Code No:

Fieldwork
on
"The Doctrine of Ultra Vires under Company Law :
A Critical Analysis "

Submitted to
The Chairman of
LL. B (Hon's) 3rd Year Examination Committee - 2022
Department of Law
University of Chittagong

Submitted by
Id No: 18501136
Session: 2017-18
Student of LL.B (Hon’s) 3rd Year
Department of Law
University of Chittagong

Date of Submission: 05/01/2024

 Code No:

Fieldwork
on
"The Doctrine of Ultra Vires under Company Law:
A Critical Analysis"

Submitted to

The Chairman of
LL. B(Hon's) 3rd Year Examination - 2022
Department of Law
University of Chittagong
 Preface

I have been assigned to find out the present context of “The Doctrine of Ultra Vires under

Company Law : A critical analysis". I have tried my best to collect information on this topic.

My main focus is, the object clause of Memorandum of the company contains the objects for

which the company is formed. An act of the company must not beyond the object clause,

otherwise it will be Ultra-Vires. I think it will be helpful for those who want to make research

work and further studies regarding this. I have adopted "Analytical" method for making this

research.
 Acknowledgement

At First, I would like to give thanks to almighty Allah for letting me to complete the work

successfully. I want to give thanks to my honorable course teacher Mr. Nirmal Kumar Saha

Associate Professor, Department of law, Chittagong University for giving proper suggestions

and guidelines to complete the Field work properly.

Lastly, I am also grateful to the different writers, researchers, authors, editors, journalists and

other related persons who have helped me to get a vast knowledge on the topic through their

books, articles, journals, interviews, lectures etc.

 Table of Contents
Introduction .............................................................................................................................. 1
Purpose of the Study ................................................................................................................ 1
Meaning of Ultra-vires ............................................................................................................ 2
The Doctrine of Ultra-vires ..................................................................................................... 3
Ultra-vires Under the Corporate Law ................................................................................... 4
Why the Doctrine of Ultra-vires? ........................................................................................... 5
Origin and Development of Ultra-vires ................................................................................. 6
Types of Ultra-vires acts in Company Law ........................................................................... 9
Is Ultra-vires legal or illegal? ................................................................................................ 10
Effects of Ultra-vires transactions ........................................................................................ 10
Exceptions to the Doctrine of Ultra-vires ............................................................................ 11
Case Notes ............................................................................................................................... 12
Criticisms of the Doctrine of Ultra-vires ............................................................................. 16
Can an Ultra-vires ac be Ratified? ....................................................................................... 17
Ultra-vires Contracts ............................................................................................................. 18
Ultra-vires Torts..................................................................................................................... 18
Importance of the Doctrine of Ultra-vires ........................................................................... 18
Reforms in the Doctrine of Ultra-vires ................................................................................ 19
Conclusion .............................................................................................................................. 24
Bibliography ........................................................................................................................... 25
Primary Sources ................................................................................................................. 25
Secondary Sources.............................................................................................................. 25
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Introduction

In today’s day and age, practically every human act needs to be censured. Whether the
act is an individual act or a group act, censuring is a necessity. The reason why censuring has
become such an important part of society is because of the lack of control people show in
exercising self-restraint and abundance of temptation in every direction. Censuring only
individual or group acts is insufficient. Even when the Company- treated as an artificial person
after incorporation- has committed a mistake, censuring must be done. Obviously, a company
is an artificial person with no physical manifestation. Sending a ‘company’ to jail is not a
possibility. Therefore, those people who run the company and are responsible for the daily
functioning of the company are the ones going to be held guilty.
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 Bangladesh 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 acted outside the scope of its authority as mentioned in the object clause of the
memorandum of associations.

Purpose of the Study

This paper will delve into the concept of the ‘doctrine of ultra vires’ and its applicability.
The paper will discuss the process of evolution of the concept and the various angles and
aspects of the doctrine. In this paper, we will not just look at the journey the doctrine has taken
in Bangladesh, but we will also study about the applications of the doctrine in countries like
United States of America and the United Kingdom.
Through this paper, the readers should have a clear understanding of the concept of ‘ultra
vires’ and its uses. Also, the author will attempt to make certain suggestions that can be
implemented in law to better the applications of this doctrine and render it more effective.
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Meaning of Ultra-vires
Ultra vires acts are any acts that lie beyond the authority of a corporation to perform. Ultra
vires acts fall outside the powers that are specifically listed in a corporate charter or law. This
can also refer to any action that is specifically prohibited by the corporate charter.
The roots of the term are from a Latin phrase that means beyond the power. It is the
opposite of under proper authority—intra vires. You will also find the term in the legal
profession.

Ultra vires acts can also be defined as any excessive use of corporate power that has been
granted. These acts cannot be legally defended in court. They will, in fact, leave the corporation
vulnerable to lawsuits by employees or other parties.
Companies have a variety of legal documents and directives that outline the parameters
of what actions are permitted by each organization, its employees, and directors. These
documents can include what is known as a "memorandum of association." The memorandum
is largely used in Europe but not in the United States.
The memorandum combined with articles of association can serve as a constitution for
companies that outlines the conditions by which the organization may operate and interact with
shareholders. The memorandum offers guidance on the external matters the company can
engage in. Articles of incorporation also define the nature of a company, its purpose, and the
type of organization it will be.
If other types of entities such as government bodies also take actions beyond the scope of
their legal powers, their deeds can also be described as ultra vires acts.
Actions that breach the above directives can be classified as ultra vires. For example, a
company’s constitution might outline the procedure for appointing directors to its board. If
board members are added or removed without following those procedures, then those actions
would be described as ultra vires. If individuals within a company make use of resources that
go beyond the scope of their legal purview, this can be called ultra vires. Such actions may
include appropriating company revenue or shares of the company that the individuals do not
have legal ownership of. If a manager were to access the bank accounts of the company and
use those assets for personal needs this would be classified as ultra vires acts. If an accountant
or another financial officer within a company transferred ownership of company shares,
they have rights to control, this also falls under ultra vires acts.
When government bodies or agencies act, the scope of their powers is determined by laws
that can include a constitution. If branches of government go beyond those outlined powers,
their actions can be deemed ultra vires and may face legal repercussions.
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The Doctrine of Ultra-vires

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 members wish to
ratify. This is called the doctrine of ultra vires. The expression “ultra vires” consists of two
words: ‘ultra’ and ‘vires’. ‘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
a company 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 we are restricting the meaning of ultra vires to the objects clause of the
company’s memorandum.
In other word, it is to be said, Ultra vires (Latin for Beyond the powers) is a condition
where a company engages in activities that exceed its authority or power as established in
organizational documents such as objects clause, articles of incorporation, bylaws, charters,
operating agreements, and such like. The doctrine of ultra vires is a constituent of corporate
law that governs all contracts entered by a company. As such, any contract that is beyond the
scope of the company's corporate powers is deemed illegal. Ultra vires is the opposite of intra
vires (Latin for Within the powers).
A company's officers and directors might sometimes lead the organization to engage in
activities that are clear violations of their authority or power as outlined in the constituting or
vesting instrument. Such a violation constitutes ultra vires and may lead to legal proceedings
against the company or its directors.
Although the evolution of modern corporate law has rendered the doctrine of ultra vires
obsolete, it still enjoys relevance in the case of government entities. The following are some of
the attributes of ultra vires.

 The doctrine of ultra vires is applicable to all powers created by a contract or statute,
irrespective of whether they are express or implied.
 Ultra vires may not be used by the company or any third party as justification for
invalidating a contract.
 Any action of the directors of a company that amounts to ultra vires often has severe
repercussions for the shareholders of the company. As such, shareholders often initiate
lawsuits against individual directors since the directors of a company are personally
liable for its corporate actions.
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 It is not possible to turn an ultra vires contract into an intra vires contract by reason of
estoppel or ratification. This is because ultra vires contracts are treated as invalid by
default.
 Shareholders cannot ratify an ultra vires transaction.
 It is possible for any member of the company to initiate an injunction against the
company to prevent it from engaging in any ultra vires activities.
 A company cannot sue or be sued based on an ultra vires transaction. In the event that
the company sells products or services on an ultra vires contract, it will not be able to
either receive payment or recover any loan involved.
 It is not possible to bind a company through an ultra vires contract.

Ultra-vires Under the Corporate Law

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the
objects of a company, as specified in its Memorandum of Association, can be departed from
only to the extent permitted by the Act. Hence, if the company does an act, or enters a contract
beyond the powers of the directors and/or the company itself, then the said act/contract is void
and not legally binding on the company.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the
acts performed more than the legal powers of the doer. This works on an assumption that the
powers are limited in nature. Since the Doctrine of Ultra Vires limits the company to the objects
specified in the memorandum, the company can be:

 Restrained from using its funds for purposes other than those specified in the
Memorandum
 Restrained from carrying on trade different from the one authorized.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a
company supplies goods or offers service or lends money on an ultra vires contract, then it
cannot obtain payment or recover the loan.

However, if a lender loans money to a company which has not been extended yet, then he
can stop the company from parting with it via an injunction. The lender has this right because
the company does not become the owner of the money as it is ultra vires to the company and
the lender remains the owner. Further, if the company borrows money in an ultra vires
transaction to repay a legal loan, then the lender is entitled to recover his loan from the
company.
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Sometimes an act which is ultra vires can be regularized by the shareholders of the
company. For example,

 If an act is ultra vires the power of directors, then the shareholders can ratify it.
 If an act is ultra vires the Articles of the company, then the company can alter the
Articles.

We must remember that we cannot bind a company through an ultra vires contract.
Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intra-vires’.

Summing up the Doctrine of Ultra Vires

 An act, legal, but not authorized by the object clause of the Memorandum of
Association of a company or statute, is Ultra Vires the company. Hence, it is null and
void.
 An act ultra vires the company cannot be ratified even by the unanimous consent of all
shareholders.
 If an act is ultra vires the directors of a company, but intra vires the company itself, then
the members of the company can pass a resolution to ratify it.
 If an act is Ultra Vires the Articles of Association of a company, then the same can be
ratified by a special resolution at a general meeting.

Why the Doctrine of Ultra-vires?

The term Ultra Vires is derived from the Latin word meaning “beyond the powers of”.
Any transaction or activities beyond the scope of the company or the authority endowed upon
the custodian of the company will come under the scope of the doctrine of ultra vires and can
be criticized accordingly.
The concept of the doctrine of ultra vires was first introduced in the United Kingdom in
1612.The concept of the doctrine of ultra vires enables the men to determine whether the action
is legitimate or illegitimate. This concept has been elaborated by the judges in various
judgments over a given period. In the case, of Sutton Hospital of the year, it was stated that the
doctrine of ultra vires will not be applied for any action or transaction of chartered accountant,
even though such corporations are corporate personalities with a separate and distinct identity.
In 1612, the companies used the documents known as the “royal charters' ' to incorporate
the company and give them a separate and distinct identity from its owners in the eyes of law.
Such a royal charter retains similar rights as a natural human being such as the right to sue or
to be sued without any physical exhibition. Therefore, in the case of Sutton Hospital of the
year, even though the company had a separate legal existence in the eyes of law, the doctrine
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of ultra vires did not apply. This case is considered as an exception to the doctrine of the ultra
vires and its scope.
The Doctrine of Ultra Vires is introduced to safeguard the creditors and investors of the
company. The doctrine of Ultra vires prevents the company from using the money of the
investors other than those mentioned in the object clause of the memorandum. Hence, both the
investors and company must be assured that their investment will not be used for the objects
or activities which they did not have specified at the time of investing money in the company.
This ensures that the funds of the investors won't be dispersed in unauthorized activities by the
company. The wrongful use of a company's assets may result in the insolvency of the company,
a situation where the creditors of the company are not being paid.
The doctrine of the company prevents the wrongful use of the company’s assets thereby
protecting the creditors. Also, the doctrine of ultra vires prevents directors from diverting the
object for which the company has been formed out, and hence constantly examining the
activities of the directors. It helps the directors to know within what lines of business they are
eligible to act.
The doctrine of ultra vires applies only to those companies that have been incorporated or
have a separate existence in the eyes of law. All those companies that have not been registered
such as sole proprietorship or partnership will not fall under the scope of the doctrine of ultra
vires. Only the companies that are incorporated or have a separate existence in the eyes of law
come under the scope of the doctrine of ultra vires.
Every illegal transaction or abuse of power by directors or employees of a company will
not come under the scope of the doctrine of ultra vires. Only the transactions that are beyond
the scope of what a company can do will be liable under the scope of the doctrine of ultra-
vines. What a company can do, or the purpose of the company is always mentioned in the
object clause of the Memorandum of Association of the company. Therefore, if the company
is exceeding the authority, it has mentioned itself in the object clause of the Memorandum of
Association will be criticized under this doctrine.

Origin and Development of Ultra-vires

The doctrine of ultra vires was first introduced in relation to the statutory companies.
However, the doctrine was not paid due attention up to 1855. The reason appears to be this that
doctrine was not felt necessary to protect the investors and creditors. The companies prior to
1855 were usually in the nature of an enlarged partnership and they were governed by the rules
of partnership. Under the law of partnership, the fundamental changes in the business of
partnership cannot be made without the consent of all the partners and the act of one partner
cannot be binding on the other partners if the act is found outside his actual or apparent
authority, but it can always be ratified by all the partners. These rules of partnership were
considered sufficient to protect the investors. Because of the unlimited liability of the members,
the creditors also felt themselves protected and did not require any other device for their
protection. Besides, during early days the doctrine had no philosophical support. The doctrine
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is based on the view that a company after incorporation is conferred on legal personality only
for the purpose of the particular objects stated in the objects clause of its memorandum and
transaction not authorized expressly or by necessary implication must be taken to have been
forbidden, but this view was not followed during early days and contrary to it, the view that a
company has all the powers of a natural person unless it has been taken away expressly or by
necessary implication was given a big support.

In 1855 some important developments took place. One of them was the introduction of
the principle of limited liability. After the introduction of this principle, it was possible to make
the liability of the members limited. Set Off long as the liability of the members was unlimited,
the creditors of the company considered themselves protected, but after the development of
doctrine of limited liability, they found themselves in a miserable state. This necessitated a
device to protect the creditors: this molded the minds of the pioneers towards the doctrine of
ultra vires. In addition to it, the companies were required to have two important documents, the
memorandum, and articles. The memorandum was to contain the objects of the company. The
alteration of the memorandum was made difficult. Thus, the importance of memorandum was
realized, and the management of the company was desired to observe the objects stated in the
memorandum. All these created an atmosphere favorable for the development of doctrine of
ultra vires.

If an act requires legal authority and it is done with such an authority, it is characterized in
law as intra vires literally meaning "within the powers" and if it is done without such authority,
it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are
ultra vires "invalid". The ultra vires doctrine typically applies to a corporate body, such as a
limited company, a government department, or a local council so that any act done by the body,
which is beyond its capacity to act will be considered void. Although a corporation is an entity
recognized by the law, having a separate personality, the analogy with a real person can plainly
never be completed or complete one. There are, as we have seen, some attributes which a
corporation it the nature of things cannot have (race or sex), and there are some acts which it
cannot perform (marry); to these natural limitations (which effects the capacity of all
corporations) the law has by the doctrine of ultra vires, added further artificial limitations,
which applies only to the corporations created by statutes.

This doctrine was first introduced in respect of statutory companies, such as railway etc.
which grew rapidly in number significantly during the first half of nineteenth century. The
companies before 1855 were usually gigantic in nature and were governed by the rules of
partnership. The rules of partnership were considered sufficient to protect the investors, during
early days this doctrine has no philosophical support, and it was based on the view that a
company after incorporation is conferred on legal personality only for the purpose of the
particulars, stated in the object clause of its memorandum, and transactions not authorized
specifically, expressly or by implication must be taken to have been forbidden, but this view
was not followed during early days and contrary to it, the view that a company has all the
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powers of a natural person unless it has been taken away expressly or by necessary implication
was given a huge support, the Ultra vires principle never formed part of common Law of many
European Countries and as a step in the direction of harmonization a partial reform of the law
was introduced by the European Communities Act 1975. The fact that the company could
not only be restricted from doing an Ultra vires act at the suit of his member, but any contract
entered by the company beyond its power was void and could not be enforced and was finally
settled in one of legendry case Teller vs. Chichester Midhurst Rail company 18673. Despite
the power full dissenting Judgment by the Blackburn who sought to restrict the application of
the Doctrine to action brought by the member against the company through injunction. The
theories behind the application of Ultra vires rule as regarded registered companies were laid
down by the House of Lords in Ashbury Railway Carriage & Iron co v Riche 18755. The
ultra vires act or transaction is different from an illegal act or transaction, although both are
void, an act of the company which is beyond its objects clause is ultra vires and therefore is
void, even if it is legal, similarly an illegal act will be void even if it falls within the object
clause, unfortunately the doctrine of ultra vires has often been used in connection with illegal
and forbidden acts. It should be born in mind that there are some cases which are differently
decided keeping in view the doctrine of ultra vires in its sections 35.

In the context of ultra vires doctrine there was a case, which can be regarded as the proof
or evidence of its application. In the case of Ashbury Railway and Iron Co v Rich it was
described that, “a company incorporated under the company’s act has power to do only those
things which are authorized by the memorandum of association. Anything not so authorized,
expressly or by implication, is ultra-Vires”.

The above-mentioned case laid down a precedent that a company or its directors or even
its shareholders cannot ratify or made effective to the act which has been done beyond the
scope of an object Clause mentioned in memorandum of Association at any cost. Further it was
also urged that the act which is beyond the objects clause cannot be validated by the subsequent
agreement. However this doctrine was made much clearer in the case of A.G. vs great Eastern
Railway Co: In this case the House of lords affirmed that the doctrine of ultra vires ought to
be reasonable and not unreasonable understood and applied and whatever may fairly be
regarded as incidental to or consequential upon those things, which the legislature has
authorized, or ought not to be held by judicial construction, to be ultra Vires, it would mealy
be void in allowing the company and its business which is incidental or which is ancillary to
its object clause. The contract beyond the object clause of the company’s is an ultra vires
contract and cannot be enforced against the company, in the case of Re Jon Beau fore
(London) Ltd in 1953. It was held that the company was not liable to claim for the aforesaid
claimants because the money was taken from them for the business of veneered panels which
was admittedly ultra vires the object of the company, the court held that the memorandum is a
constructive notice to the public and therefore if an act is ultra vires, it will be void and will
not be binding on the company and the outsider dealing with the company cannot take a plea
that he had no knowledge of the contents of memorandum.
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Types of Ultra-vires acts in Company Law

Ultra-vires acts can be generally of four types:

 Acts which are ultra-vires to the Companies Act.

 Acts which are ultra-vires to the Memorandum of the company.
 Acts which are ultra-vires to the Articles of the company but intra-vires the company.
 Acts which are ultra-vires to the directors of the company but intra-vires the company.

Acts which are ultra-vires to the Companies Act

Any act or contract which is entered by the company, which is ultra-vires the Companies
Act, is void-ab-initio, even if memorandum or articles of the company authorized it. Such act
cannot be ratified in any situation. Similarly, some acts are deemed to be intra-vires for the
company even if they are not mentioned in the memorandum or articles because the Companies
Act authorizes them.

Acts which are ultra-vires to the memorandum of the company

An act is called ultra-vires the memorandum of the company if, it is done beyond the
powers provided by the memorandum to the company. If a part of the act or contract is within
the authority provided by the memorandum and remaining part is beyond the authority, and
both the parts can be separated. Then only that part which is beyond the powers is considered
as ultra-vires, and the part which is within the authority is considered as intra-vires. However,
if they cannot be separated then whole contract or act will be considered as ultra-vires and
hence, void. Such acts cannot be ratified even by shareholders as they are void-ab-initio.

Acts which are ultra-vires to the Articles but intra-vires to the memorandum
All the acts or contracts which are made or done beyond the powers provided by the
articles but are within the powers and authority given by the memorandum are called ultra-
vires the articles but intra-vires the memorandum. Such acts and contracts can be ratified by
the shareholders (even retrospectively) by making alterations in the articles to that effect.

Acts which are ultra-vires to the directors but intra-vires to the company
All the acts or contracts which are made by the directors beyond the powers provided to
them are called acts ultra-vires the directors but intra-vires the company. The company can
ratify such acts and then they will be binding.
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Is Ultra-vires legal or illegal?

The ultra vires act or transaction is different from an illegal act or transaction, although
both are void. An act of a company which is beyond its objects clause is ultra vires and,
therefore, void, even if it is illegal. Similarly, an illegal act will be void even if it falls within
the objects clause. Unfortunately, the doctrine of ultra vires has often been used in connection
with illegal and forbidden act. This use should also be prevented.

Effects of Ultra-vires transactions

 Void ab initio: The ultra vires acts are null and void ab initio. These acts are not binding
on the company. Neither the company can sue, nor it can be sued for such acts.
[Ashbury Railway Carriage and Iron Company v. Riche].
 Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
 Injunction: when there is a possibility that company has taken or is about to undertake
an ultra-vires act, the members can restrain it from doing so by getting an injunction
from the court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
 Personal liability of Directors: The directors have a duty to ensure that all corporate
capital of the company is used for a legitimate purpose only. If such funds are diverted
for a purpose which is not authorized by the memorandum of the company, it will attract
a personal liability for the directors. In Jehangir R. Modi v. Shamji Ladha, [(1866-
67) 4 Bom. HCR (1855)], the Bombay High Court held, “A shareholder can maintain
an action against the directors to compel them to restore to the company the funds of
the company that have by them been employed in transactions that they have no
authority to enter into, without making the company a party to the suit”.

 Criminal action can also be taken in case of a deliberate misapplication or fraud.

However, there is a small line between an act which is ultra-vires the directors and acts
which are ultra-vires the memorandum. If the company has authority to do anything as
per the memorandum of the company, then an act which is done by the directors beyond
their powers can also be ratified by the shareholders, but not otherwise.

 If any property is purchased with the money of the company, then the company will
have full rights and authority over such property even if it is purchased in an ultra-vires
manner.
 Relationship of a debtor and creditor is not created in an ultra-vires borrowing. [In Re.
Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].

In case of borrowing,
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 Any borrowing which is made by an act which is ultra-vires will be void-ab-initio. It

will not bind the company and company and outsiders cannot get them enforced in a
court.

 Members of the company have power and right to prevent the company from making
such ultra-vires borrowings by bringing injunctions against the company.

 If the borrowed funds of the company are used for any ultra-vires purpose, then
directors of the company will be personally liable to make good such act. If the
company acquires any property from such funds, the company will have full right to
such property.

 No estoppel or ratification can convert ultra-vires borrowing into an intra-vires

borrowing, as such acts are void from the very beginning. As no debtor and creditor
relationship is created in ultra-vires borrowings only a remedy in rem and not in
personam is available.

Exceptions to the Doctrine of Ultra-vires

 Any act which is done irregularly, but otherwise it is intra-vires the company, can be
validated by the shareholders of the company by giving their consent.
 Any act which is outside the authority of the directors of the company but otherwise
it is intra-vires the company can be ratified by the shareholder of the company.
 If the company acquires property in a manner which is ultra-vires of the contract, the
right of the company over such property will still be secured.
 Any incidental or consequential effect of the ultra-vires act will not be invalid unless
the Companies Act expressly prohibits it.
 If any act is deemed to be within the authority of the company by the Company’s
Act, then it will not be considered as ultra-vires even if they are not expressly stated in
the memorandum.
 Articles of association can be altered with retrospective effect to validate an act which
is ultra-vires of articles.

In Attorney General v. Mersey Railway Co, (1907) 1 Ch. 81 case, where a company
was incorporated for carrying on a hotel business. It entered a contract with some third party
for purchasing furniture, hiring servants and for maintaining omnibus. The purpose or object
of the company was only to carry on the hotel business, and it was not expressly mentioned in
the objects clause of the memorandum of the company that they can purchase furniture or hire
servants. This deal was challenged and was sought from the court that this act of the directors
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be held as ultra vires. The court held that a company incorporated for carrying on a hotel could
purchase furniture, hire servants, and maintain omnibus to attend at the railway station to take
or receive the intending guests to the hotel. Thus, the act of the company is not ultra vires.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a
company supplies goods or offers service or lends money on an ultra vires contract, then it
cannot obtain payment or recover the loan. However, if a lender loans money to a company
which has not been extended yet, then he can stop the company from parting with it via an
injunction. The lender has this right because the company does not become the owner of the
money as it is ultra vires to the company and the lender remains the owner. Further, if the
company borrows money in an ultra vires transaction to repay a legal loan, then the lender is
entitled to recover his loan from the company.

Sometimes an act which is ultra vires can be regularized by the shareholders of the
company. For example,

 If an act is ultra vires the power of directors, then the shareholders can ratify it.
 If an act is ultra vires the Articles of the company, then the company can alter the
Articles.

A company through an ultra vires contract. Estoppel, acquiescence, the lapse of time,
delay, or ratification cannot make it ‘Intra-vires’.

Case Notes
The doctrine of Ultra-vires was first enunciated by the House of Lords in a clause case,
Ashbury Railway Carriage and Iron Co. Ltd vs Riche (1878) L.R 7. H.L.653. Except this
case, there are some cases about the doctrine of Ultra-vires. These are mentioned below:
i) In 1875, in the case Ashbury Railway carriage & Iron Co. V Riche11, 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 most
of the stakeholders in the company. Hence, it was binding. The Court held that
the object clause of the memorandum12 is, essentially, the purpose of the
company i.e. it states what a company is supposed to do. It is the most important
 13 | P a g e

document of a company and cannot be overridden 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.

ii) In England, the Doctrine was used for the first time in joint stock companies in
1860 in the case of Simpson V. West Minister Palace Hotel. Essentially, 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
remodeled in part. During 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 was sought. However, the Courts
held that the defendants had not acted outside the scope of the object clause of
the Memorandum of Associations.

iii) In 1880, in the case, Attorney General V. Great Eastern Railway Co. The
courts stated for the first time that if a particular activity is for the benefit of the
business, then even though it is not mentioned in the object clause, it will not be
deemed ultra vires. This was the first time that the Courts had taken a decision
reducing the importance of the doctrine.

iv) In 1966, in the case Bell House Ltd. V City Wall Properties Ltd, 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.
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v) In India, prior to the introduction of LPP’s, the need for the doctrine of ultra vires
was not very grave. Post the introduction of LPP’s, doctrine of ultra vires gained
notoriety in the legal fraternity. The first time the concept of ultra vires was
accepted in India was through the case Jahangir R. Modi V Shamji Ladha19
in 1866. 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 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.

vi) Another important case that has helped in shaping the doctrine of ultra vires in
India is A. Lakshmanaswami Mudaliar V L.I.C. In this case, the company’s
memorandum stated that the directors should donate a part of the company’s
profit to charitable organizations that help the public or undertake useful objects.
In accordance with this, the directors donated Rs. 2 lacs to a charitable
organization. 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 organization. It should donate to a cause is related to the
business in some manner or furthers the business objectives of the company. The
charitable organization that was donated to did not fall under either category.
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.

vii) In Evans v. Brunner Mond & Company, (1921) Ch 359., In this case, a
company was incorporated for carrying on business of manufacturing chemicals.
The objects clause in the memorandum of the company authorized the company
to do “all such business and things as may be incidental or conductive to the
attainment of the above objects or any of them” by a resolution the directors were
authorized to distribute £ 100,000 out of surplus reserve account to such
universities in U.K. as they might select for the furtherance of scientific research
and education. The resolution was challenged on the ground that it was beyond
the objects clause of the memorandum and therefore it was ultra vires the power
of the company. The directors proved that the company had great difficulty in
 15 | P a g e

finding trained men and the purpose of the resolution was to encourage scientific
training of more men so as to enable the company to recruit staff and continue its
progress. The court held that the expenditure authorized by the resolution was
necessary for the continued progress of the company as chemical manufacturers
and thus the resolution was incidental or conductive to the attainment of the main
object of the company and consequently it was not ultra vires. “Acts incidental
or ancillary” are those acts, which have a reasonable proximate connection with
the objects stated in the objects clause of the memorandum.

viii) In Re, German Date Coffee Co., (1882) 20 Ch. D. 169, In this case, the main
objects rule of construction was applied. There was a company and was formed
to acquire and use a German patent for making coffee from dates. It was also to
acquire other patents and inventions by purchase or otherwise for the
improvements and extensions of the German patent. On learning that the German
patent could not be obtained, the majority of shareholders allowed the company
to continue but two shareholders presented a petition for winding up of the
company on the ground that the main object of the company was to acquire the
German patent and since it had become impossible to acquire, the company
should be wound up. The court held that the that the main object for which the
company was formed was to acquire the German patent and the other objects
stated in the objects clause of its memorandum were merely ancillary to that
object and since the main object had failed, it was just and equitable that the
company should be wound up.

ix) In Re, Jon Beauford (London) Ltd., (1953) Ch. 131., A company was
authorized by its memorandum to carry on the business of Consumers, gown
makers, tailors, and other activities of allied nature. Later, the company decided
to carry on the business of manufacturing Veneered Panels which was admittedly
ultra vires and for this purpose erected a factory. A firm of builders, who
constructed the factory, brought an action to recover £ 2078 from the company.
Another firm supplied Veneers to the company and claimed £ 1011. A third firm
claimed £ 107 for supplying the fuel to the factory. The claimants did not
acknowledge that the Veneered business was ultra vires. However, the court held
that the company was not liable to the claims of the aforesaid claimants because
the money was taken from them for the business of veneered panels which was
admittedly ultra vires the objects of the company, the court held that the
memorandum is a constructive notice to the public and therefore if an act is ultra
vires, it will be void and therefore will not be binding on the company and the
outsider dealing with the company cannot take a plea that he had no knowledge
of the contents of the memorandum.
 16 | P a g e

x) that he had no knowledge of the contents of the memorandum. In S.

Sivashanmugham And Others v. Butterfly Marketing Private Ltd., (2001)
105 Comp. Cas. Mad 763, It was the case of the defendants that the partnership
deed which contains the arbitration clause was a void instrument, as according to
them, the plaintiff-company had done acts which were ultra vires its
memorandum in entering into a partnership deed for the purpose of
manufacturing and exporting garments. These clauses provide ample power to
the respondent-company to enter into partnership with others for any purpose,
which may directly or indirectly benefit the company. The company has reserved
to itself expressly the power to carry on business of importers or exporters. The
submission made for the appellant that these clauses do not enable the company
to form a partnership for the purpose of manufacturing garment is without any
substance. The company not only may carry on business of exporters and
importers, but it may also enter into partnership with any one for any purpose so
long as that purpose is regarded by the company as being one which would
benefit the company. Such benefit need not be direct and it may be indirect also.
The court was of the view that the third party may not take advantage of this
doctrine in order to avoid the performance of the obligations voluntarily
undertaken with full opportunity to know the extent of the company's power
before entering into the transaction.

Criticisms of the Doctrine of Ultra-vires

We know that the purpose of the doctrine of Ultra-vires is to protect interests of the
shareholders and creditors of the company, but it has been criticized by the Bhabha committee
on company law reforms which has observed that this doctrine is illusory protection to the
shareholders and a pitfall for third parties dealing with the company. This criticism of the
doctrine is due to two following reasons.

 The Memorandum of Association are so widely drafted that all provable acts are
covered in the objects clause. It is then possible for the company to extend its operation
at any time and therefore the doctrine becomes ineffective. However, this has been
protected by the Companies Amendment Act 1965 to state their objects in two sub
clauses namely (a) Main Objects and (b) another object clause.

 Two company may do any act which is incidental to and consequential upon the main
objects. This also provides a scope of ambiguity.

 3.The company may also start new business under certain circumstances. This power
may be misused by the company. Section 17(1)(d) of the Company Act provides that
 17 | P a g e

the company may alter its objects clause so far as it is necessary to carry on some
business of the company. This is against the interest of the shareholders.

 The creditors generally consider that all their activities are within the powers until they
are challenged in the court of law. The shareholders may not go to courts all the time.
And thus, they are may not actually protected by the doctrine of Ultra-vires.

The certain complications are there in the application of the doctrine of Ultra-vires. The
English company law Commission suggested that every contract made on behalf of the
company whether within or beyond its powers should be made valid. Thus, some efforts are
necessary to protect the interest of the shareholders and the third parties dealing
with the company.

Can an Ultra-vires ac be Ratified?

An ultra vires act cannot be ratified even by the whole body of the shareholders and make
it binding on the company. In other words, even the shareholders cannot do an ultra vires act.
This is the peculiar feature of this doctrine.

The principles of law on this subject were first enunciated by Lord Cairons, L.J., in
Ashbury Railway Carriage & Iron Co. Ltd. V. Riche. In that case, a company was formed with
the following objects:

 to make, sell, lend or hire, railway carriages and wagons, and

 to purchase, lease, work and sell mines, minerals and land and buildings.

The directors contracted to finance the construction of a railway line in Belgium with Mls
Riche. The Court held that the contract was ultra vires the company and void, so that even the
subsequent assent of the whole body of the shareholders could not ratify it.
However, later, the House of Lords held in other cases that the doctrine of ultra vires
should be applied reasonably and unless it is expressly prohibited, a company may do an act,
which is important for, or incidental to attainment of its objectives.
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Ultra-vires Contracts
As we know that ultra vires contract is the void ab initio which implies that it cannot be
provided with a legal status even by ratification or estoppel. The question here rests on the
company's competency and authority regarding the contract but not its legality. Liability of The
Company. There are no principles regarding the company’s liability against the damages
resulting from the ultra vires act. However, the tortious liability may arise if it is verified with
the believable explanation that the activity in the duration of which the ultra vires act or the
tort occurred falls within the scope of the Memorandum of Association. It occurred during the
duration of employment.

Ultra-vires Torts
A company will not be held liable for a tort committed by its employees is an outside
aim as mentioned in the memorandum. They will only hold the company liable if it intravires.

Importance of the Doctrine of Ultra-vires

i) Shareholders may ratify an act that is intra vires by company but beyond the
director’s authority.

ii) The assent of shareholders is sufficed to validate an intra vires act that is done in an
irregular manner.

iii) Where through investment if any acquisition of property is made that is intra vires,
it does not harm still company right over property.

iv) Consequential or incidental effects would not be invalidated by applying doctrine

of ultra vires if it is not expressly prohibited.

v) A company’s capacity to raise the capital by borrowing is such a power though it is

provided in its memorandum, but it is impliedly taken as with in company capacity
and therefore, it is deemed to intra vires.

vi) Company by amending its articles can an ultra vires act of company but still some
restrictions are present on this power.
 19 | P a g e

vii) After complete performance of a transaction by one party, the estoppels rule come
into action and bring an end to reliance on ultra vires doctrine.

viii) Where execution of a contract is done, either party may have ultra vires as a defense
plea.

ix) Partial performance of a contract or transaction is not sufficed to invoke the plea of
estoppels rule while the next option is suit for quasi contract for the recovery of
business is available.

x) Where an employee within the course of his employment commits any tort then the
corporation fail to protect itself with a plea that the act was beyond the authority
conferred.

xi) The doctrine is concerned with confining the activities of the company within its
stated objects; it necessarily has the effect of restricting the company’s powers.

Reforms in the Doctrine of Ultra-vires

An examination to the historical fact of the origin of the “corporate legal personhood”
concept”, its application to the business companies with which now we are concerned, and
problems ensued in the subsequent theoretical legal discourses and the continuance of fault-
line would better explain the rationality and irrationality of ultra vires doctrine to modern
companies. But given the very limited scope of such historic analysis in this article, a brief
outline of it only given below -

(i) The “company law” or the “law of business corporation” from its historical origin
to modern perspectives of companies faced two challenges, first, is the challenge
of framing the effective legal scheme addressing the commercial context of
companies formed by a group of private individuals, the basic legal assumptions
or theories being borrowed from a different field of their applications - the State
created entities serving the public function which were wholly unconnected with
the commercial reality of our companies. The theories that underlie at the
foundation of company law were originally developed in a different branch of
law - the law governing the State created “entities” to discharge its public
function, hence, they were known as “public corporations”. These State created
bodies had their peculiar “entity conception” in law and legal “functional
capacity”. Its basic “legal assumptions” used to be discussed in the branch of law
 20 | P a g e

known as the “law of corporate body” or “law of corporation." These entities

were created under the specific parliamentary Act or Crown’s Charter. The
“Parliamentary Act” or “Crown’s Charter” then defined the independent
functional domain of the entity created under it that served as the “legal soul” of
such “artificial entity” and could function only within the defiled limit under it.
The conferment of “corporate personhood” under the law to these “artificial
entities” endowed some legal rights, liabilities and functional capacity that were
discussed in the branch of law mentioned above. The “company law” or the “law
of business corporation” to which we are now concerned is a subsequent origin
developed with legal theories by importation from it. This historic root of the
“corporate entity” concept and its “corporate capacity” have been discussed and
analyzed in a number of renowned research papers and courts’ cases.

(ii) Having imported the concepts from that heterogeneous field, subsequent
adaptations have misstated in several respects: particularly concepts interpreting
the company’s “legal personhood”, its capacity as a “corporate person” and
“defining relationships” of shareholders to it.

(iii) Thereafter, with the outbreak of new problems in the ever-increasing complexity
of modern companies, those concepts went on further adaptation process in
which the concepts behind the legal framework once again misstated for failing
to treat the problems free from the historical legacy of thinking. The courts in
different countries of common law heritage in ruling on the ultra vires
transactions of companies frequently referred to the House of Lords’ decision
given in the Ashbury Railway Carriage and Iron Company v. Riche (1875)
case as the authoritative comment on the matter. The case decided that an ultra
vires transaction is void ab initio, and since the company lacks the capacity to
enter such contract it cannot be validated even by unanimous ratification of
shareholders. As the time rolled onwards from the said historic origin of the use
of “corporate personhood” concept, the lawyers to bypass the ultra vires rule
effect started drafting the company’s memorandum enumerating long list of
objectives when registering a company. Such a practice led to the enumeration
of company’s main objects and the incidental objects or powers at the same place.
Thus, the difficulty arose on drawing the differentiating line between the
independent objects and the powers ancillary to them. Moreover, practice
developed in the legal engineering of lawyers too often add an evasive phrase at
the end of the objects clause stating in the like nature that- “all those mentioned
objectives would be construed as the independent objects, and that no restrictive
meaning be assigned to them in interpreting the capacity of the company to lessen
their scope whatsoever”. This was done partly with the aim of evading the
consequences of the ultra vires rule on company’s transactions, and with the fear
of the time-consuming cumbersome procedure of amending the “object clause of
the memorandum” by taking approval on petition to the court. The practice of
 21 | P a g e

drafting the whole-embracing objects clause in the memorandum was then

further multiplied with the lawyers starting to add an omnibus statement at the
end of the ‘objects clause’ as follows: The company will have power to carry on
any other trade or business whatsoever which can in the opinion of the board of
directors, be advantageously be carried on by the company in connection with or
as ancillary to any of the above businesses or general business of the of company.
As a result, the ultra vires rule on “corporate transactions” now has the least value
than what it was originally intended except to remain as a nuisance to the
corporate business and a trap to the unwary third-party entering transactions with
the company. From the said experience of the ultra vires rule, countries of the
world now increasingly started revising its application. Many countries of the
world including the UK, USA, Hong Kong, Switzerland, and most of the
countries of the EU have now either abolished or greatly revised the ultra vires
rule in their company laws. The position of Bangladesh remained unchanged and
no initiative in such a modern trend yet found towards reforming the ultra vires
rule. The rule derives its full effect under provision of sections 6, 7, and 8 read
with section 12 of the Companies Act, 1994.

European Union law played an important role in initiating the legislative change in
member countries. With the aim of establishing the integrated market within the member
countries, the European Union issued the Company Law Directives providing guidance on
required legislative framework for the member countries. These directives have had
considerable influence over the UK Companies Acts of 1980, 1981, 1989, and 2006. The earlier
Companies Act 1985 of UK in section 2 though retained the older position of enumerating the
objects in the companies’ memorandum, latter reenacted to conform to the EC First Directive
on the Company law (The EC First Directive 68/151/EEC of 9 March 1968). Substantial effect
to the provision of section 9(1) of the European Communities Act, 1972 was given effect by
the UK’s Companies Act, 1985 in its section 35 providing firstly, that in the corporate
transaction entered into by the decision of directors, the outsider third person acting in good
faith, can assume it within the capacity of the company and such transaction will be free from
any limitations on the directors’ powers placed in the memorandum and articles, and secondly,
it relieved the other party of any obligation to inquire about matters of any limitation on the
company’s capacity contained in those document (Gower’s Principles of Company Law, p.
209). The 1985’s reform was a partial implementation of the EC First Directive and in the line
of the recommendations of the Jenkins Committee report, (1962). The limited protection which
such reformation extended only in respect of third parties acted bona fide in entering into
transaction with the company. Such a limited protection under the 1985’s Company Act was
widely criticized for its failing fully to implement the EC Directive and left much to be decided
on policy ground. It did not contemplate the protection of the company against the effect of
ultra vires rule to its transactions where the other party though received benefit of the
transaction latter declined to perform its obligation. The directive does not specifically deal
with this point, as Gower explained that, presumably because prior to the entry of the common
law country it did not occur to anyone party to the Directive that any legal system could be so
asinine as to allow a third party to invoke ultra vires against the company (and the company
could not) (Ibid. at p. 208). Considering further reform necessity, in December 1985, the UK
 22 | P a g e

Department of Trade and Industry (DTI), appointed Professor Dan Prentice to examine the
legal and commercial implications of abolishing the ultra vires rule. His report which he titled
as the refined version of his recommendations was delivered in 1986. It was circulated by the
DTI under the title Reform of the Ultra Vires Rule: A Consultative Document, which in the
words of Gower was a more complicated but less far reaching, followed by the enactment the
Companies Act 1989 (Ibid). The report of Professor Prentice originally recommended that
companies should be afforded the capacity to do any act whatsoever and the option of whether
stating their objects in their memoranda. But the Prentice Commission Report was given a
partial and modified effect under the Companies Act 1989 of UK.

The UK Company’s Act 2006 is shown a shift to the traditional “functional object clause”
statement in the memorandum. Section 31 of the Act 2006 relieved the companies from stating
in their memoranda and thus can have the unfettered functional capacity unless they choose to
specifically state its functional objectives in their “articles of association”. Thus, the reform
affected that, except the company deliberately has chosen to restrict its functional objects, the
ultra vires rule on corporate functional capacity will have no application. Under this reform,
the memorandum got the stable document not required to be altered along the new lines of
company’s business ventures. Thus, the Act 2006 brought a revolutionary change in UK
liberalizing the companies’ capacity as like as a natural person unless they chose to limit the
corporate capacity in their constitution. Even if a company chose to mention its functional
objects in the constitution, it will operate for its internal management purpose only not affecting
the obligations under the transaction entered by it. The statement of objects in its constitution
will have the effect as like the “corporate affairs management contract” between the directors
and shareholders of the companies. Outsiders will be unaffected by it. The Company will be
capable to embark on any new line of activity subject only to amend its constitution by the
simple procedure of taking shareholders’ general meeting resolution (in the case where the
objects are mentioned in the articles) and giving notice of it to the registrar.

In the USA Federation, States by their individual laws empower business corporations
engaging in any lawful business, unless the incorporators choose by its “articles of association”
limit company’s function to some specified activities only by express terms. The incorporators
can exclude objects clause altogether from their constitution when applying to incorporate their
company. In America, the Model Business Corporation Act, 2002 (MBCA) provides that,
“every corporation incorporated under this Act has the purpose of engaging in any lawful
business unless a more limited purpose is set forth in the articles of incorporation” The MBCA
provides that “the validity of corporate action may not be challenged on the ground that the
corporation lacks or lacked power to act” (Section 3.01 of the MBCA 2002). The MBCA also
provides for some “general powers” which each corporation deemed to have irrespective of
their mentioning or not in the incorporation documents. Thus, the MBCA by making redundant
the mention of such powers in the company’s constitution reduced the unnecessary prolixity in
the statement of objects and powers. In USA, the ultra vires rule of corporate function now
applies only to non-profit corporations or State-created corporate bodies established for some
specific public purposes defined in their constitutions, e.g., universities or charities. The
 23 | P a g e

MBCA allowed invoking ultra vires rule in challenging the acts of the corporations under three
circumstances as follows (Section 3.04 of the MBCA 2002):
(i) Except as provided in subsection (b), the validity of corporate action may not
be challenged on the ground that the corporation lacks or lacked power to act.

(ii) A corporation’s power to act may be challenged:

o in a proceeding by a shareholder against the corporation to enjoin the act.
o in a proceeding by the corporation, directly, derivatively, or through a receiver,
trustee, or other legal representative, against an incumbent or former director,
officer, employee, or agent of the corporation; or
o in a proceeding by the Attorney General.
In India the new Companies Act came into being on 29th August 2013 amending the
earlier Companies Act, 1956. Though it did not abolish the traditional ultra vires rule on the
corporate transactional capacity, it is notable of the amended Act is that, it made possible the
alteration of the ‘functional objects clause’ by a simpler process of taking special resolution in
the general meeting of shareholders and filing it before the Registrar of companies. Under
section 13(9) of the present Act, the Registrar shall register the alteration to the statement of
company’s functional objects and certify the registration within a period of thirty days from
the date of filing of the special resolution of the company in support of it. After complying with
this simple procedure, the amendment of articles shall take effect. The procedure of such
alteration in the objects clause of the company’s memorandum earlier was subject to some
stricter and cumbersome procedure like obtaining the approval of the Company Law Board.

The Companies Act, 1994 of Bangladesh retained the full effect of the classical ultra
vires rule as is explained in the ruling of the case Ashbury Railway Carriage (1875) mentioned
above. The corporate transaction which may be interpreted as outside the stated objects of the
company’s constitution is void and a nullity. Bangladesh is the direct transplant country of
common law of UK. Although much before the enactment of its Companies Act, 1994 (which
is made upon the earlier Companies Act, 1913), the reformative initiatives instantiated in UK
towards modification of the effect of classical ultra vires rule on corporate transaction, and at
present in UK this rule retained effect only to some limited extents, no such reformative
initiative has ever been taken in Bangladesh in this regard up to now, even if the reforming Act
2020 (Act No. XXIV of 2020) came into being on 26th November 2020. The Companies Act,
1994 in section 6(a) (iii) provides for the requirement of stating by the companies its functional
objects in the memorandum. Besides that, the stricture has been placed upon altering the objects
clause of the memorandum by section 10(1) providing that: A company shall not alter the
conditions contained in its memorandum except in the case and the mode and to the extent for
which express provision is made in the Act. Section 12 of the Act specified seven grounds upon
which the alteration to the object clause may be sought to the court after taking special
resolution for it by the Company in its general meeting. Thus, the combined effect of the above
stated provisions under sections 6(a) (iii), 10(1) and 12 can be summarized as that after the
objects clause has been stated in the company’s memorandum (as the law required mentioning),
 24 | P a g e

they cannot be altered or amended except the legal procedures for it and to the extent only
allowed by this Act. This position of company law of Bangladesh corresponds to the UK’s
Companies Act prior to its modification in 1948. Thus, the traditional ultra vires rule with all
its impropriety and problems has been full retained by the Companies Act of Bangladesh. Now
it is for the policy makers, legislators and all concerned to pay their prompt attention and take
effective steps in the worldwide present trends towards reformulating this century’s old rule by
enacting appropriate legislation for it.

Conclusion
The rule ultra vires transaction of companies is now urgently required greatly revise to
modern business companies. Many of the modern countries, for much of the criticisms to this
rule as explained above, have now either totally abolished it, or narrowed down its application
attaching qualifying languages in their company law statutes. References of such reformation
steps in countries are abundant including South Africa, China and in most of the member States
of the European Union in this regard. The company law of Bangladesh is inherited from the
British company law as the transplant country of common law. Although much before the
adoption of the Companies Act, 1994 of Bangladesh, the reform on the ultra vires rule was
started in UK, its application is retained with full effect in Bangladesh though not found any
positive impact of such retention. To keep pace with the company law modernization all over
the world and global business and investment relationship, no least delay is desirable to reform
the rule removing all its impropriety and misapplications. One issue in such amending the rule
may be raised, whether by abolishing the doctrine the company directors would get the
unfettered power to run the company and thereby undermining the present support for the
‘increased shareholders control’ value perspective. Certainly, the reformation to this rule would
not impact so. Shareholders may still choose to restrict the directors’ power to some defined
objectives of the constitution of the company. But any such restriction would be operative only
between the shareholders and directors of the company as their internal governance matter.

The guiding issue on liability determination would be that the transaction is not that it is
ultra vires of corporate functional capacity, but that it is in excess of directors’ powers as
conferred upon them by the shareholders mentioned in its constitution. The outsider third party
who bona fide in-volved in the transaction with company would not be affected by any such
limitation put into the companies’ documents. The third party would have the right to recover
the amount which the company gained from the transaction in question, and the vice versa for
the company also. Provisions may also be made in the Companies Act providing for recovery
by the company any damage caused by the unauthorized acts of directors if it can be established
that the directors willfully disregarded their powers.
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Bibliography

Primary Sources
Books
 Top Home AF.(2009), Principles of Company Law
 Lowry J. & Dignam A.(2010).Company Law.Oxford:Oxford University press.
 Kershaw D.(2009). Company Law in Context. Oxford.
 Kinda & Rock E.(2009). The Anatomy of Corporate Law.Oxford.
 Sealy L. & Worthington S.(2010). Cases and Materials in Company Law:Oxford
 Grower PL. Devis.(2008).Modern Company Law:London:Sweet and Maxwell
 Kraakman R., Armour J., Davies PL., Enrihqes L., Hansmann H., Herting G., Robert
W., Hamilton W.(1996).The Law of Corporation.West Group.
 Hornley, J.A. Introduction to Company Law
 Ghosh, K.M.Indian Company Law
 Sen, S.C. Indian Companies Act
 Zahir, Dr.M.(19998) Company and Securities Law.Dhaka
 Chowdhury, Justice S.K.Sur's Doctrine of Company Law.Calcutta:Kamla Law House
 Singh.A.Company Law.Lucknow:Eastern Book Company.
 Sim.R.S.O.Case Book on Company Law.London:Butterworths

Secondary Sources
Legislation, Laws Journal, Case laws

Benanza Creek Gold Mining Co. Vs. The King, (1916), 1 A.C. 566.
https://canliiconnects.org/fr/r%C3%A9sum%C3%A9/34421

Ashbury Railway Carriage and Iron Company v. Riche, (1875). L.R. 7 H.L. 653.
https://thecompany.ninja/ashbury-railway-carriage-1875/

Companies Act, 1994 of Bangladesh (Section 12)., as amended 25th February 2020 (Act No.
XXIV of 2020)

Communities Economic Development Fund v. Canadian Pickles Corp, (1991). 3 S.C.R. 388
https://decisions.scc-csc.ca/scc-csc/scc-csc/en/item/812/index.do
 26 | P a g e

 Davies, Paul L., (2003). Principles of Modern Company Law (Sweet and Maxwell,
London: 7th ed.), atp.142.

 For the historic analysis of the “corporate entity and its functional capacity” theory may
be referred to following and many others -
 Blackstone, William. Commentaries on the Laws of England, 1st ed.
(Oxford, Clarendon Press
https://en.wikipedia.org/wiki/Commentaries_on_the_Laws_of_Englad

 Blumberg, Philip I., (1990). “The Corporate Entity in Era of

Multinational Corporation.” Delaw. J. of Corp. Law 15, no. 2: 283-375.
https://core.ac.uk/download/pdf/302392009.pdf

 Blumberg, Philip I., (2001). “Account-abi-lity of Multinational

Corporations: The Bar-riers Presented by Concepts of the Corporate
Juridical Entity.” Hasting Inter-national and Comparative Law Review.
24: 297 – 320.
https://opencommons.uconn.edu/law_papers/137/

 Carter, James Treat, (1919). “The Nature of the Corporation as a Legal

Entity.” PhDdiss., Johns Hopkins University.

 Krannich , Jess M., (2005). “The Corporate ‘Person’: A New Analytical

Approach to a flawed Method of Constitutional Interpretation,” Loyola
University Chicago Law J.37 (2005): 67.
https://lawecommons.luc.edu/cgi/viewcontent.cgi?article=1200&conte
xt=luclj

 Kyd, Steward, (1793). A Treatise in the Law of Corporations, London,

J. Butter-worth Fleet Street, 1793.

 Morawetz Victor, (1886). A Treatise on the Law of Private Corporations

(Boston: Little, Brown, and Company, 1886).
 https://lawcat.berkeley.edu/record/322521
 Spelling, T., (1892). Carl. A Treatise on the Law of Private Corporations
(New York: L. K. Strouse & Co., 1892).
 27 | P a g e

 Sutton’s Hosp., (1612). 10 Coke 23a, 30b-32b, 77 Eng. Rep. 960, 970-
73.
https://en.wikipedia.org/wiki/Case_of_Sutton%27s_Hospital

 Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819).

 Munshi MOF. (2021). Company’s corporate legal capacity: problems

of the ultra vires rule, modern shift and position of Bangladesh, Asian
J. Soc. Sci. Leg. Stud.,

https://doi.org/10.34104/ajssls.021.01190127

 Royal British Bank vs. Turquand, (1856). 6 E. & B. 327, Exch.Ch; (1843 –
60) All E.R. Rep.
https://www.coursehero.com/file/61629881/Case-Brief-Royal-British-Bank-
v-Turquand-1856-62-327p

 Section 12 of the Companies Act, (1994). Bangladesh also remained the same
even if the Companies (Amendment) Act, 2000 of 25 th February, 2020 df/