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CA Foundation
Business Law
The Companies Act, 2013
Case Studies on Memorandum and Article of Association
Q. 1 JSW Steel Ltd., a public company, its articles of association empower the managing agents to
borrow both short and long-term loans on behalf of the company. Mr Jindal, the director of
the company, approached Indiabulls Finance Ltd., a non-banking finance company for a loan
of ₹10 Crores in the name of the company.
The lender agreed and provided the above-said loan. Later on, JSW Steel Ltd. refused to repay
the loan on the pretext that no resolution authorizing such loan has been actually passed by
the company and the lender should have enquired about the same prior providing such loan,
hence, company not liable to pay such loan.
Analyse the above situation in terms of the provisions of Doctrine of Indoor Management
under the Companies Act, 2013 and examine whether the contention of JSW Steel Ltd. is
correct or not?
Ans. As per the provision of the Companies Act, 2013, the doctrine of Indoor Management says, if
an act is authorized by the articles or memorandum of the company, an outsider is entitled
to assume that all the detailed formalities for doing that act have been observed.
In the leading case law of The Royal British Bank V. Turquand, Mr Turquand was the official
liquidator of an insolvent company. The company had given a bond for £2,000 to the Royal
British Bank, which secured the company’s drawings on its current account. The bond was
under the company’s seal, signed by two directors and the secretary. When the company was
sued, it alleged that under its registered deed of settlement (articles of association) directors
have the powers to borrow up to an amount authorized by a company resolution. A
resolution had been passed but not specifying how much the directors could borrow.
In the court, it was decided that the bond was valid, so the Royal British Bank could enforce
the terms. The court said the bank was deemed to be aware that the directors could borrow
only up to the amount resolutions allowed. The passing of the resolution is the company’s
internal matter which is the company’s problem not of outsiders.

The fact of the case:

JSW Steel Ltd., a public company, its articles of association empower the managing agents to
borrow both short and long-term loans on behalf of the company. Mr Jindal, the director of
the company, approached Indiabulls Finance Ltd., a non-banking finance company for a loan
of ₹10 Crores in the name of the company.
The lender agreed and provided the above-said loan. Later on, JSW Steel Ltd. refused to
repay the loan on the pretext that no resolution authorizing such loan has been actually
passed by the company and the lender should have enquired about the same prior providing
such loan, hence, company not liable to pay such loan.

Conclusion:
Here, The contention of JSW Steel Ltd. is not correct as according to the doctrine of indoor
management, Indiabulls Finance Ltd. assumes that all the necessary formalities regarding
the passing of resolution have duly complied by the company. They are not entitled to check
whether the company has passed the resolution or not. Indiabulls Finance Ltd. can recover
its money from JSW Steel Ltd. The passing of the resolution is the company’s internal matter;
outsiders shall not be liable for it.

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Q. 2 Reliance Petro-Chemical Ltd., a chemical manufacturing company, distributed ₹50 Crores

to Sriram Industrial Institute of Research for further enhancement of scientific education
and research. Decide whether the distribution of money was ultra vires to the company?
Ans. As per the provision of the Companies Act 2013, the meaning of the term ‘ultra vires’ is
simply “beyond powers”. The acts done by the company beyond its object clause of the
Memorandum of Association are void. The impact of the doctrine of ultra vires is that a
company can neither be sued on an ultra vires transaction nor can it sue on it.

The fact of the case:

Reliance Petro-Chemical Ltd., a chemical manufacturing company, distributed ₹50
Crores to Sriram Industrial Institute of Research for further enhancement of scientific
education and research.

Conclusion:
Here, Reliance Petro-Chemical Ltd. may distribute money to Sriram Industrial Institute of
Research for further enhancement of scientific education and research. It is not an ultra
vires transaction. A chemical company distributing money for research and education
purposes is not an ultra vires act.

Q. 3 Ravi Private Limited has borrowed ₹5 crores from Mudra Finance Ltd. This debt is ultra
vires to the company. Examine whether the company is liable to pay this debt? State the
remedy if any available to Mudra Finance Ltd.?
Ans. As per the provision of the Companies Act, 2013, any contract made by the company
which travels beyond the powers not only of the directors but also of the company is
wholly void and inoperative in law and is therefore not binding on the company.

The fact of the case:

As per the facts given, Ravi Private Limited borrowed ₹5 crores from Mudra Finance Ltd.
This debt is ultra vires to the company, which signifies that Ravi Private Limited has
borrowed the amount beyond the expressed limit prescribed in its memorandum.

Conclusion:
So is being the act void in nature, there being no existence of the contract between the
Ravi Private Ltd. and Mudra Finance Ltd. Therefore, Ravi Private Ltd. is liable to pay this
debt amount up to the limit prescribed in the memorandum.
Remedy available to the Mudra Finance Ltd.: The impact of the doctrine of ultra vires is
that a company can neither be sued on an ultra vires transaction nor can it sue on it. Since
the memorandum is a “public document”, it is open to public inspection. Therefore, a
company which deals with the other is deemed to know about the powers of the company.
So, Mudra Finance Ltd. can claim for the amount within the expressed limit prescribed in
its memorandum.

Q. 4 Explain Ashbury Railway Carriage and Iron Company Limited vs Riche case law?
Ans. As per the provision of the Companies Act, 2013, the meaning of the term ‘ultra vires’ is
simply “beyond powers”. The acts done by the company beyond its object clause of the
Memorandum of Association are void. The impact of the doctrine of ultra vires is that a
company can neither be sued on an ultra vires transaction nor can it sue on it.

The facts of the case law:

In the leading case law of Ashbury Railway Carriage and Iron Company Limited vs Riche, the
main business of the company was to make, sell or lend on hire, railway carriages or wagon
and to carry on the business of mechanical engineers and general contractors. The directors
of the company entered into a contract with Riche for financing the construction of a railway
line in Belgium, and the company further ratified this act of the directors by passing a special

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resolution. Riche, however, repudiated the contract as being ultra vires and the company
brought an action for damages for breach of contract. Its contention was that the contract
was well within the meaning of the word ‘general contractors’ and hence within its powers.

Conclusion:
The court decided that the term ‘general contractors’ was associated with mechanical
engineers, i.e. it had to be read in connection with the company’s main business. If the term
‘general contractors’ was not so interpreted, it would authorize the making of contracts of
any kind and every description.

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