The Doctrine of Ultra Vires is a fundamental rule of Company Law.

It
states that the objects of a company, as specified in its Memorandum of
Association, can be departed from only to the extent permitted by the
Act. Hence, if the company does an act, or enters into a contract beyond
the powers of the directors and/or the company itself, then the said
act/contract is void and not legally binding on the company.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is

applicable only to the acts performed in excess of the legal powers of
the doer. This works on an assumption that the powers are limited in
nature. Since the Doctrine of Ultra Vires limits the company to the
objects specified in the memorandum, the company can be:

 Restrained from using its funds for purposes other than those

specified in the Memorandum
 Restrained from carrying on trade different from the
one authorized.
The company cannot sue on an ultra vires transaction. Further, it cannot
be sued too. If a company supplies goods or offers service or lends
money on an ultra vires contract, then it cannot obtain payment or
recover the loan.

However, if a lender loans money to a company which has not been

extended yet, then he can stop the company from parting with it via an
injunction. The lender has this right because the company does not
become the owner of the money as it is ultra vires to the company and
the lender remains the owner.

Further, if the company borrows money in an ultra vires transaction to

repay a legal loan, then the lender is entitled to recover his loan from the
company.
Sometimes an act which is ultra vires can be regularized by the
shareholders of the company. For example,

 If an act is ultra vires the power of directors, then the shareholders

can ratify it.
 If an act is ultra vires the Articles of the company, then the
company can alter the Articles.
Remember, you cannot bind a company through an ultra vires contract.
Estoppel, acquiescence, lapse of time, delay, or ratification cannot make
it ‘Intravires’.

Summing up the Doctrine of Ultra Vires

1. An act, legal in itself, but not authorized by the object clause of the
Memorandum of Association of a company or statute, is Ultra Vires
the company. Hence, it is null and void.
2. An act ultra vires the company cannot be ratified even by the
unanimous consent of all shareholders.
3. If an act is ultra vires the directors of a company, but intra vires the
company itself, then the members of the company can pass a
resolution to ratify it.
4. If an act is Ultra Vires the Articles of Association of a company,
then the same can be ratified by a special resolution at a general
meeting.
The Flip-side

While the main advantage of the Doctrine of Ultra Vires is the

protection of shareholders and creditors, it has disadvantages too. This
doctrine prevents the company from changing its activities in a direction
agreed by all members. Further, a special resolution can alter the object
clause of the Memorandum. This defeats the core purpose of the
doctrine.