Exception and Effect of Doctrine of Ultra- Vires by Shikha at LexCliq

The company’s scope and field of operation, as well as its purposes, powers, and scope, are all specified in the memorandum of association. A corporation is only permitted to engage in activities that fall within the scope of the memorandum’s rights. A company can also do things that are  incidental to the company’s main goals as stated in its memorandum. An ultra-vires act is one that goes beyond the extent of the memorandum’s authorization. This doctrine ensures that the company’s creditors and shareholders’ funds are exclusively used for the reasons stated in the memorandum of incorporation.

Basic principles regarding the doctrine

  • Shareholders can’t ratify or act on an ultra-vires transaction, even if they want to.
  • The law of estoppel normally prevents reliance on the defence of the ultra-vires where one party has fully completed his side of the contract.
  • When both parties have completely fulfilled their obligations under the contract, it cannot be challenged under this doctrine.
  • Ultra-vires defence can be raised by any of the parties.
  • A claim can be undertaken for the recovery of the advantages granted if a contract has been partially completed but the performance was inadequate to bring the doctrine of estoppel into the action.
  • If a corporation’s agent commits a default or tort in the course of his employment, the firm cannot claim that the act was ultra-vires and so avoid the repercussions.

Exceptions to the doctrine

  • Any act that is irregular but otherwise intra-vires the company can be validated by the permission of the company’s shareholders.
  • Any act that is not within the directors’ authority but otherwise intra-vires the company can be ratified by the company’s shareholders.
  • The company’s entitlement to the property will be safeguarded even if it gets it in a method that is ultra-vires the contract.
  • Unless the Companies Act clearly prohibits it, any incidental or consequential effect of the ultra-vires activity will not be illegal.
  • Any act that is irregularly conducted but otherwise intra-vires.
  • Even if the Company Act considers any action within the company’s authority, it will not be regarded ultra-vires if it is not explicitly specified in the memorandum.
  • An ultra-vires act can be validated by amending the articles of association retroactively.

Effects of ultra vires Transactions

  1. Null and void from the start: The ultra vires acts are null and void from the start. The corporation is not bound by these acts. For such conduct, neither the firm nor anybody else can sue.
  2. An ultra-vires act cannot be converted into an intra-vires act by estoppel or ratification.
  3. Injunction: When there is a possibility that a company has committed or is about to commit an ultra-vires act, the members can seek an injunction from the court to prevent it.
  4. Directors’ personal liability: The directors have a responsibility to ensure that the company’s capital is only used for legitimate purposes. If such funds are diverted for a purpose that is not authorized by the company’s memorandum, the directors will be personally liable. In Jehangir R. Modi v. Shamji Ladha[1], the Bombay High Court ruled that a shareholder can sue the board of directors to compel them to return the company’s funds that have been used in transactions that they have no authority to enter into, without making the company a party to the suit.
  5. Any borrowing made pursuant to an ultra-vires act will be void-ab-initio. It will not bind the corporation, and outsiders will not be able to enforce it in court. Members of the company have the power and right to bring injunctions against the firm to prohibit it from making ultra-vires borrowings. If the company’s borrowed funds are used for any ultra-vires purpose, the company’s directors will be held personally liable for the consequences. If the company utilizes this money to buy a house, it will be the only owner of that house.

 

[1] 4 Bom. HCR (1855)

 

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