CENTR

AL
UNIVE
RSITY
OF
SOUTH
BIHAR
…………………………………………………………………………
…

PROJECT
ON :-
CRITICAL
ANALYSIS OF
THE
DOCTRINE OF
ULTRA VIRES

…………………………………………………………………………………
….

Submitted by: - Submitted to:-

Bablu kumar sharma Dr. PRADIP KUMAR DAS

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B.sc.LLb (Hons.) Assistant professor
7th semester School of law and governance
CUB1413115008 CUSB

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 Acknowledgement

I hereby take the opportunity thank P.K das sir, for his consent and the inspiration that he
radiates. His jovial behaviour and ease making attitude eased my tension and the initial
doubts that I had about my potentialities. I also want to thank my friends who helped me a lot
in preparing this project. I have also taken help from several books and websites for doing
this. Ultimately, I once again thank P.K das sir, who made indelible impact on me which shall
go beyond the pages of this project and reflect in all my endeavours of life.

Hoping Acceptance and Appreciation from you, I hereby submit this project.

- Bablu kumar sharma

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1. Title of the proposed study

Critical analysis of doctrine of ultra-virus. A study of the provisions under Companies Act,
2013

2. Statement of Problem

The present study is intended to focus upon the issue and problem relating to doctrine of
ultra-virus. Generally doctrine of ultra-virus means a company cannot do anything beyond
the power expressly or impliedly confer upon it by the statue or memorandum of association
any purported activity beyond such power will be ineffective even if agreed to all the
member. A section of this paper also deal with the company can do certain act which beyond
the power of company. But such act must be justified and reasonable within the framework of
statute of within the provision of companies Act 2013

3. Literature Survey/Review

The following Primary and Secondary sources have been referred

Primary Sources

 Books Referred

The following textbooks have been referred to:

(i) Pranjape, N.V., “Company Law”, (Central Law Agency,Allahabad ,7th ed., 2016)

(ii) Singh, Avtar, “Company Law”, (Eastern Book Company,Lucknow,16th ed.,2015)

(iii) Kapoor G.K and Sanjay Dhamija. Company Law. 19 TH edition

Secondary Sources

Website referred

1. https://accountlearning.com/doctrine-of-ultra-vires-objectives-effects-ratification-types/
2. http://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-
Chandak.
3. http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf
4. http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary

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4. Hypotheses
The following hypotheses would be taken account of in this study and they have been
examined in the course of discussion. A conclusion has been drawn to assess whether the
hypotheses proposed were true to their extent of statement

The first time doctrine of ultra-virus was recognised in our country in the case Jehangir R
Modi v. shamgi Ladha in this case Supreme Court that the act of director to purchase share
of another company will be ultra-virus when it will not be permitted by the memorandum of
association.

5. Research design/methodology

In accordance with the objectives of the present study, doctrinal research design has been
adopted. The doctrinal design has been used to study the provisions related to scope and
feature of doctrine of ultra-virus. Doctrinal Research is a research, as we all know, based
on the principles or the propositions made earlier. It is more based on the sources like
books of the library, and through resources collected through access to various websites.
For the purpose of the Research Project, the Researcher has collected relevant materials
from books on company law and also from various websites. The Research has been done
primarily with the help of case laws and leading judgements of various courts as well as
legislative provisions. Various articles from the internet sources have also been referred.
The main provisions have been collected through study of bare provisions from companies
Act 2013.

6. Research question
(1) What is the basic concept of doctrine of ultra-virus?
(2) What are the importance of doctrine of ultra-virus in the company?
(3) What is the current scenario of the applicability of the doctrine of ultra-virus in India?

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 Tentative Chapterization Scheme
For an effective study, the research work would be divided into several chapters which are as
follows:-

Chapter 01 Introduction 07-09

Chapter 02 Needs for the doctrine of ultra-virus 09-11
Chapter 03 Recognition for this doctrine by Indian Judiciary 11-12
Chapter 04 Division of doctrine of ultra-virus 13-14
Chapter 05 Case law 14-16
Chapter 06 Current scenario of the applicability of doctrine of ultra-virus in 16
India

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 Table of content

Chapter Content Page no.

01 Introduction 07
1.1 doctrine of ultra-virus 08
1.2 basic concept of doctrine of ultra-virus 09
02 need for the doctrine of ultra-virus 10
2.1 scope of the doctrine of ultra-virus 10
2.2 object of the doctrine of ultra-virus 11
03 recognition of this doctrine by Indian judiciary 11
3.1 case: Jahangir R. Modi V Shamji Ladha 11
3.2 case: A. Lakshmanaswami Mudaliar V L.I.C 12
04 division of doctrine of ultra-virus 13
4.1 An act ultra-virus to the director 13
4.2 An act is ultra-virus to the article of association 13
4.3 An act is ultra-virus to the memorandum of association 13
4.4 An act is ultra-virus to the company act 13
4.5 Ultra-virus borrowing in case of company 13
4.6 exception to the doctrine of ultra-virus 14
05 case laws 14
5.1 Simpson V. West Minister Palace Hotel 14
5.2 Ashbury Railway carriage & Iron Co. V Riche 15
5.3 Bell House Ltd. V City Wall Properties Ltd 15
06 current scenario of the applicability of the doctrine of ultra- 16
virus in India

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CHAPTER 01 Introduction

Indian judiciary is quite a strong. It has immense power inscribed by the constitution of
India. Immense power means whatever law are being made by the legislature has to be
tested upon the constitutional reality and that has been done by the judiciary by the judicial
review. And therefore whether it is executive made rule, administrative rule and whether
law made by legislature while having competence to make law under the constitution of
India. The validity has to be judge by judiciary alone. These power is vested in the
constitution of India to the Indian judiciary. So whatever rule are there or law are there are
subject matter of judicial review. If the spirit of law has been violated or the purpose for
which law was enacted which was not bring implemented by way of making rule and
regulation. In the Indian judiciary there model of hierarchy. At the top of Indian constitution
then parent Act and another legislation. So then all legislation has to be made with line and
length of the provision of parent Act and similarly all parent Act has to enact within the
framework of the constitution of India. So if any provision or any part of the legislation goes
beyond any of the provision of parent Act and henceforth any of the provision of
constitution of India naturally that shall be called ultra-virus and liable to be rejected by the
court of law. That is why parliament cannot make any law as for their wishes as desire.
Because constitution of India set out a boundary within which parliament or state legislature
are require to make law. If any law made by parliament or state legislative assembly are
being inconsistence with the provision of constitution of India then those law are liable to
be rejected or shall be declared ultra-virus by the court of law. Therefore the constitution is
supreme authority whatever the law has been made that has to test within the constitution
framework. Therefore parliament have immense power while making the law thy has to
keep in mind of all or provision of constitution so therefore any part of law or any process of
law which are beyond the constitution framework then the law shall be declare ultra-virus
by the court of law.

In the reference of company law we can say that the object clause of the
memorandum of the company contains the object for which the company is formed. An act of
the company must not be beyond the object clause otherwise it will be ultra vires and
therefore, void and cannot be ratified even if all the member wish to ratify. This is called the
doctrine of ultra vires. The expression “ultra vires" consists of two words: ‘ultra’ and ‘vires’.

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‘Ultra’ means beyond and ‘Vires’ means powers. Thus, the expression ultra vires means an
act beyond the powers. Here the expression ultra vires is used to indicate an act of the
company, which is beyond the powers conferred on the company by the objects clause of its
memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to
ratify it. Sometimes the expression ultra vires is used to describe the situation when the
directors of a company have exceeded the powers delegated to them. Where accompany
exceeds its power as conferred on it by the objects clause of its memorandum, it’s not bound
by it because it lacks legal capacity to incur responsibility for the action, but when the
directors of a company have exceeded the powers delegated to them. This use must be
avoided for it is apt to cause confusion between two entirely distinct legal principles.
Consequently, here are restricting the meaning of ultra vires objects clause of the company’s
memorandum.

Doctrine of ultra-virus
The term “Ultra” means beyond and “Vires” means powers. The term, therefore, means the
doing of an act, which is beyond the legal power, and authority of the company. It is
considered as an act outside the scope of the object of the company

The Memorandum, being the constitution of the company sets out the principal
objectives, powers, scope and its area of operation, both internal and external. A company,
therefore, can do anything within the scope of the powers specified in the Memorandum. It
has also an implied power to do all such things that are fairly incidental to its main objects. If
the company does anything which is beyond the powers specified in the Memorandum it shall
be construed as an Ultra Vires act.1

A very important principle helps in defining where a company has gone wrong or an action is
outside the scope of the authority of the company. This principle is known as the ‘Doctrine of
Ultra Vires’. This doctrine has been recognized all over the world for its important
applications. From India to USA, every company follows the doctrine of ultra vires. Simply
speaking, it is a doctrine that helps in determining if in a particular situation, the company has

1
https://accountlearning.com/doctrine-of-ultra-vires-objectives-effects-ratification-types/ last accessed on
20/10/2017

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acted outside the scope of its authority as mentioned in the object clause of the memorandum
of associations2

Basic concept of the doctrine of ultra-vires

‘Ultra vires’ comes from the Latin word meaning ‘beyond the powers of’. Any action or
transaction beyond the scope of the company or the authority endowed upon a care taker of
the company will fall under the doctrine of ultra vires and will be censured accordingly.

The concept of ultra vires has basically been in existence since the beginning of man itself.
Even though it had never been codified formally, this concept is the basis of reasoning for
any man to determine whether an action is legitimate or illegitimate. This concept has been
elaborated upon by judges in various judgements given over a period of time.

The concept of doctrine of ultra vires was acknowledged formally in 1612 in the United
Kingdom for the first time. In the case, Sutton’s Hospital of the year, it was stated that the
doctrine will not be applied for any action or transaction of a chartered corporation 3, despite
the fact that such corporations are corporate personalities with a separate and distinct identity.

In 1612, the country made use of documents called the ‘royal charters’ to incorporate
companies and give them an identity separate and distinct from its owner in the eyes of law.
Such royal chartered companies would have the same rights as a natural human being such as
the right to sue and the right to be sued without having any physical manifestation- an
artificial

Human being4. Thus, in the case of Sutton’s Hospital of the year, despite the fact that the
company had a separate existence in the eyes of law, the doctrine of ultra vires did not apply.
This case listed out an important exception to the doctrine of ultra vires and its scope.

CHAPTER 02 Need for the doctrine of ultra-vires

2
http://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-Chandak. Last
accessed on 21/10/2017
3
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf last accessed on
21/10/2017
4
https://privycouncil.independent.gov.uk/royalcharters/chartered-bodies/ last accessed on 21/10/2017

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Even though United Kingdom acknowledged the existences of the doctrine of ultra vires in
1612, the first time it was adopted as an important concept of law was in the year 1855. In
India, the concept was adopted officially in 1866 by way of a Bombay High Court
judgement.

Prior to 1855 and 1866, respectively, there was no need for the doctrine of ultra vires because
the most common types of businesses were sole proprietorships and partnerships. In both
these types of companies, the owner(s) of the business had unlimited liability because of
which the creditors were always protected. Since there was no distinction between owners of
the business and business itself, the creditors were always assured of getting their money
back- even if it meant that the owners would have to attach their private and personal
property to the business in order to pay off the business loans. The creditors had the option of
juicing the owners/partners of the business down to their last penny to recover loans.

In 1855, the Limited Liability Act introduced the Parliament of UK introduced the concept of
limited liability partnerships (LLP’s). This concept basically means that partners will have a
limited extent of liability in their business beyond which they will be absolved of any
responsibility to clear the credit of the company. This concept distinguished the company
from the partners. Partners were no longer going to be held unconditionally liable for the
loans of the company. They would be liable only to the extent of the capital invested in the
business or the pre decided profit sharing ratio, as the case maybe.

After the Limited Liability Act, 1855, the creditors were suddenly worried about their ability
to recover loans given to LLP’s, To give respite to creditors and ensure that the partners did
not take undue advantage of the limited liability concept, the doctrine of ultra vires found an
integral place in law. Any transaction beyond the capacity of the company will, thus, be
wholly void.

Scope of the doctrine of ultra-vires

The doctrine of ultra vires is applicable to all those companies that have been incorporated
and have a separate existence in the eyes of law. All those companies that have not been
registered, such as partnerships and sole proprietorships will not come under the scope of the
doctrine of ultra vires. Only incorporated companies with an independent existence in the
eyes of law will be considered under this doctrine.

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Every illegal transaction or abuse of power by a director/ employee will not fall under the
ambit of the doctrine of ultra vires5. Only those transactions that are beyond the scope of what
a company can do will be censured under the doctrine. What a company can do or the
purpose of the company is always mentioned in the object clause of the Memorandum of
Associations of the Company. Thus, if the company is exceeding the authority it has given
itself in the object clause of the Memorandum of Association, it will be censured under this
doctrine.

Object of doctrine of ultra-virus

The followings object of ultra-virus is as follow:-

(1) To protect the investor of the company so that they may know the object in which
their money is employed
(2) To protect the creditors by ensuring that the company funds are not wasted in
unauthorised manner.

CHAPTER 03 Recognition of this doctrine by Indian judiciary

A series of cases are pronounced by the court of law on the concept of doctrine of ultra-virus.
But some of the cases are very much important for explaining this doctrine such as:

The first time the concept of ultra vires was accepted in India was through the case
Jahangir R. Modi V Shamji Ladha6

The facts of this case were as follows: In this case, the plaintiff has purchased 601 shares in a
particular company. The directors- also the defendants in this case- purchased 1422 shares of
the company. The object clause of the memorandum of the company did not allow the
directors to purchase and sell shares. However, the directors went ahead and purchased shares
anyways. The plaintiff filed a suit against the directors in the Court and asked for
compensation for the losses incurred due to such purchase. The Court exercised the Doctrine
of Ultra Vires in this case. It was held that the defendants had acted outside of the scope of
5
Rolled Steel Product (Holdings) Ltd v. British Steel Corp (1986) 1 Ch 306
6
1866-1867) 4 Bom. HCR (1855
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf last accessed on
21/10/2017

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the object clause of the memorandum. Since the memorandum was the most important
document of any company, an action/transaction overriding the document will be completely
void. Thus, the defendants were held guilty as per the doctrine of ultra vires.

This case paved the way for the doctrine in India. With LLP’s just having been introduced,
there were several cases of partners/owners/directors of companies misusing their limited
liability position with respect to the company. Since this case, the scope of the doctrine of
ultra vires has increased manifold and is of great importance as of now.

Now another important case that has helped in shaping the doctrine of ultra vires in India is
A. Lakshmanaswami Mudaliar V L.I.C7

In this case, the company’s memorandum stated that the directors should donate a part of the
company’s profit to charitable organisations that help the general public or undertake useful
objects. In accordance with this, the directors donated Rs. 2 lacs to a charitable organisation.
At that point in time, LIC had taken over the said business and questioned the charitable
donation stating that it was out of the scope of the object clause of the memorandum. The
object clause did not mean for the company to donate to any charitable organisation. It should
donate to a cause is related to the business in some manner or furthers the business objectives
of the company. The charitable organisation that was donated to did not fall under either
categories. Therefore, the Courts deemed the charity as an ultra vires act and not an intra
vires act. Donating to research facilities that focus on certain business processes followed by
the company or to non-profits making men and woman employable in companies would be
considered intra vires and valid.

In the case of National Provincial Bank v. Introductions Ltd 8 court stated that that if a
bank or any other lending institution lends money to a company for a purpose that is out of
the scope of the object clause of the memorandum of association of the company, then such a
loan cannot be recovered with the help of any remedy that would normally be used for the
recovery of such loans. This is because any action that is outside the scope of the object
clause falls under the doctrine of ultra vires and is wholly void.

7
AIR (1963) SC 1185
8
(1969) 1 All ER 887

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CHAPTER 04 Division of doctrine of ultra-virus
(1) An act ultra-virus to the director.

If any Act or transaction is ultra-virus to the director but within the power of
company, then shareholder can ratify it by passing a resolution in a general meeting.
The act is not altogether void because this Act can be ratified by the general body of
shareholder and after such ratification the Act becomes binding on the company.

(2) An act is ultra-virus to the article of association.

If an Act becomes ultra-virus to the article of the company. It can be ratified by the
altering the article by a special resolution but, such rectification is only possible if the
act is ultra-virus to the memorandum and the company Act.

(3) An act is ultra-virus to the memorandum of association.

A company cannot do anything which is beyond the preview of the object clause of
the memorandum. If the company does any act which is contrary to the object clause
of the memorandum then it will called as ultra-virus of the memorandum. And that
shall be wholly void. An act cannot be subsequently ratified by unanimous resolution
of all shareholder.

(4) An act is ultra-virus to the company act.

When an act or transaction is ultra-virus to the company Act, it cannot be ratified by

even by the whole body of shareholder and that transaction will be void from the
beginning

(5) Ultra virus borrowing in case of company.

In case of ultra-virus borrowing it would not be create the relationship of creditor and
debtor of the company. The concerned officer and director will be personally liable
for that borrowing

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Exception to the doctrine of ultra vires
There are a few exceptions to the Doctrine of Ultra Vires. They are listed out as follows-

(1) If an act is ultra-virus to the director of the company but intra virus to the company
Act, then company may ratify it by passing a special resolution in general meeting
(2) If an act is ultra-virus to the article of the company then the article may altered to
include the act within the power of the company through the process of ratification.
(3) An incidental or consequential effect of an act shall not be considered as ultra vires,
unless it is expressly prohibited by the statute
(4) If a director of a company makes a payment ultra vires to the company then the
company can compel him to refund the amount. However, the dirctor has the right to
be indemnify the person receiving the money provided he knew of the transaction to
be ultra-virus to the company.

CHAPTER 05 CASE LAW

Simpson V. West Minister Palace Hotel9

The company’s memorandum stated that the purchase land and construct hotel on those
lands. They would be responsible for the upkeep and maintenance of the hotel. The land
would not be used for any other purpose apart from that of a hotel. The company would also
have the authority to use the land in a manner that would help in the upkeep of the hotel and
would further the cause of maintaining a hotel e.g. – constructing a swimming pool would be
a legitimate use of the land because it furthers the cause of maintaining and running a hotel.

In this case, the plaintiff had sold his building to the defendants for the hotel to be used as a
hotel. The building could not function as a hotel in its current state and needed to be
remodelled in part. During the course of the construction of the hotel, a large part of the
building was demolished and re-modelled to create a structure that was more conducive to
being a hotel. The plaintiff filed a case against the defendants on the grounds that they had
acted outside the scope of the object clause in the Memorandum of Association by
demolishing large parts of the building. Thus, they needed to be punished and a compensation

9
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf last accessed on
21/10/2017

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was sought. However, the Courts held that the defendants had not acted outside the scope of
the object clause of the Memorandum of Associations.

Ashbury Railway carriage & Iron Co. V Riche10

The company in question- Ashbury Railway Carriage & Iron Co. - entered into an agreement
to construct a railway line in Belgium with a man named Mr. Riche. However, the object
clause of the Memorandum of Association of the Company did not include in its scope the
construction of railway lines. Owing to this fact, the company repudiated the contract. Mr.
Riche filed a suit for damages against the company on the grounds of cancellation of the
contract. Also, he strengthened his argument by stating that the company had ratified the
agreement with the majority of the stakeholders in the company. Hence, it was binding.

The Court held that the object clause of the memorandum11 is, essentially, the purpose of the
company i.e. it states what a company is supposed to do. It is the most important document of
a company and cannot be over ridden by ratification of the stake holders. Thus, the contract
will be considered wholly void because of an invalid consideration. Mr. Riche was not
awarded any compensation due to the lack of a void contract. This case was extremely
important in the development of the concept of doctrine of ultra vires.

Bell House Ltd. V City Wall Properties Ltd12

The Courts held that if the directors of the company are convinced that a particular activity
should be performed for the furtherance of the main business or some ancillary purpose, then
such an activity will be considered intra vires and not ultra vires. Normally, before this
case, the directors did not have any discretionary powers to decide whether a particular
activity was within the scope of the object clause or not. However, after this case, the Court
recognized this discretionary power given to directors. It, essentially, meant the death of
the doctrine of ultra vires. After 1966, the Courts have the final say in whether a particular
activity is intra vires or ultra vires.

10
(1875) LR 7 HL 653
11
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf last accessed on
21/10/2017
12
(1966) 36 Comm Cases, 779,
http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf last accessed on
21/10/2017

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CHAPTER06 current scenario of the applicability of the doctrine
of ultra vires in India
In a developing country like India, the economy is still growing. New companies need to be
formed to increase the GDP of the country. In a country like ours, having the doctrine of ultra
vires is very important. The doctrine of ultra vires basically restricts the company from acting
outside the scope of its object clause as mentioned in the Memorandum of Association. This
gives new companies an opportunity to be formed. Thus, the doctrine is important in India.
Also, with new businesses being formed frequently, banks and lending institutions need to
give out loans to such new companies. The doctrine of ultra vires protects the lenders by
giving them a guarantee of money back should the companies act outside the scope of their
object clause. The doctrine of ultra vires plays a very important role in India till date.13

In 2009, in the case, Radhabari Tea Company Private Limited vs. Mridul Kumar
Bhattacharjee and Other14, the Court decided that any action taken by the board of directors
of a company or the company itself beyond the scope of powers conferred on the company
and/or its directors by the object clause of the memorandum of association of the company, is
ultra vires.

In the new Companies Act, 2013, S. 245 (1) (a) states that any company that acts outside the
scope of the object clause of the memorandum of association will be censured under the
Doctrine of Ultra Vires.

CONCLUSION
The test of all the law shall be challenged before the two count. First is on the basic of
substantive ultra-virus. Substantive ultra-virus literary means beyond the scope of authority if
13
http://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-Chandak.pdf last
accessed on 21/10/2017
14
2009 Indlaw GUW 44

17 | P a g e
the law was made then that shall be called as substantive ultra-virus and if the prescribed
procedure was not followed by the rule making body while making the rule or by the
legislature while making the law then again the law is inconsistent and that can be challenged
on the ground that the established procedure was not followed by the rule making body or
that of the legislature at the time of framing the rule.

In the reference of company law I am of the opinion that on the above report that the doctrine
of ultra vires plays a very big role in the companies. Almost, all actions/transactions of a
company come under the scrutiny of the doctrine of ultra vires.

We can simply say that any authority does anything in exercising the power conferred upon
them. But that power is beyond its power that is called doctrine of ultra-virus. Doctrine of
ultra-virus also mean excessive power beyond the jurisdiction

Bibliography
The following Primary and Secondary sources have been referred

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Primary Sources

 Books Referred

The following textbooks have been referred to:

(iv) Pranjape, N.V., “Company Law”, (Central Law Agency,Allahabad ,7th ed., 2016)

(v) Singh, Avtar, “Company Law”, (Eastern Book Company,Lucknow,16th ed.,2015)

(vi) Kapoor G.K and Sanjay Dhamija. Company Law. 19 TH edition

Secondary Sources

Website referred

5. https://accountlearning.com/doctrine-of-ultra-vires-objectives-effects-ratification-types/
6. http://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-
Chandak.
7. http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary.pdf

http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/9793/17/17_summary

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