Name : Insha Fatima | Program: PGDM eBiz (Batch 1) | Roll No.

: 028
Legal and Tax Aspects of Business Assignment

Q.20 Discuss the Doctrine of Ultra Vires? What are the legal effects of ultra
vires act?

Ans:
Ultra Vires is a Latin term composed of two words “ultra” which means beyond and “vires”
which means power or authority. We can therefore say that anything beyond authority or
power is called ultra vires. In the corporate context, anything done by the company or its
directors outside of their legal authority or outside the perimeter of the company can be
said to be ultra vires.

Memorandum of association is considered to be the constitution of the company. A

company is authorized to do only that much which is within the scope of the powers
provided to it by the memorandum. Anything which is beyond the objects authorized by the
memorandum is an ultra-vires act. This doctrine assures the creditors and the shareholders
of the company that the funds of the company will be utilized only for the purpose specified
in the memorandum of the company. If the assets of the company are wrongfully applied,
then it may result into the insolvency of the company, which in turn means that creditors of
the company will not be paid. This doctrine helps to prevent such kind of situation.

This doctrine draws a clear line beyond which directors of the company are not authorized
to act. It puts a check on the activities of the directors and prevents them from departing
from the objective of the company.

Following are the effects of ultra vires act –

1. Injunction: Any member of the company can bring injunction against the company to
restrain it from doing ultra-vires acts.

2. Personal Liability of Directors: The directors of the company are personally liable to make
good those funds of the company which they have used for ultra-vires purposes. It is the
duty of the directors of the company to employ funds and properties of the company for the
purposes laid down in the memorandum of association of the company.

3. Contracts Void: Any contract which is ultra-vires the company, will be void and of no
effect whatsoever. “An ultra vires contract being void ab initio cannot become intra vires by
reason of estoppel, lapse of time, ratification, acquiescence or delay”. However, if the
contract is only ultra-vires the powers of the directors but not ultra-vires the company, it
may ratify such a contract in the general meeting and thereby be bound by it.

4. Ultra-vires Acquisition of Property: When money of a company is spent ultra vires in

acquiring a property, the right of the company over that property would be secure. This is
because the property represents corporate capital, though acquired wrongly.
However, where the payment for an ultra vires acquired property/asset has not been made,
the vendor can obtain a tracing order to recover the property from the hands of the
company. A company cannot be allowed to benefit from such transactions at the cost of the
other party.

5. Ultra-vires Borrowings: A bank or other person lending to company for purposes ultra-
vires the memorandum cannot recover the money under that loan agreement. But nothing
prevents the company from repaying that money. The lender is also entitled to a tracing
order, and if the money lent is traced in specie or into any investment held by the company,
the lender can recover it from the company.
Further, if that money is used by the company in discharging any debts or liabilities of the
company, the lender will, on accounts of principle of subrogation, step into the shoes of the
creditors whose claims have been paid off by the company and acquire their rights against
the company.

6. Ultra-vires Lending: If the money has been lent by the company and the lending is ultra-
vires, the contract void. No action can be brought on it, but the company can sue for
recovery of its money. This is because the borrower who has made a promise to repay that
money cannot be allowed to refrain from paying it back on the ground that it is without
authority.

Q.21 Explain the Doctrine of Indoor Management with special reference to

Turquand’s Case.

Ans:
This Doctrine of Indoor Management is an age-old principle that was established in the
perspective of the ‘Doctrine of Constructive Notice’ more than 150 years ago and since then
is popularly known as the Turquand’s Rule. The Royal British Bank v. Turquand was the case
through the Doctrine of Indoor Management originated which is the main reason why this
doctrine is popularly known as the ‘Turquand Rule’. Through a special resolution passed in
the General Meeting of the company, the Articles authorize the Directors to borrow money
from time to time through bonds. A bond was signed by the Company’s Secretary and the 2
Directors under the seal of the company where the plaintiff was authorized to draw from
the current account without the authority of any resolution. On the basis of this bond,
Turquand sought to bind the action taken by the company. So, the question of whether the
company can be held liable for the bond or not was challenged in this case. It was held by
the court that since Turquand was permitted to have the presumption that the company’s
resolution was passed in the general meeting of the company, hence the bond was binding
on the company accordingly.

The main objective of the Doctrine of Indoor Management is to ensure that the outsiders
are protected from the company while the Doctrine of Constructive Notice ensures that the
company is protected from the outsiders. The Doctrine of Indoor Management as a concept
explains the underlying principle that when an outsider enters into a contract with the
company in good faith, then the outsider can presume that no such irregularities exist and
as such all the procedural requirements have been complied by the company accordingly.
Despite the existence of the requirement that the outsiders must be well-versed and
consciously aware of the Memorandum and Articles of Association of the respective
company for the purpose of seeking remedy, yet the government authorities are also
covered under the ambit of this doctrine.