in the company’s bankruptcy, which would imply that creditors would not be paid.
Similar situations can benefit from this doctrine. This philosophy clearly defines the boundaries of what business directors may and may not do. The directors’ indoctrination is restrained, and they are kept from straying from the company’s objective.
The Doctrine of Ultra Vires under the Companies Act
As per Section 4(1)(c) within the Companies Act of 2013, the MOA should include all essential information that is deemed important for advancement as well as objects for objectification.
Whereas Section 245 (1)(b) of the Act provides the right to file a petition to the members and depositors, having the reason to believe that the business is acting in a manner which has detriment towards the benefit of the corporation, its member, or its investors, to stop the corporation from taking any actions that could be seen as a breach of the MOA or other documents of such company.
Fundamental tenets of the doctrine of Ultra Vires
- Investors can’t consent to an ultra-vires transaction, especially if they decide so.
- In cases when one party has completely complied with his contractual responsibilities, the principle of estoppel usually precludes relying on the ultra-vires defence.
- A contract that is fully fulfilled by both parties is not voidable under this concept.
- The ultra-vires defence is open to any party.
- If a contract is fulfilled in part but the performance was not appropriate for applying the concept of estoppel with the procedure, a claim for the recovery of the gains provided may be initiated.
- If an agent’s activities were taken as part of their employment, the corporation cannot use the defence that they have been ultra-vires to escape liability.
Exceptions of the doctrine of Ultra Vires
- Any unlawful act that might normally be intra-vires the firm may be justified with the consent of the shareholders of the corporation.
- The shareholders have the authority to authorize any intra-vires act which is not within the limits of the directors of the institution.
- Even if a particular property is obtained in a manner that deviates from the contract, the company’s right to it will still be secured.
- Only when the Companies Act expressly forbids it otherwise, the ultra-vires act’s unintended consequences are not unlawful.
- Unless the Company’s Act determines that something falls inside the company’s authority, it will not be treated as ultra-vires even if it is not expressly stated in the memorandum.
- The ability to amend the articles of association retroactively allows for the validation of acts that violate the articles.
In the case of Eley v. The Positive Government Security Life Assurance Company, Limited (1875-76) L.R. 1 Ex. D. 88
Court decided here that articles aren’t really the reason for the dispute between the plaintiff and the firm. There is no agreement between the claimant and the company notwithstanding the possibility that they could compel the directors or bind the members.
The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653
According to the memorandum of organisation, The objectives were to supply and sell certain supplies required for building railroads. The arrangement, however, required the construction of railroads, and it’s against the company’s MOA as it wasn’t in it. The contract was found to be ultra-vires in the memorandum and therefore could not be authorized despite the agreement of all shareholders. If such approval had been secured beforehand through the passing of a resolution, the contract would have been intra-vires. However, a sanction cannot be applied retroactively because the MOA in this situation is ultra-vires of the contract.
It was determined in Shuttleworth v. Cox Brothers and Company (Maidenhead), Limited, and Others,  2 K.B. 9 When an agreement is subject to the authorized right of alteration provided by the articles and a specific alteration is carried out in good faith and for the benefit of the business, it cannot be viewed as a breach of the agreement and needs to be considered as genuine.
Re New British Iron Company,  1 Ch. 324
According to the ruling, the directors for the purpose of their remuneration at the time of liquidation of the company, this issue will be classified as ordinary creditors. This was stated since, generally speaking, articles only serve as binding agreements between shareholders and not among a company and its directors. The directors in this instance accepted their posts despite if they had been already hired because of the aforementioned articles of association. Therefore, even at the point of the company’s liquidation, they were still treated as creditors.
In the case of Jahangir R. Modi v. Shamji Ladha, the claimant bought 600 shares in a corporation and the defendant (corporate directors) also bought a few shares within the same firm, initial use of the term “super vires” was noted in India. Members were not permitted to sell or buy any company shares per the business’s memorandum. The plaintiff sued the company’s directors and requested reimbursement from the court for the cost of the share acquisition. Without including the company in the lawsuit, the Bombay HC ruled that “a shareholder may pursue legal action against the company’s directors to get them to return the money they spent on a transaction they were not authorized to enter into”.
The A. Lakshmanswamy Mudaliar v. Life Insurance Company case is another significant one that should be mentioned. In this instance, the company’s memorandum specified that the directors may contribute a portion of the profits to any charitable organisation that benefits the public. As a result, the directors gave a non-profit organisation for advancing technical and business expertise Rs. 2 lacs. In the end, the court ruled that the directors were not permitted to distribute the funds toward any trust fund of their choosing. Even then, they could only use that money to support charitable trusts that permitted them to further the company’s goals.
Those who could only make donations to trusts that enabled them to further the company’s goals. There was nothing left for the company to advertise because the LIC had taken over the company’s operations. The court ruled that because the directors’ cash contribution to the charitable trust was not authorised, the trustees did not have any rights to it. The company’s directors were also held legally responsible for their earnings, according to the court. As a result, the appeal of the company was denied.
Without the use of credit, no business could possibly operate. The interests of creditors and investors must be protected as well, though. Any unethical or reckless behavior could result in the company’s insolvency or winding up. As a result, they might sustain sizable losses. The company memorandum, which specifies the firm’s objectives, includes precise processes to safeguard the rights of creditors and shareholders. If members go beyond the MOA the acts were termed ultra-vires. So, the doctrine of Ultra Vires prevents the members from acting beyond the limits of the memorandum.
- Harsh Jain, Doctrine of Ultra Vires under Company Law- What acts will be deemed as ultra views? Available at: https://blog.ipleaders.in/borrowing-company-deemed-ultra-vires/?amp=1 (Accessed: November 16, 2022).
- Submit Gupta, Doctrine of Ultra Vires, Available at: https://www.legalserviceindia.com/legal/article-8835-doctrine-of-ultra-vires.html (Accessed: November 16, 2022).
- Anshika Sharma, Doctrine of Ultra Vires under Companies Act: Meaning, Development and Important Cases, Available at: https://lawbhoomi.com/doctrine-of-ultra-vires-under-companies-act-meaning-development-and-important-cases/ (Accessed: November 16, 2022).