DOCTRINE OF ULTRA VIRES BY NEELMANI SAMIR

DOCTRINE OF ULTRA VIRES

 

The doctrine of Ultra Vires implies that company should confine its activities within its stated objects. It is meant to restrict the powers of the company to go beyond its object clause. The doctrine intends to protect the subscribers of a company and its investors. The people investing in the company are assured by the doctrine that their money shall be used for the purpose they have read and understood in the memorandum and not for any other purposes. Many a time, a company’s ultra vires action led to its insolvency. Hence the doctrine empowers the investors to first seek remedy such as as injunction against the ultra vires act and later demand their money during insolvency.

This means that once it is proved that an act is not authorized by the memorandum, it will be so pretended that the act was never done at all. The doctrine of Ultra Vires is well illustrated by the House of Lords in Ashbury Railway Carriage & Iron Co. Vs. Riche. (1875). In this case A perusal of the object clause gives that the company intends to deal in mechanical engineering contracts in buying, selling & lending railway plants. The company enters into contract with Riche for financing the construction of railway line for the latter. It realizes that the contract is ultra vires and repudiated it. Riche brings a suit for breach of contract with two main arguments. One, that the term “general contractors” is wide enough to include the given contract. Two, that majority of shareholders were present and ratified the contract at its formation. It was held that the term general contract is to be read in the light of the rest of the clause, which means that the company may only deal in mechanical engineering contracts and may enter to general contracts related to that purpose only. The house clarified into unequivocal terms that if every share holder of the company submits that it is authorized to the said contract, even then it will be nullity from the beginning. Acts ultra vires the memorandum can not be ratified by the shareholders.

In the landmark case of A.Lakshmanswami Mudaliar Vs. L.I.C , Justice Shah has upheld the Doctrine of Ultra Vires which brings it in the common law of India as well. The facts are such that given power in the memorandum authorizes the Director to make payment towards any charitable object. A resolution of shareholder is passed and Rs.2 Lakhs are paid to a charitable trust for promoting technical and business knowledge. However, the company have been acquired by the LIC. The act was held ultra vires and therefore void by Hon’ble Judge. The court highlighted that the powers of Director and the object of the company are distinct clauses where the former is bound by the latter. That is, Power of Director to make payment or borrow money may only be exercised for the furtherance of the objects stated and not for any and all purposes. It further said that for payment towards charitable purposes, a nexus should exist between the charitable purpose and the business of the company. For instance, A company dealing in chemicals may contribute towards a charitable organization research in that field.

 

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