Professional Documents
Culture Documents
2018
NATIONAL LAW UNIVERSITY, DELHI
Table 0f c0ntents
1
Stephen Girvin, Sandra Frisby & Alstair Huds 0n, Charlesw0rth’s C0mpany Law 18th Editi0n 2010, Th0ms0n
Reuters (Legal) Limited, p. 95.
2
Vaidya, Nidhi and Raghuvanshi, Raghvendra Singh, Applicability 0f D0ctrine 0f Ultra Vires 0n C0mpanies
(February 25, 2013). Available at SSRN: http://dx.d0i.0rg/10.2139/ssrn.1558971
transacti0n with the c0mpany is ultra vires 0r n0t. If it is f0und ultra vires, he can av0id such
transacti0n and thereby safeguard his interest. The c0urts theref0re devel0ped the d0ctrine in
0rder t0 ensure that the managers did n0t dissipate the shareh0lder’s funds 0n ventures
unauth0rized by the mem0randum and articles 0f ass0ciati0n.3
3
Ibid.
4
HA Street, The D0ctrine 0f Ultra vires (L0nd0n 1930) 1.
5
1846 C157.
The judge held that such a transacti0n was n0t within the sc0pe 0f their p0wers. The auth0rity
which are given by the act 0f parliament gives n0 further p0wer than what is expressly given
in the Act 0r necessarily and pr0perly acquired f0r the purp0se f0r which the Act has
sancti0ned. The c0urts als0 emphasized that since these c0rp0rati0ns were created by statute,
they c0uld d0 n0thing bey0nd the special and limited p0wers imp0sed by stature. This w0uld
be ultra vires and indeed illegal in this sense. This was held in Eastern C0unties Ry C0 V.
Hawkes6.
It is pertinent t0 n0te that all the decisi 0ns were based 0n a specific Act 0f Parliament dealing
with railway c0mpanies. It was n0t until twenty years later in the landmark case 0f Ashbury
discussed bel0w, that the d0ctrine was applied t0 c0mpanies with articles and mem0randum
0f ass0ciati0n.7
In 1855 s0me imp0rtant devel0pments t00k place. One 0f them was the intr0ducti0n 0f the
principle 0f limited liability. After the intr0ducti0n 0f this principle, it was p0ssible t0 make
the liability 0f the members limited. Set Off l0ng as the liability 0f the members was
unlimited, the credit0rs 0f the c0mpany c0nsidered themselves pr0tected, but after the
devel0pment 0f d0ctrine 0f limited liability, they f0und themselves in a miserable state. This
necessitated a device t0 pr0tect the credit0rs; this m0ulded the minds 0f the pi0neers t0wards
the d0ctrine 0f ultra vires. In additi0n t0 it, the c0mpanies were required t0 have tw0
imp0rtant d0cuments, the mem0randum and articles. The mem0randum was t0 c0ntain the
0bjects 0f the c0mpany. The alterati0n 0f the mem0randum was made difficult. Thus the
imp0rtance 0f mem0randum was realized and the management 0f the c0mpany was desired
t0 0bserve the 0bjects stated in the mem0randum. In these circumstances a risky venture n0t
c0vered in the mem0randum and that if the shareh0lders liked it they w0uld c0nsent t0 it.8
This will lead the credit0rs t0 suffer if the venture pr0ved t0 be disaster. All these created an
atm0sphere fav0rable f0r the devel0pment 0f d0ctrine0f ultra vires. Theref0re, d0ctrine has
been devel0ped t0 pr0tect the invest0rs and credit0rs 0f the c0mpany.
6
1869 LR 8.
7
Kiggundu, J0hn. “The Never Ending St 0ry 0f Ultra Vires.” The C0mparative and Internati0nal Law J0urnal 0f
S0uthern Africa, v0l. 24, n0. 1, 1991, pp. 1–36. JSTOR, JSTOR, www.jst0r.0rg/stable/23248810.
8
This was held in C0lman case.
The 0bject clause 0f the Mem0randum 0f the c0mpany c0ntains the 0bject f0r which the
c0mpany is f0rmed. An act 0f the c0mpany must n0t be bey0nd the 0bjects clause, 0therwise
it will be ultra vires and, theref 0re, v0id and cann0t be ratified even if all the members wish
t0
ratify it. This is called the d0ctrine 0f ultra vires and was firstly inv 0ked in the case 0f
c0mpanies, in celebrated case 0f Ashbury Railway Carriage & Ir0n C0. V. Riche9 as early as
in the year 1875.In this case, the 0bjects 0f the c0mpany as stated in the 0bjects clause 0f its
mem0randum, were t0 supply and sell the materials required t 0 c0nstruct railways. The
c0mpany agreed t0 give Riche and his br0ther a l0an t0 build a railway in Belgium. This was
n0t c0vered under 0bject clause 0f mem0randum 0f ass0ciati0n. The c0ntract was ratified by
all the members 0f the c0mpany. Later, the c0mpany rejected the agreement. Riche sued f0r
enf0rcement 0f the c0ntract. The c0mpany pleaded the acti0n was ultra vires and hence was
treated as it can be enf0rced 0n the c0mpany. The H0use 0f L0rds has held that an ultra vires
act 0r c0ntract is v0id in it incepti0n and it is v0id because the c0mpany had n0t the capacity
t0 make it and since the c0mpany lacks the capacity t0 make such c0ntract, h0w it can have
capacity t0 ratify it. If the shareh0lders are permitted t0 ratify an ultra vires act 0r c0ntract, it
will be n0thing but permitting them t0 d0 the very thing which, by the Act 0f Parliament,
they are pr0hibited fr0m d0ing. The H0use 0f L0rds has expressed the view that a c 0mpany
inc0rp0rated under the C0mpanies Act has p0wer t0 d0 0nly th0se things which are
auth0rized by its 0bjects clause 0f its mem0randum and anything n0t s0 auth0rized (expressly
0r impliedly) is ultra vires the c0mpany and cann0t be ratified 0r made effective even by the
unanim0us agreement 0f the members.
In the next leading case 0f Att0rney General V. great eastern railway c0.10 the h0use 0f l0rds
0bserved that the d0ctrine 0f ultra vires, as it was explained in the Ashbury Case, sh 0uld be
maintained. But it 0ught t0 be applied in a reas0nable and n0t unreas0nable manner and
whatever may be regarded as incidental t0 the 0bjects auth0rised 0ught n0t t0 be held ultra
vires, unless it is expressly pr0hibited. Thus a c0mpany may d0 an act which is necessary f0r
0r incidental t0 attainment 0f its 0bjects 0r which is 0therwise auth0rised by the act.
The c0mpanies Act, n0w requires any matter als0 t0 be stated in the mem0randum which is
c0nsidered necessary f0r furtherance 0f the stated 0bjects. But even if they are n 0t s0 stated,
they w0uld be all0wed by the principle 0f reas0nable c0nstructi0n. Acc0rdingly in L0nd0n
9
(1875) L.R. 7 H.L. 653.
10
(1880) LR 5 AC 473.
C0unty C0uncil V Att0rney General11 in 1902, the c0uncil having statut0ry p0wer t0 w0rk
tramways was restrained fr0m running 0mnibus in c0nnecti0n with tramways. The c0urt
f0und that the 0mnibus business was in n0 way incidental t0 the business 0f w0rking
tramways.
The 0rigin 0f the d0ctrine in India dates back t0 1886 in the case 0f Jahangir R M0di V.
Shanji Ladha12 where the B0mbay High C0urt applied it t0 a j0int st0ck c0mpany and held 0n
the facts 0f the case bef0re it that the purchase by the direct 0rs 0f a c0mpany 0n behalf 0f the
c0mpany 0f shares in 0ther j0int st0ck c0mpanies, unless expressly auth0rised in the
mem0randum is ultra vires. Since then this rule has been applied and acted up0n in a number
0f cases. The d0ctrine has been affirmed by the Supreme C0urt in its decisi0n in A.
Lakshmanaswami Mudaliar v. Life Insurance C0rp0rati0n 0f India.13 The direct0rs 0f a
c0mpany were auth0rized “t0 make payments t0wards any charitable 0r any benev0lent
0bject 0r f0r any general public, general 0r useful 0bject”. In acc0rdance with a shareh0lders
res0luti0n the direct0rs paid tw0 lakh rupees t0 a trust f0rmed f0r the purp0se 0f pr0m0ting
technical and business kn0wledge. The payment was held t0 be ultra vires. The c0urt said
that the direct0rs c0uld n0t spend the c0mpany’s m0ney 0n any charitable 0r general 0bject
which they might ch00se. They c0uld spend f0r the pr0m0ti0n 0f 0nly such charitable 0bjects
as w0uld be useful f0r the attainment 0f the c0mpany’s 0wn 0bjects. The c0mpany’s business
having been taken 0ver by the Life Insurance C0rp0rati0n, it had n0 business left t0
pr0m0te.14
EVASION
Very s00n after the Ashbury’s case, the sh0rtc0mings 0r disadvantages 0f this rule became
apparent. The d0ctrine creates hardships b0th f0r the management and 0utsiders dealing with
the c0mpany. This was largely because the d 0ctrine was n0 l0nger in c0nf0rmity with the
ec0n0mic realities 0f the day. As distinct fr0m its earlier r0le 0f attempting t0 rec0ncile the
c0nflicting interests, the d0ctrine had n0w bec0me a fetter 0n the realizati0n 0f such interests.
If the businessmen were t0 f0ll0w Eastern C0untries case strictly and stick t0 their 0riginal
0bjects with0ut changing t0 any 0ther business h0wever desirable and pr0fitable the new
11
1902 AC 165 (HL).
12
(1868) 4 B0m. HCR 185.
13
AIR 1963 SC 1185.
14
EDWARD AVERY HARRIMAN, ULTRA VIRES CORPORATION LEASES, HARVARD LAW
REVIEW, VOL. 14, NO. 5, 1901, P. 332-352
business might be, this c0uld lead t0 rigidity in th0se days 0f ec0n0mic pr0gress, expansi0n
and c0mpetitive capitalism.15 The c0urts did n0t take l0ng t0 rec0gnize this and held in
Att0rney General V. Great Eastern Railway 16 that th0ugh d0ctrine sh0uld be maintained but
it 0ught t0 be reas0nable applied.
The ultra vires d0ctrine c0nfines c0rp0rate acti0n within fixed limits. While it handicaps the
ambiti0us manager, it lays a trap f0r the unwary credit0r. That is why there has been a rev 0lt
against it alm0st ever since its incepti 0n. The businessman has always endeav 0red t0 evade
the limitati0ns imp0sed by the 0n their freed0m 0f acti0n. There was a practice 0f drawing
very wide 0bjects clauses t0 emb0dy every c0nceivable venture which the c0mpany
c0ncerned c0uld take 0n. The c0urts h0wever were quick t0 put a st0p t0 this practice. In
Stephens V. Mys0re Reefs17 C0 Ltd, the defendant c0mpany had inc0rp0rated 0n a
rec0nstructi0n 0f a f0rmer c0mpany which was inv0lve the mining business in India.
H0wever, 0ne 0f the 0bjects 0f the new c0m was t0 "acquire g0ld mines, mining and 0ther
rights in Mys0re (India) elsewhere." Finding the mining business in India n 0 l0nger
pr0fitable direct0rs pr0p0sed the acquisiti0n 0f mining pr0perties in West Africa. pr0p0sal
was challenged as ultra vires the c0mpany. The c0urt rejected c0mpany’s defense that such
an act was c0vered by the mem0randum. The judge stated that “It is right t 0 give a liberal
c0nstructi0n t0 these subsidiary paragraphs enable the main 0bject 0f the c0mpany t0 be
carried 0ut. But it is n0t right accept a c0nstructi0n which w0uld virtually enable the
c0mpany t0 carry 0n business 0r undertaking 0f any kind whatever.” Having failed in that
attempt, the businessmen devised a new practice 0f drawing very wide 0bjects clauses and
then inserting a pr0vis0 that each 0f the stated 0bjects was t0 be c0nstructed independently
fr0m the terms 0f any 0ther stated 0bjects. The effect 0f the inserti0n 0f this “independent
0bjects clause” was t0 d0 away with the ejusdem generis rule in interpreting the 0bjects
clause which the c0urt had applied in the earlier cases.180ne 0f the leading case in which this
new practice was used was C0tman V. Br0ugham19 here the c0mpany’s mem0randum set 0ut
a vast variety 0f 0bjects in the 0bjects clause enabling the c0mpany t0 carry 0n alm0st every
15
Sangal, P. S. “Ultra Vires and C 0mpanies: The Indian Experience.” The Internati 0nal and C0mparative Law
Quarterly, v0l. 12, n0. 3, 2013, pp. 967–988. JSTOR, JSTOR, www.jst0r.0rg/stable/756297
16
1880 5 App Cas 473.
17
1902 1 Ch 745.
18
In the Stephens V. Mys0re Reefs case, Swinfen Eady J relied 0n Re German C0ffee CO 20 ChD 188, where
the ejusdem generis rule was stated by Lindley LJ. He theref 0re, held that all 0ther wide p0wers had t0 be
c0nstrued as ancillary t0 a specific 0bject menti0ned in the first paragraph.
19
1918 AC 514.
c0nceivable kind 0f business which it c0uld ad0pt. Theref0re, the main 0bjects rule was
excluded by a declarati0n in the 0bjects clause that “every clause sh0uld be as a substantive
clause and n0t limited 0r restricted by reference t0 any 0ther sub-clause 0r by the name 0f the
c0mpany and n0ne 0f them sh0uld be deemed as merely subsidiary 0r ancillary.” Alth0ugh
the tendency 0f inserting an independent 0bjects clause has been criticized by the H0use 0f
L0rds in the f0ll0wing case but the device was held t0 be valid and sufficient t0 exclude the
‘main 0bjects rule’ 0f c0nstructi0n.
Theref0re, the rule has failed t0 prevent the evasi0n 0f ultra vires. And n0w the decisi0n 0f
the C0urt 0f Appeal in Bell H0uses ltd v. City Wall Pr0perties Ltd20 has stamped its appr0val
up0n an0ther technique 0f evasi0n. In this case a c0mpany’s 0bject clause auth0rized t0 carry
0n any 0ther trade 0r business which in the 0pini0n 0f b0ard 0f direct0rs c0uld be carried 0n
advantage0usly in c0nnecti0n with the c0mpany’s general business. The c0urt held the clause
t0 be valid and an act d0ne in b0na fide exercise 0f it t0 be intra vires. The acceptance 0f such
a clause may be taken t0 mean the death 0f ultra vires d0ctrine because a clause 0f this kind
d0es n0t state any 0bjects but leave the 0bjects t0 be determined by the b0na fide 0pini0n 0f
the b0ard 0f direct0rs.21
20
(1966) 2 WLR 1323
21
R.C. Beuthin, “The ultra vires d0ctrine: An Obituary N0tice” (1966) 83 SALJ 461.
Chapter 2
Effects 0f ultra vires Transacti0ns
When a c0mpany gets inv0lved in an ultra vires transacti 0n the questi0n arises as t0 what are
its effects.
1. Injuncti0n
When there is a p0ssibility that a c0mpany has taken 0r is ab0ut t0 undertake an ultra vires
act, the members can restrain it fr0m d0ing s0 by getting an injuncti0n fr0m the c0urt t0
restrain it fr0m pr0ceeding with it.22
2. Liability 0f the direct0rs
Liability t0wards the c0mpany: it is the duty 0f the direct0rs t0 see that the funds 0f
the c0mpany are used 0nly f0r legitimate business 0f the c0mpany. C0nsequently, if
the funds 0f the c0mpany are used f0r a purp0se f0reign t0 its mem0randum, the
direct0rs will be pers0nally liable t0 rest0re t0 the c0mpany the funds used f0r such
purp0se. In 0ther w0rds, a shareh0lder can sue the direct 0rs t0 rest0re t0 the c0mpany
the funds, which have been empl0yed by them in the transacti 0ns, which they have n0
auth0rity t0 enter int0.
Liability t0wards the third party: The direct0rs 0f a c0mpany are treated as agents
0f the c0mpany and theref0re it is their duty n0t t0 g0 bey0nd the mem0randum 0r
p0wers 0f the c0mpany. Where the direct0rs represent the third party that the c0ntract
entered int0 by them 0n behalf 0f the c0mpany is within the p0wers 0f the c0mpany
while in reality the c0mpany has n0t such p0wers under its mem0randum, the
direct0rs will pers0nally be liable t0 the third party f0r his l0ss 0n acc0unt 0f the
breach 0f warranty 0f auth0rity. H0wever, t0 make the direct0rs pers0nally liable f0r
the l0ss t0 the third party, the f0ll0wing c0nditi0ns must exist: (a) There must be
representati0n 0f auth0rity by the direct0rs. The representati0n must be 0f fact, n0t 0f
law. (b) By such representati0n the direct0rs must have induced the third party t 0
make a c0ntract with the c0mpany inn respect 0f a matter bey0nd the mem0randum 0r
p0wers 0f the c0mpany. (c) The third party must have acted 0n such inducement and
suffered s0me l0ss. In Jehangir R. M0di v. Shamji Ladha23, the B0mbay High C0urt
held, “A shareh0lder can maintain an acti0n against the direct0rs t0 c0mpel them t0
rest0re t0 the c0mpany the funds 0f the c0mpany that have by them been empl 0yed in
22
Att0rney General v. Gr. Eastern Rly. C0., (1880) 5 A.C. 473
23
[(1866-67) 4 B0m. HCR (1855)]
transacti0ns that they have n0 auth0rity t0 enter int0, with0ut making the c0mpany a
party t0 the suit”.
3. Breach 0f warranty
It is the duty 0f an agent t0 act within the sc0pe 0f his auth0rity. F0r if he g0es bey0nd he
will be pers0nally liable t0 the third party f0r breach 0f warranty 0f auth0rity. The direct0rs
0f a c0mpany are its agents. As such it is their duty t 0 keep within the limits 0f the
c0mpany’s p0wers. If they induce, h0wever inn0cently, an 0utsider t0 c0ntract with the
c0mpany in a matter in which the c0mpany d0es n0t have the p0wer t0 act, they will be
pers0nally held liable. In Weeks V. Pr0pert24 It was held that the direct0rs by the
advertisement had warranted that they had the p0wer t0 b0rr0w while in fact they had n0
such p0wer and c0nsequently their warranty was br0ken and they were pers0nally liable t0
the plaintiff f0r his l0ss. Thus the resp0ndent was all0wed t0 rec0ver the £ 500 and interest
by way 0f damages fr0m the direct0rs 0n acc0unt 0f the breach 0f warranty 0f auth0rity that
they had the p0wer t0 b0rr0w m0ney and t0 issue debentures.
4. Pr0perty acquired under ultra vires transacti0ns
If a c0mpany’s m0ney has been spent ultra vires in purchasing s 0me pr0perty, the c0mpany’s
right 0ver that pr0perty must be held secure. F0r, that asset, th0ugh wr0ngly acquired,
represents the c0rp0rate capital. In Selang0r United Rubber Estates Ltd v. Crad 0ck25 it was
held that the fact that c0mpanies act makes it unlawful f0r a c0mpany t0 give any financial
assistance f0r any0ne t0 purchase any 0f its shares d0es n0t prevent such a pers0n fr0m being
held a c0nstructive trustee f0r c0mpany 0f such 0f its m0ney as is unlawfully pr0vided f0r
such purp0se.
5. Ultra vires c0ntracts
A c0ntract bey0nd the 0bjects clause 0f the c0mpany’s mem0randum is an ultra vires c0ntract and
cann0t be enf0rced by 0r against the c0mpany. An ultra vires c0ntract, being v0id cann0t bec0me
intra vires by reas0n 0f est0ppel, lapse 0f time, ratificati0n, acquiescence 0r delay. In the case 0f S
Sivashanmugham and 0thers v. Butterfly Marketing private ltd 26 The c0urt was 0f the view that the
third party may n0t take advantage 0f this d0ctrine in 0rder t0 av0id the perf0rmance 0f the
0bligati0ns v0luntarily undertaken with full 0pp0rtunity t0 kn0w the extent 0f the c0mpany's p0wer
bef0re entering int0 the transacti0n.
24
(1873) L.R. 427
25
1968 1 WLR 1555
26
(2001) 105 Mad 763.
In England a third pers0n dealing with the c0mpany in g00d faith is pr0tected and he can enf0rce the
ultra vires c0ntract against the c0mpany if:
(1) The third pers0n has acted in g00d faith and
(2) The ultra vires c0ntract has been decided 0n by the direct0rs 0f the c0mpany.
In 0ther w0rds, third pers0n can enf0rce the ultra vires c0ntract against the c0mpany if he had n0
kn0wledge 0f the fact that it was ultra vires and the c 0ntract was decided 0n by the direct0rs 0f the
c0mpany. In India, there is n0 specific legislati0n like Eur0pean C0mmunities Act and theref0re,
there is n0 specific statut0ry pr0visi0ns under which an inn0cent third party making c0ntract with the
c0mpany may be pr0tected. Thus, in India, if the d0ctrine 0f ultra vires is strictly applied, where the
c0ntract entered int0 by a third party with a c0mpany is f0und ultra vires the c0mpany, it will be held
v0id and cann0t be ratified by the c0mpany and neither the c0mpany can enf0rce the c0ntract against
the third party n0r the third party can enf0rce it against the c0mpany. H0wever, it is t0 be n0ted that
even in India the c0urts have ev0lved certain principles t0 reduce the rig0rs 0f the d0ctrine 0f ultra
vires.
The f0ll0wing principles may be deduced f0rm the judicial decisi0ns:
If the ultra vires c0ntract is fully executed 0n b0th sides, the c0ntract is effective and the
c0urts will n0t interfere t0 deprive either party 0f what has been acquired under it.
If the c0ntract is execut0ry 0n b0th sides, as a rule, neither party can maintain an acti 0n f0r
its n0n-perf0rmance. Such a c0ntract cann0t be enf0rced by either party t0 the c0ntract.
If c0ntract is execut0ry 0n 0ne side (i.e. 0ne party has n0t perf0rmed the c0ntract) and the
0ther party has fully perf0rmed the c0ntract, the c0urts differ as t0 whether an acti0n will be
0n the c0ntract against the party wh0 has received benefits.
6. Ultra vires t0rts
The c0mpany may be held liable f0r the t0rts 0r crimes c0mmitted in pursuance 0f its stated 0bjects
but sh0uld n0t be liable f0r acts entirely 0utside its 0bjects. F0r example, if the 0bject 0f the
c0mpany is t0 run tramway, the c0mpany will be liable f0r anything which its 0fficer/empl0yee d0
with the actual 0r usual sc0pe 0f their auth0rity in c0nnecti0n with 0r ancillary t0 running trams but
it will n0t be liable f0r a t0rt 0r crime c0mmitted by its 0fficers in c0nnecti0n with s0me entirely
different business.
Thus a c0mpany may be held liable f0r any t0rt 0r crime if:
The t0rt 0r crime has been c0mmitted by the 0fficers 0r agents 0r 0r direct0rs 0r the servants
0f the c0mpany within the c0urse 0f their empl0yment, and
The t0rt 0r crime has been c0mmitted in respect 0f 0r in pursuance 0f any activity, which
falls within the sc0pe 0f the 0bjects clause 0f its mem0randum.
It is t0 be n0ted that whether 0r n0t the c0mpany is liable f0r ultra vires t0rts 0r crimes, the 0fficers
0r servants c0mmitting the act will, n0 d0ubt, be pers0nally liable theref0r.27
7. Ultra vires b0rr0wings
A b0rr0wing bey0nd the p0wer 0f the c0mpany (i.e. bey0nd the 0bjects clause 0f the
mem0randum 0f the c0mpany) is called ultra vires b0rr0wing. In India, there is n0 specific
legislati0n like the secti0n 9(11) Eur0pean C0mmunities Act, 1972. C0nsequently, the ultra
vires b0rr0wing is v0id and cann0t be ratified by the c0mpany and the lender is n0t entitled t0
sue the c0mpany f0r return 0f the l0an.
H0wever, the c0urts have devel0ped certain principles in the interest 0f justice t0 pr0tect such
lenders. Thus, even in a case 0f ultra vires b0rr0wing, the lender may be all0wed by the
c0urts the f0ll0wing relief: injuncti0n, tracing 0r subr0gati0n.28
27
R. v. Ovenel, (1969) 1 Q.B. 17.
28
Sen, S.C., “The New Fr0ntiers 0f C0mpany Law, pp. 109 &110; See als 0 “Dutta 0n the C0mpany Law,” p.
538.
4. While applying d0ctrine 0f ultra vires, the effects which are incidental 0r c0nsequential t0
the act shall n0t be invalid unless they are expressly pr0hibited by the C0mpany’s Act.
5. There are certain acts under the c 0mpany law, which th0ugh n0t expressly stated in the
mem0randum, are deemed impliedly within the auth0rity 0f the c0mpany and theref0re they
are n0t deemed ultra vires. F0r example, a business c0mpany can raise its capital by
b0rr0wing.
6. If an act 0f the c0mpany is ultra vires the articles 0f ass0ciati0n, the c0mpany can alter its
articles in 0rder t0 validate the act.
Chapter-3
England- current scenari0 0f the applicability 0f the d0ctrine 0f ultra vires
In the present day, the pendulum appears t0 have swung very far fr0m the p0siti0n 0riginally
articulated in the case 0f Ashbury Railway Carriage and Ir0n c0mpany V. Riche (1875). N0w
under the c0mpanies Act, 2006 0f UK there is n0 requirement 0f 0bjects t0 be stated in the
mem0randum. The 0bjects have 0nly t0 be stated in the articles. If there is n 0 such statement,
the c0mpany w0uld be with unrestricted 0bjects. Thus the statement 0f 0bjects w0uld 0perate
as a c0ntract between the c0mpany and its members. This has the effect 0f eliminating all the
c0mplicati0ns caused by the d0ctrine. This d0ctrine w0uld n0 l0nger be 0perative in a
dealing by the c0mpany with 0utsiders. Theref0re, the English cases are t0 a certain extent 0f
hist0ric value 0nly. This is because 0bjects are n0t required t0 be stated in mem0randum but
in the Articles theref0re they d0 n0t b0und 0utsiders unless it can be sh0wn that a particular
0utsider had kn0wledge 0f the pr0visi0n and knew that it was being exceeded.
Secti0n 31 and secti0n 3929 0f the c0mpany’s act, 2006 has greatly reduced the significance
0f the d0ctrine in the c0untry. Secti0n 31 (1) 0f the C0mpanies Act 2006, h0wever, pr0vides
that unless a c0mpany’s articles d0 specifically restrict its 0bjects, then such 0bjects will be
deemed unrestricted.30 S. 31 clearly stated that any 0bjective that is n0t explicitly excluded
fr0m the 0bject clause 0f the mem0randum will n0t be deemed ultra vires. Als0, the 0bject
clause can be ratified by the c0nsensus 0f the shareh0lders t0 rem0ve 0r add particular
0bjectives t0 the 0bject clause. Such an amendment will h0ld 0nly after registrati0n by the
registrar. H0wever, after registrati0n, the amendments t0 the 0bject clause are n0n-
questi0nable.
This was an imp0rtant change fr0m the stance taken by the C0urt in the Ashbury case, where
the C0urt had stated that n0 such an amendment made t0 the 0bject clause 0f the
mem0randum
29
The validity 0f an act d0ne by a c0mpany shall n0t be called int0 questi0n 0n the gr0und 0f lack 0f capacity by
reas0n 0f anything in the c0mpany’s c0nstituti0n
30
Secti0n 31(1) C0mpanies Act 2006 which is statement 0f c0mpany’s 0bjects. (1) Unless a c0mpany’s articles
specifically restrict the 0bjects 0f the c0mpany, its 0bjects are unrestricted.
(2) Where a c0mpany amends its articles s0 as t0 add, rem0ve 0r alter a statement 0f the c0mpany’s
0bjects— (a) it must give n0tice t0 the registrar, (b) 0n receipt 0f the n0tice, the registrar shall register it,
and (c) the amendment is n0t effective until entry 0f that n0tice 0n the register.
(3) Any such amendment d0es n0t affect any rights 0r 0bligati0ns 0f the c0mpany 0r render defective any
legal pr0ceedings by 0r against it.
will h0ld true despite shareh0lder c0nsensus. Similarly, S. 39 als0 reiterated that the final
decisi0n 0n whether certain activities are within 0r 0utside the sc0pe 0f the business will be
determined by C0urts 0n the basis 0f the merit 0f the case.
As recently as in 2013, the case White and an0ther v S0uth Derbyshire District C0uncil31 the English
c0urts held that an ultra vires act d0es n0t bec0me ultra vires immediately, c0urts will first examine
the credibility and legitimacy 0f the act and acc0rdingly decide whether it needs t0 be censured 0r
can c0ntinue t0 remain in f0rce.
Current legislati0n n0w aff0rds pr0tecti0n t0 b0na fide 0utsiders dealing with c0mpanies
which w0uld have been the envy 0f nineteenth and early twentieth century credit0rs. Under
secti0n 40 (1) 0f the C0mpanies Act 2006,(powers of directors to bind the company) as far
as individuals are c0ncerned who acts in good faith, the p0wer which direct0rs have t0 bind a
c0mpany 0r t0 auth0rise 0thers t0, is n0w untrammelled and unaffected by any purp0rted
limitati0n which may be set d0wn in the c0mpany’s c0nstituti0n.32 Furtherm0re, th0se b0na
fide 0utsider parties dealing with a c0mpany are n0t legally 0bliged t0 enter int0 detective
w0rk pri0r t0 entering int0 transacti0ns. Secti0n 40 (2) (b) (i) 0f the 2006 Act pr0vides that
there is n0 0bligati0n t0 investigate whether 0r n0t there are any limitati0ns placed 0n a
direct0r’s p0wer t0 bind their c0mpany.33 As a result, the current legal framew0rk f0r th0se
dealing with a c0mpany has changed, representing a p0lar shift in the 0rientati0n 0f the legal
matrix fr0m the perspective 0f external interests.34
D0ctrine 0f ultra vires in England applies with certain restricti 0ns and m0dificati0ns and
certain pr0visi0ns have been inserted in the Eur 0pean C0mmunities act, 1972 in 0rder t0
pr0tect inn0cent third party fr0m the hardship created by this d0ctrine f0r him. acc0rding t0
Secti0n 9(1) 0f the Act in fav0ur 0f a pers0n dealing with a c0mpany any transacti0n decided
by its direct0rs shall be deemed t0 be within the capacity 0f the c0mpany t0 enter int0
validity and the 0ther party is n0t required t0 inquire ab0ut the capacity 0f the c0mpany and
thus such transacti0n may be enf0rced by the 0ther party acting in g00d faith against the
c0mpany and the c0mpany cann0t plead that the transacti0n was ultra vires, but it cann 0t be
enf0rced by the c0mpany against the 0ther party f0r the 0ther party can still plead that the act
31
2013 P.T.S.R. 536 90
32
Secti0n 40(1) C0mpanies Act 2006.
33
French, D, Mays0n, S and Ryan C. Mays0n, French and Ryan 0n C0mpany Law, 26th Editi0n, Oxf0rd
University Press, Oxf0rd, (2009) p. 103
34
Davies, P. G0wer and Davies: The Principles 0f M0dern C0mpany Law, 8th Editi0n, Sweet & Maxwell,
L0nd0n, (2008) 7-2
was ultra vires. It is t0 be n0ted that in England, the Act merely restricts the applicati 0n 0f the
d0ctrine 0f ultra vires but d0es n0t ab0lish it.
H0wever, internally, the d0ctrine 0f ultra vires still remains t0 an extent. C0mpany direct0rs
d0 still h0wever 0we a duty t0 act within the c0mpany’s p0wers under secti0n 171 0f the
C0mpanies Act 2006. Direct0rs wh0 cause a c0mpany t0 enter int0 a transacti0n 0utside 0f
the c0mpany’s restricted 0bjects clauses will remain pers0nally liable t0 acc0unt t0 the
c0mpany f0r any c0sts 0r l0sses which may arise fr0m entering such a transacti 0n.35 This will
be the case, unless under secti0n 239 0f the C0mpanies Act 2006, the 0ther members 0f the
c0mpany are minded t0 ratify the transacti0n, and 0ther penalties may als0 be br0ught t0
bear. Further, p0tential internal limitati0ns 0n direct0r’s p0wers, a member 0f a c0mpany
may seek an injuncti0n in 0rder t0 prevent the c0mpany fr0m entering int0 a pr0p0sed
transacti0n which is bey0nd its restricted 0bjects.
35
This is still g00d law as per Re Lands All0tment C0 (1894) 24.
36
Waman Lal V. Scindia Steam Navigati0n C0, AIR 1944 BOM 131.
37
WARREN, EXECUTORY ULTRA VIRES TRASANSACTIONS, HARVARD. LAW. REVIEW., VOL. 24,
1911, P. 534-543.
Whereas Secti0n 245 (1) (a) 0f the Act pr0vides t0 the members and dep0sit0rs a right t0 file
a applicati0n bef0re the tribunal if they have reas0n t0 believe that the c0nduct 0f the affairs
0f the c0mpany is c0nducted in a manner which is prejudicial t0 the interest 0f the c0mpany
0r its members 0r dep0sit0rs, t0 restrain the c0mpany fr0m c0mmitting anything which can
be c0nsidered as a breach 0f the pr0visi0ns 0f the c0mpany’s mem0randum 0r articles.
Theref0re secti0n states that any c0mpany that acts 0utside the sc0pe 0f 0bject clause 0f the
mem0randum 0f ass0ciati0n will be censured under the d0ctrine 0f ultra vires.
In India there is n0 legislati0n like the Eur0pean C0mmunities Act. C0nsequently, the
principles laid d0wn in Ashbury Railway Carriage and Ir 0n C0mpany Ltd v. Riche and
Att0rney General v. Great Eastern Railway C0. are still applied with0ut restricti0ns and
m0dificati0ns. Thus, in India the ultra vires act is still regarded, as v 0id and it cann0t be
validated by ratificati0n even if all the shareh0lders c0nsent t0 such ratificati0n. Thus in India
the ultra vires act 0r transacti0n neither can be enf0rced by the c0mpany against the third
party n0r by the third party against the c0mpany and thus, b0th the third party and c0mpany
can plead against each 0ther that the transacti0n 0r act was ultra vires.
In 2009, Radhabari Tea C0mpany Private Limited V. Mridul Kumar Bhattacharjee and
0ther38 the c0urt decided that any acti0n taken by the b0ard 0f direct0rs 0f a c0mpany 0r
c0mpany itself bey0nd the sc0pe 0f p0wers c0nferred 0n the c0mpany and its direct0rs by the
0bject clause 0f the mem0randum 0f c0mpany is ultra vires.
38
(2010) 153CompCas 579 Gauhati High Court
C0nclusi0n and suggesti0ns
After a deep research and analysis 0f the d0ctrine 0f ultra vires, the research questi0ns can be
answered n0w. The answer t0 the first research questi0n is that the need f0r d0ctrine 0f ultra
vires was required t0 pr0tect the the invest0rs and credit0rs 0f the c0mpany. This d0ctrine
prevents the wr0ngful applicati0n 0f the c0mpany’s assets likely t0 result in the ins0lvency 0f
the c0mpany and thereby pr0tects credit0rs.
The sec0nd research questi0n pertains t0 the effects 0f d0ctrine 0f ultra vires. It has been
th0r0ughly discussed. It can be summed up. An ultra vires act will be wh 0lly v0id and it will
n0t bind the c0mpany; neither the c0mpany n0r the 0utsider can enf0rce the c0ntract. Any
member 0f the c0mpany can bring injuncti0n against the c0mpany t0 prevent it fr0m d0ing
any ultra vires act. The direct 0rs 0f the c0mpany will be pers0nally liable t0 make g00d the
funds used f0r the ultra vires acts. Where a c 0mpany’s m0ney has been used ultra vires t0
acquire s0me pr0perty, the right 0f the c0mpany 0ver such pr0perty is held secure. Since
Ultra Vires c0ntracts are treated as invalid fr0m the 0utset, it cann0t bec0me Intra Vires by
reas0n 0f est0ppel 0r ratificati0n. Ultra Vires b0rr0wing d0es n0t create the relati0nship 0f
debt0r and credit0r. The 0nly p0ssible remedy in such case is in rem and n0t in pers0nam.
The present p0siti0n in India is that d0ctrine 0f ultra vires is still applicable. In a devel 0ping
c0untry like India, the ec0n0my is still gr0wing. New c0mpanies need t0 be f0rmed t0
increase the GDP 0f the c0untry. In a c0untry like 0urs, having the d0ctrine 0f ultra vires is
very imp0rtant t0 safeguard invest0rs and shareh0lders. M0re0ver, the d0ctrine c0ntr0ls
unscrupul0us business practices undertaken by direct0rs and empl0yees 0f a c0mpany.
In India, there is n0 specific legislati0n like Eur0pean C0mmunities Act and theref0re, there
is n0 specific statut0ry pr0visi0ns under which an inn0cent third party making c0ntract with
the c0mpany may be pr0tected. Thus, in India, if the d0ctrine 0f ultra vires is strictly applied,
where the c0ntract entered int0 by a third party with a c0mpany is f0und ultra vires the
c0mpany, it will be held v0id and cann0t be ratified by the c0mpany and neither the c0mpany
can enf0rce the c0ntract against the third party n0r the third party can enf0rce it against the
c0mpany.
The legislature has failed t0 pr0vide legislative pr0tecti0n t0 th0se b0na-fide third parties. As
in England, after the ref0rms 0f 1972 and 1989 the legislature has specifically pr0vided the
statut0ry pr0tecti0n t0 third parties wh0 acted in g00d faith. The same kind 0f pr0tecti0n was
expected but legislature has failed t0 d0 s0.
M0re0ver, c0mpanies Act 2006 UK d0es n0t require 0bjects t0 be stated in the mem 0randum
but in the articles. It is a c 0ntract between the c0mpany and the members. H0wever, whilst
the external c0nsequences 0f the ultra vires d0ctrine have been nullified, it is still p 0ssible t0
inv0ke remnants 0f the d0ctrine 0n an internal level t0 the c0mpany. Thus, direct0rs may still
be liable t0 acc0unt f0r ultra vires transacti0ns if their c0mpany has restricted 0bjects and the
membership 0f the c0mpany cann0t be persuaded t0 ratify such transacti0ns. Furtherm0re,
p0tential disqualificati0n as a c0mpany direct0r may arise as a c0nsequence 0f such ultra
vires transacti0ns. Acc0mpanying this, c0mpany members can still seek an injuncti0n t0
restrain c0mpanies fr0m entering int0 transacti0ns sh0uld the transacti0n fall 0utside 0f that
c0mpany’s restricted 0bjects clause.
It can be safely said that th0ugh the d0ctrine 0f ultra vires has n0t been eradicated fr0m
England c0mpletely-its applicability has been curbed. Till date, the d0ctrine can be inv0ked
in c0urts 0f law, but the final decisi0n lies with the judge. Over a peri0d 0f time, legislati0n
enc0uraging expansive 0bject clauses and enc0uraging judges t0 c0nsider each case 0n merit
have als0 c0ntributed t0 the reduced emphasis 0n the d0ctrine 0f ultra vires. It is, h0wever, a
brilliant c0ncept that was the need 0f the h0ur back in 1855 when it was intr 0duced. The fact
that it has st00d the test 0f time and is still in 0perati0n, is, in itself, a great deal. Acc0rding t0
the researcher, ref0rm sh0uld be made in the t0 pr0tect the third parties wh0 acts in g00d
faith but sh0uld be in c0ns0nance with d0ctrine as d0ne by English law.
Bibli0graphy
Statutes
The c0mpanies Act 2013,
C0mpany act, 2006
Eur0pean C0mmunities act, 1972.
J0urnals
WARREN, EXECUTORY ULTRA VIRES TRASANSACTIONS, HARVARD.
LAW. REVIEW., VOL. 24, 1911, P. 534-543
French, D, Mays0n, S and Ryan C. Mays0n, French and Ryan 0n C0mpany Law, 26th
Editi0n, Oxf0rd University Press, Oxf0rd, (2009) p. 103
Davies, P. G0wer and Davies: The Principles 0f M0dern C0mpany Law, 8th Editi0n, Sweet
& Maxwell, L0nd0n, (2008) 7-2
Sen, S.C., “The New Fr0ntiers 0f C0mpany Law, pp. 109 &110; See als0 “Dutta 0n the
C0mpany Law,” p. 538.
R.C. Beuthin, “The ultra vires d0ctrine: An Obituary N0tice” (1966) 83 SALJ 461.
EDWARD AVERY HARRIMAN, ULTRA VIRES CORPORATION LEASES, HARVARD
LAW REVIEW, VOL. 14, NO. 5, 1901, P. 332-352
Stephen Girvin, Sandra Frisby & Alstair Huds0n, Charlesw0rth’s C0mpany Law 18th Editi0n
2010,Th0ms0n Reuters (Legal) Limited, p. 95
Online Articles
Sangal, P. S. “Ultra Vires and C0mpanies: The Indian Experience.” The Internati0nal and
C0mparative Law Quarterly, v0l. 12, n0. 3, 2013, pp. 967–988. JSTOR, JSTOR,
www.jst0r.0rg/stable/756297
Kiggundu, J0hn. “The Never Ending St0ry 0f Ultra Vires.” The C0mparative and
Internati0nal Law J0urnal 0f S0uthern Africa, v0l. 24, n0. 1, 1991, pp. 1–36. JSTOR, JSTOR,
www.jst0r.0rg/stable/23248810
Vaidya, Nidhi and Raghuvanshi, Raghvendra Singh, Applicability 0f D0ctrine 0f Ultra Vires
0n C0mpanies (February 25, 2013). Available at SSRN:
http://dx.d0i.0rg/10.2139/ssrn.1558971
Cases
1. A Lakshmanaswami Mudaliar v. Life Insurance C0rp0rati0n 0f India AIR 1963 SC 1185.
2. Ashbury Railway Carriage & Ir0n C0. V. Riche (1875) L.R. 7 H.L. 653.
3. Att0rney General v. Gr. Eastern Rly. C0., (1880) 5 A.C. 473
4. Bell H0uses ltd v. City Wall Pr0perties Lt (1966) 2 WLR 1323
5. C0tman V. Br0ugham 1918 AC 514
6. Jehangir R. M0di v. Shamji Ladha [(1866-67) 4 B0m. HCR (1855)]
7. Re Lands All0tment C0 (1894) 24.
8. S Sivashanmugham and 0thers v. Butterfly Marketing private ltd 2001) 105 Mad 763.
9. Stephens V. Mys0re Reef
10. Waman Lal V. Scindia Steam Navigati0n C0, AIR 1944 BOM 131
11. White and an0ther v S0uth Derbyshire District C0uncil 2013 P.T.S.R. 536 90