DOCTRINE OF ULTRA VIRES BY HARSHITA JAIN @LEXCLIQ

Companies need to borrow funds from time to time for various projects during which they’re engaged. Borrowing is an important a part of day to day transactions of a corporation , and no company are often alleged to run without borrowing from time to time. Balance sheets are released per annum by the businesses , and you’ll hardly find any record without borrowings within the liabilities clause of it. However, there are certain restrictions while making such borrowings. If companies transcend their powers to borrow then such borrowings could also be deemed as ultra-vires.

 

DOCTRINE OF ULTRA VIRES

 

Memorandum of association is taken into account to be the constitution of the corporate . It sets out the interior and external scope and area of company’s operation along side its objectives, powers, scope. A company is permitted to try to to only that much which is within the scope of the powers provided thereto by the memorandum. A company can also do anything which is incidental to the main objects provided by the memorandum. Anything which is beyond the objects authorized by the memorandum is an ultra-vires act.

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated within the memorandum of the corporate .

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file a application before the tribunal if they need reason to believe that the conduct of the affairs of the corporate is conducted during a manner which is prejudicial to the interest of the corporate or its members or depositors, to restrain the company from committing anything which may be considered as a breach of the provisions of the company’s memorandum or articles.

 

Basic principles regarding the doctrine:

 

  1. Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
  2. 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.
  3. Where both the parties have entirely performed the contract, then it cannot be attacked on the basis of this doctrine.
  4. Any of the parties can raise the defense of ultra-vires.
  5. 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.
  6. If an agent of the corporation commits any default or tort within the scope of his employment, the company cannot defend it from its consequences by saying that the act was ultra-vires.

 

CONCLUSION

No company are often alleged to run without borrowings. However, at the same time, it is necessary to protect the interest of the creditors and investors. Any irregular and irresponsible act may end in insolvency or completing of the corporate . This may cause considerable losses to them. So to guard the interest of the investors and therefore the creditors, specific provisions are made within the memorandum of the corporate which defines the objectives of the corporate .

Directors of the corporate can act only within the purview of the authority provided to them under these objectives. If any borrowing is formed beyond the authority provided by these objective mentioned within the memorandum, it’ll be considered as ultra-vires. Any borrowing which is formed through an ultra-vires act is void-ab-initio, and hence, directors are personally liable for these acts. However, if such borrowings are ultra-vires only to the articles of the corporate or ultra-vires directors, then they will be ratified by the shareholders. Then after such ratification, they’re going to be considered valid.

Thus, directors must be very cautious while borrowing funds, because it might not only make them personally responsible for the results of such acts but also may end in considerable losses to investors and creditors.

 

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