ULTRA VIRES

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WHAT IS ULTRA VIRES?

The latin term of the word ultra vires defines as beyond power. Any action which is performed beyond the power is said to be ultra vires act .When a business acts or engages into agreements that are outside of its legal authority as specified by the Companies Act, the Memorandum of Association, or its Articles of Association, it is said to be ultra vires, which translates to “beyond the powers.” This acts shield creditors and stockholders from unlawful activity since they are null and void.

Ultra Vires Act Types

To understand the concept better let’s look into the three different types of Ultra Vires 

1. Ultra Vires companies act 
2. Ultra Vires Memorandum of Association
3. Ultra Vires Articles of association 

Ultra Vires Companies Act

Any action that goes beyond the legislative bounds established by the Companies Act is null and void. A business cannot, for instance, operate outside of its permitted business forms or participate in unlawful actions (e.g., a private company offering public shares without conversion).An act which is ultra vires to companies act cannot be ratified even by special resolution.

CASE : Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1878)

Case Facts:

• The Ashbury Railway Carriage and Iron Co. Ltd. was incorporated under the Companies Act 1862.
• The company’s memorandum of association stated its objects, which included making and selling railway carriages, wagons, and other related items.
• The company entered into a contract with Riche to provide a loan for building a railway from Antwerp to Tournai in Belgium.
• Later, the company repudiated the agreement, claiming it was ultra vires (beyond its powers as defined in the memorandum).

Judgment:

• The Exchequer Court was divided on the issue, but the House of Lords ultimately held that the contract was ultra vires and therefore void.
• The House of Lords ruled that any act done by a company beyond its stated objects in the memorandum of association is ultra vires and void.
• This case established the principle that a company’s actions must be within the scope of its objects as defined in its memorandum of association

Ultra Vires Memorandum of Association

A company’s range of operations is specified in the MOA. Any actions taken by a firm that go beyond its object clause are considered extra vires. For example, unless specifically permitted, a textile company cannot engage in real estate..An act which is ultra vires to memorandum cannot be ratified even by special resolution.

CASE : Dr. A. Lakshmanaswami Mudaliar v. LIC (AIR 1963 SC 1185).

Case Facts:

• The United Life Insurance Co. was authorized by its Memorandum of Association to carry on the business of life insurance.
• The shareholders passed a resolution in an extraordinary meeting to donate ₹2 lakhs to a Memorial Trust aimed at promoting technical or business knowledge.
• The Life Insurance Corporation (LIC), which later took over the business, called upon the appellant to refund the amount as it was beyond the scope of the company’s objectives.

Judgment:

• The Court emphasized that a company must operate within the confines of its Memorandum of Association, adhering strictly to its stated objects.
• The donation was deemed ultra vires and void, rendering it unratifiable even by a special resolution.
• The directors involved in such actions incurred personal liability, necessitating reimbursement to the company

Ultra Vires Articles of association 

The AOA contains specifics on a company’s internal management policies. Ultra vires acts may result from violations of these regulations. For instance, it may be contested if directors issue shares without the necessary authorization outlined in the AOA.An act which is ultra vires to articles of association act can be ratified  by special resolution 

The ultra vires doctrine essentially upholds corporate discipline by making sure businesses operate within the bounds of their contracts and statutes.

CASE : Rattan Chand Hirachand v. The State of Punjab (AIR 1961 SC 1508)

Case Facts:

• The State of Punjab issued a notification under the Punjab Security Interest Act, 1929, to recover certain amounts from the company.
• The company argued that the notification was ultra vires its Articles of Association, as it was not authorized by the shareholders.

Judgment:

• The Supreme Court held that the notification was indeed ultra vires the Articles of Association.
• However, the Court also noted that such an act could be ratified by a special resolution passed by the shareholders at a general meeting.

Also Read- DOCTRINES OF CONSTRUCTIVE NOTICE

ARTICLE WRITTEN BY – Gaddam Sneha Deepthi

EDITOR – Nancy Sharma