DOCTRINE OF ULTRA VIRES DOCTRINE OF CONSTRUCTIVE NOTICE DOCTRINE OF INDOOR MANAGEMENT

BY NAVEEN DAS

MEANING OF DOCTRINE
‡ Doctrine(Latin: doctrina): A set of beliefs or principles held and taught by a religious, political, or other group. ‡ Legal Usage: A legal doctrine is a body of inter-related rules (usually of common law and built over a long period of time) associated with a legal concept or principle.

DOCTRINE OF ULTRA VIRES

MEMORANDUM OF ASSOCIATION (MOA)
‡ The MOA of a company is its Charter ‡ Contains fundamental conditions upon which alone the company can be incorporated ‡ Tells the objects of the company ‡ Defines the utmost possible scope of the company s operations

MOA In a Nutshell
‡ It s a document which defines and confines the powers of the company ‡ If anything is done beyond those powers, that will be ultra vires

ORIGIN OF DOCTRINE OF ULTRA VIRES
‡ First introduced in relation to statutory companies ‡ Not paid due attention up to 1855 ‡ Reason: Doctrine not felt necessary to protect the investors and creditors ‡ Principle of limited liability introduced in 1855

MEANING AND PURPOSE
‡ Company cannot go beyond its objectives mentioned in its memorandum ‡ If company goes beyond its objects, such acts will be ultra vires ‡ Object of declaring an act ultra vires: 1.To protect the interests of the shareholders, 2. and all others who deal with the company.

IS IT ULTRA VIRES OR ILLEGAL?
‡ Ultra vires act different from illegal act, although both are void. ‡ An act of the company which is beyond its objects clause is ultra vires, hence void even if it is legal. ‡ An illegal act is void even if it falls within the objects of the company.

POINTS WORTH NOTING
‡ Company exists only for the objects which are expressly stated or implied in its MOA ‡ Any act done outside the express or implied objects is ultra vires. ‡ The ultra vires acts are void ab initio. ‡ Members of company can get an order of injunction

‡ If directors exceed authority, such act can be ratified by the general body of the shareholders, provided company has capacity to do so by its MOA. Example: Company has the power to borrow money, but the Articles of the company provide that in case the directors borrow more than Rs.50000,they should get prior approval by the company in general meeting. However, the directors issue debentures to the extent of Rs.75000 without getting the approval from shareholders

The company in general meeting may ratify the act of directors as it is intra vires the company, though ultra vires the powers of the directors. ‡ Any property aquired by a company under an ultra vires transaction may be protected by the company against damage by third persons.

‡ Directors and other officers can be held liable to compensate the company for any loss occasioned to it by an ultra vires act ‡ Directors and other officers shall be personally accountable to the third parties ‡ Money and property gained through an ultra vires transaction available in specie or capable of being identified shall be restituted(restored) to the third party.

‡ In case an ultra vires loan taken by a company is used for payment of an intra vires debt, the lender of the ultra vires loan is substituted in place of the creditor who has been paid off and as such can recover the money.

LANDMARK CASES
‡ Ashbury Railway Carriage and Iron company Ltd v. Riche, 1875 ‡ Attorney General v. Great Eastern Railway Co.,1880 In India: ‡ Jahangir R Modi v. Shamji Ladha,1866-67 ‡ Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, 1963

Dr. A. Lakshmanaswami Mudaliar v LIC of India [1963]

‡ HELD: Articles cannot extend scope of memorandum. ‡ Articles cannot extend scope of memorandum. The memorandum of association has to be read with the articles of association where the terms are ambiguous or silent. The articles may explain the memorandum but cannot extend its scope.

SHORT COMINGS OF THE DOCTRINE

‡ Creates hardships for management

‡ Creates hardships for outsiders

EXPERT S OPINION
‡ Ballantine has described it as a mischievious doctrine ‡ Cohen Committee has recommended abolition ‡ Jenkin Committee also expressed dissatisfaction

STEPS TOWARDS IMPROVING THE DOCTRINE
‡ European Communities Act,1972: Has made many modifications to the Doctrine of Ultra Vires ‡ Principles Developed by Court: 1. Powers implied by statute 2. The principle of implied and incidental powers

PRESENT STATUS
ENGLAND: ‡ Doctrine restricted by European Communities Act, 1972 ‡ U/S 9(1) of the act any act or transaction decided by the directors deemed within capacity of the company. INDIA: ‡ No legislation like the European Communties Act.

ARTICLES OF ASSOCIATION
‡ Bye laws and regulations which govern the management ‡ Defines the duties, rights, powers and authority of the shareholders

DOCTRINE OF CONSTRUCTIVE NOTICE

MEANING AND PURPOSE
Every person dealing with the company is treated as having the knowledge of the contents of the memorandum. (Public documents of the company). It seeks to protect the company against the outsider. Imputation of knowledge whether the party concerned has actual knowledge or not.

EXAMPLES
‡ One of the articles of the company provides that a bill of exchange to be effective must be signed by two directors. A bill of exchange is signed only by one of the directors. The payee cannot claim under the bill

CASE
Kotla Venkataswamy v. Ram Murthy AIR(1934) ‡ The articles provided that all deeds and documents of the company shall be signed by the managing director,secretary and working director ‡ A mortgage deed was accepted with secretary and working director s signature only. ‡ Held, the deed was invalid

DOCTRINE OF INDOOR MANAGEMENT

MEANING AND PURPOSE
‡ The rule is beneficial for convenience in business relations. ‡ An outsider is presumed to know the constitution of a company, but not what may or may not have taken place within the doors that are closed to him. ‡ It operates to protect outsiders against the company.

CASE
Royal British Bank v. Turquand(1856) ‡ Persons dealing with the company are assumed to have read the public documents of the company and to have ascertained that the proposed transactions are not inconsistent there with,they need not inquire into the regularity of the internal proceedings and may assume that all is being done regularly.

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