THE DOCTRINE OF ULTRA VIRES

AUTHOR :NAVEEN TALAWAR

https://taxguru.in/corporate-law/doctrine-ultra-vires.html

The word Ultra Vires is derived from the Latin phrase ‘beyond the powers of.‘ Ultra vires refer to any transaction
or conduct that goes beyond the limits of the company or the power granted to the custodian of the company.

Origin of the doctrine

In the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the House of Lords established
the concept of ultra-vires for the first time. In this case, the company and M/s. Riche agreed to fund the
construction of a railway line under the terms of a contract. The contract was later annulled by the board of
directors because it was ultra-vires of the company’s memorandum. Riche initiated a lawsuit against the
company, claiming damages. According to Riche, the word “generic contracts” in the company’s objectives
clause indicated any sort of contract. The company, according to Riche, has all of the essential authority and
authorization to enter into and carry out such transactions.

The contract was later confirmed by the majority of the company’s shareholders. However, the company’s
directors refused to carry out the contract, claiming that the conduct was ultra-vires and that the company’s
shareholders could not approve an ultra-vires act.

When the case reached the House of Lords, it was determined that the contract was ultra-vires the company’s
memorandum, and so null and invalid. The term “generic contracts” was construed in light of the previous
words mechanical engineers, and it was determined that this term exclusively referred to contracts involving
mechanical engineers, not all contracts.

They further stated that even if every business shareholder had accepted the act, it would have been null and void
since it was ultra-vires the company’s memorandum. Any ultra-vires act cannot be ratified, and the company’s
memorandum cannot be altered retrospectively.

The House of Lords remarked in the following significant case, Attorney-General v Great Eastern Railway
Co, that the concept of ultra vires, as stated in the Ashbury case, should be preserved. However, it must be
interpreted and used in a reasonable and not unreasonable manner, and everything that is reasonably considered
incidental to the allowed goals should not be considered ultra vires unless expressly prohibited.

As a result, a corporation may perform any conduct that is essential or incidental to the achievement of its
objectives, or that is otherwise permitted under the Act.

Purpose of Doctrine of Ultra Vires

The Ultra Vires Doctrine was intended to safeguard the company’s creditors and investors. The concept of ultra
vires forbids the company from using money from investors who are not listed in the memorandum’s object
clause. As a result, both the investors and the firm must have confidence that their money will not be used for
objects or activities that they did not indicate while investing in the company.

Effects of the Ultra Vires Doctrine

The four effects of the ultra vires doctrine are as follows:

1. Injunction

The company’s members might issue an injunction against it to prevent it from engaging in any illegal activities.

2. Ultra Vires Contract

An ultra vires contract, as we all know, is invalid from the start, which means it cannot be granted legal effect by
ratification or estoppel. The issue here is not the validity of the contract, but the company’s competence and
authority to manage it.

3. Liability of The Company :

There are no standards governing the company’s liability for damages caused by the ultra vires conduct. Tortious
liability may emerge, however, if it can be demonstrated with a credible explanation that the activity during
which the ultra vires act or tort happened fits within the scope of the Memorandum of Association.

4. Breach of Warranty :

The directors, as the business’s agent, are likewise barred from undertaking the activities that a corporation
cannot conduct as specified in the Memorandum of Association. As a result, contracts deemed ultra vires the
company will be null and invalid. The directors must operate within the limits of the company’s authority, or
they may face personal liability for breach of warranty.

References :

1. Ashbury Railway Carriage and Iron Co Ltd v Riche, (1875) LR 7 HL 653

2. Attorney General v. Great Eastern Railway, (1880) 5 AC 473
3. https://blog.ipleaders.in/borrowing-company-deemed-ultra-vires/.
4. https://www.vedantu.com/commerce/doctrine-of-ultra-vires.
5. https://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-Chandak.pdf.