“DIMENSIONS OF THE DOCTRINE OF ULTRA

VIRES UNDER THE CORPORATE LAW”

SUBMITTED BY-
AMRITA CHOUDHARY, B.A., LL.B. (HONS.)
(7th Semester), (Roll No.- 2111)
SUBMITTED TO-
MRS. NANDITA S. JHA
(Lecturer of Law)
This final draft is submitted in partial fulfilment in Company Law for the
completion of B.A., LL.B. (Hons.) course.

SEPTEMBER 2022
CHANAKYA NATIONAL LAW UNIVERSITY,
PATNA
 DECLARATION BY THE CANDITATE
I hereby declare that the project entitled “Dimensions of the Doctrine of Ultra Vires under the
Corporate Law” submitted by me at CHANAKYA NATIONAL LAW UNIVERSITY,
PATNA is a record of bonafide project work carried out by me under the guidance of our
mentor Mrs. Nandita S. Jha. I further declare that the work reported in this project has not
been submitted and will not be submitted, either in part or in full, for the award of any other
degree or diploma in this university or in any other university.

__________________
(AMRITA CHOUDHARY)
ROLL NO. – 2111

ACKNOWLEDGEMENT
It is a fact that any research work prepared, compiled or formulated in isolation is
inexplicable to an extent. This research work, although prepared by me, is a culmination of
efforts of a lot of people who remained in veil, who gave their intense support and helped me
in the completion of this project.

Firstly, I am very grateful to my subject teacher Mrs. Nandita S. Jha, without the kind support
and help of whom the completion of this project was a herculean task for me. She donated her
valuable time from her busy schedule to help me to complete this project. I would like to
thank her for her valuable suggestions towards the making of this project.

I am highly indebted to my parents and friends for their kind co-operation and encouragement
which helped me in completion of this project. I am also thankful to the library staff of my
college who assisted me in acquiring the sources necessary for the compilation of my project.

Last but not the least, I would like to thank the Almighty who kept me mentally strong and in
good health to concentrate on my project and to complete it in time.

I thank all of them!

_______________

AMRITA CHOUDHARY

ROLL NO. – 2111

B.A., LL.B. (HONS.)

TABLE OF CONTENTS
1. INTRODUCTION

 OBJECTIVES OF THE STUDY

 RESEARCH QUESTIONS

 HYPOTHESIS

 MODE OF RESEARCH

 SOURCES OF DATA

 LIMITATIONS OF THE STUDY

2. FEATURES OF THE DOCTRINE OF ULTRA VIRES

3. EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

4. EFFECTS OF THE ULTRA VIRES TRANSACTIONS

5. ADVANTAGES AND DISADVANTAGES OF ULTRA VIRES

6. CONCLUSION

BIBLIOGRAPHY

1. INTRODUCTION
Definition of Ultra Vires

The term “Ultra Vires” originated from a Latin phrase meaning “beyond the power.” Actions
beyond the corporate charter’s ambit or most appropriately beyond the predetermined power
could be cited as ultra vires. Ultra vires acts shall always exceed the limitation of power so
approved or determined. It could also include legally forbidden acts subject to corporate law.
Every company or organization has got its directives, article and memorandums that
demarcate its actions to function efficiently.

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
of ultra vires did not apply. This case is considered as an exception to the doctrine of the ultra
vires and its scope.

The object clause of the Memorandum of Association of the company includes an object for
which the company is established. An act of the company should not be beyond the clause
else it will be ultra vires and therefore void and cannot be resolved even if all the
shareholders of the company wish to resolve. The rectification is not possible even if the
shareholders pass a special resolution with the majority of the votes. The doctrine of Ultra
vires is said to have originated intending to protect the interest of the shareholders of the
company.

The ultra vires doctrine originated from the landmark judgment of Ashbury Railway
Carriage and Iron Co. Ltd v. Riche. The case came into existence when the company’s
directors initiated a contract with Riche, a railway contractor, in order to obtain finance to
construct a railway line at Belgium. However, the directors later repudiated the contract on
the grounds of being ultra vires the memorandum of association. Riche sued the company on
the ground of breach of contract. The House of Lords held that the contract at the time of
making it was void ab initio and invalid. Therefore, being ultra vires, the contract cannot be
ratified later.1

Memorandum of Association (MOA) and Article of Association (AOA), the two documents
of a corporation, which in collaboration serves as the constitution of a company. These two
corporate documents demarcate the conditions under which an organization must undertake
their functions and initiate commercial relationships with the shareholders. The MOA guides
the external and internal matters of an organization. In contrast, the AOA guides internal
matters such as the directors’ duty and powers.2 Government organizations and agencies are
not exempted from the scope of ultra vires. Any government actions beyond the ambit of
their power so granted by law could be ultra vires. If any company employee or directors use
company resources outside their legal power; such an act could be defined as ultra vires.

Appropriation of revenue or shares of a company exceeding the legal ownership or using

company assets for personal needs could be aptly classified as ultra vires act. The directors of
a company shall be held personally liable for any ultra vires acts done by them on behalf of
the company.

The provision of Section 4 (1) (c) of the Companies Act 2013 states that a company must
incorporate all the MOA objectives, based on which the company came into existence along
with other necessary matters responsible for its effective functioning. A detailed draft of the
MOA shall prevent confusion among the company members and the company, thereby
restraining any contract breach. Section 245 (1) (b) of the 2013 Act prevents the Company
from committing any ultra vires acts or transactions. The section explains the members and
depositors’ right to apply to the tribunal against any conduct of the company or any of its
members, which could be detrimental to the company’s interest and shareholders. 3The
concerned section is a legal weapon to restrain a company’s acts and its members ultra vires
transactions, which could naturally breach the objectives mentioned in their MOA and AOA.

1
(1875) LR 7HL 653.
2
Dr.Avtar Singh’s Company Law, (10th Ed.) p.50.
3
Companies Act, 2013.
What is the Purpose of the Doctrine of Ultra Vires?

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.

Scope of the Doctrine of Ultra Vires

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 vires.
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.
OBJECTIVES OF THE STUDY

 The main objective of the researcher is to study the role played by the Doctrine of
Ultra Vires under the Corporate Law.

 To analyse issues related to the Doctrine of Ultra Vires under the Corporate Law.

RESEARCH QUESTIONS

1. What is the Doctrine of Ultra Vires?

2. What are Dimensions of the Doctrine of Ultra Vires under the Corporate Law?

HYPOTHESIS

A company which owes its incorporation to statutory authority cannot effectively do anything
beyond the powers expressly or impliedly conferred upon it by the statute or memorandum of
association.

MODE OF RESEARCH

Doctrinal method of research has been relied upon for the completion of this project.

SOURCES OF DATA

Both primary as well as secondary sources of data has been relied upon to complete the
project.

1. Primary Sources: Books and Statutes.

2. Secondary Sources: Materials available on internet.

LIMITATIONS OF THE STUDY

Owing to the large number of topics that could be included in the project, the scope of this
research project is exceedingly vast. However, in the interest of brevity, this paper has
been limited to the specified topics and is limited to the context of India.
Also, the researcher has time and money limitations while making of this project.
 2. FEATURES OF THE DOCTRINE OF ULTRA VIRES
An ultra vires act is void, and it never binds the company. For any ultra vires act, neither the
company nor the parties could sue each other. Any acts that have been clearly stated as ultra
vires by the company charter could not be granted a valid intra vires status even if the
company’s members assent to it. In India, the doctrine of ultra vires was applied for the first
time in the leading judgment of Jahangir R. Modi v. Shamji Ladha, where the Bombay High
Court held that the buying of a Joint Stock Company by the directors were ultra vires the
MOA of the company as the company charter had not approved such purchase. 4 The
doctrine’s objective is to make the creditors and the shareholders aware that the company’s
assets and resources could only be utilized as per the MOA procedure and not beyond it. The
creditor must ensure that his dealing with the company is within the scope of the MOA’s
objectives and not ultra vires. In case the transaction is ultra vires, the creditor could always
safeguard its interest by rescinding the transaction.

Any contract or dealings initiated based on ultra vires act will be void and such shall never
bind the company nor the other party could enforce such contract. However, the company
members could bring a suit for an injunction against the company to prevent it from engaging
into any ultra vires act. Any estoppel or ratification cannot turn any ultra vires contract into
intra vires which holds an invalid status from the very onset. 5 Usage of company’s asset ultra
vires to acquire any property would always hold the company’s right over such property
intact. Any ultra vires relationship of debtor and creditor could never present a remedy in
personam.

4
(1867) 4 Bom HCR 185.
5
Forrest v. Manchester etc. Rly. Co., (1861) 54 ER 803.
 3. EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES
Intra vires acts include those activities that are essential for accomplishing the objectives
mentioned in the object clause of the MOA, within the permissible limits of conducting a
business and are authorized by the Companies Act. Excluding the activities mentioned above,
the activities performed in excess of power shall be considered ultra vires within Company
Law’s purview. However, there are exceptions to the conditions mentioned above, which
shall be our discussion topic. They are as follows:

1. Acts or contracts ultra-vires to the Companies Act

Acts which are ultra vires the company act, if a company performs any such act or its MOA
or AOA authorizes such act, it will still hold the status of void ab initio and cannot be ratified
in any case. Similarly, any act which the Companies Act authorizes to be intra vires, 6 and the
MOA or AOA of a company does not mention such an act, and it will still hold such an act
intra vires. Therefore, while applying the doctrine, any incidental or consequential effect of
an act will not be held as invalid unless the Companies Act expressly prohibits them.

2. Acts or contracts ultra-vires to the memorandum of the company

Acts or contracts that a company initiates beyond the powers provided by its MOA shall be
considered ultra vires. If such activities are performed which partly persists within the scope
of MOA and partly beyond the scope, then the part which is within the scope will be
considered as intra vires and the other part as ultra vires. However, only if they are separable.
In case they are inseparable, the entire activity will be considered ultra vires. Therefore, shall
be void ab initio and cannot be granted an intra vires status even after the shareholders’
ratification.7

6
In Re W & M Roith Ltd., (1967) 1 AII ER 427.
7
Chandok S, “CRITICAL ANALYSIS OF THE DOCTRINE OF ULTRA VIRES”
<http://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication Submission-Simran-
Chandak.pdf>
3. Acts or contracts which are ultra-vires to the Articles but intra-vires to the memorandum

The acts beyond the AOA’s powers but within the power provided by MOA, are termed as
ultra vires the AOA but intra vires the MOA. However, the shareholders hold the right to
ratify the ultra vires part to turn it into intra vires by altering the AOA for the same purpose.

4. Acts or contracts which are ultra-vires to the directors but intra-vires to the company

When the acts performed by the directors are beyond the powers that have been provided to
them, such acts could be termed as ultra vires to the directors, but they could be intra vires to
the company. However, such acts are open to ratification by the company, which could bind
them.8

5. An irregular act or contract which is intra vires the company

The consent of the shareholders may validate such acts. However, it is not mandatory to
obtain the shareholders’ consent simultaneously at the same meeting.9

6. Ultra vires Investment

A company retains its right over any property it acquires through an ultra vires investment.

4. EFFECTS OF THE ULTRA VIRES TRANSACTIONS

8
Madhvan Pillai V State of Kerala AIR (1966) Kerala 214.
9
Parker & Cooper Ltd. v. Reading, (1926) Ch 975.
The effects of ultra vires transactions undertaken by a company could be as follows:

1. Injunction

The company members could issue an injunction against the company to restrain it from
engaging into any ultra vires activities.10

2. Ultra Vires Contract

It has already been mentioned earlier that ultra vires contract is the void ab initio, which
cannot be provided with a valid status even by ratification or estoppel. The question here
revolves around the company’s competency and authority regarding the contract but not its
legality.11

3. Liability of the Company

There are no certain principles concerning a company’s liability against the damages
resulting from ultra vires acts. However, the tortious liability arises if it is proved with
plausible evidence that the activity in the course of which the ultra vires act or the tort
occurred falls within the ambit of MOA. It occurred in the course of employment.

4. Breach of Warranty

The acts that a Company cannot perform as stated under MOA, the directors being the
company’s agents are also prohibited from performing such acts. Therefore the contracts that
are ultra vires the company will be void. The directors must act within the ambit of the
company’s power; contrary actions could hold the directors personally liable for their breach
of warranty.12

10
Attorney General v. Great Eastern Ry. Co., (1880) 5 AC 473.
11
Ad Sait v. Bank of Mysore, (1930) 59 MLJ 28.
12
National Provincial Bank v. Introductions Ltd., (1969) 1 AII ER 887.
5. Personal Liability of the Directors

In Trevor v. Whitworth, it was held that a company could never invest any of its funds for
any objectives that do not come within the ambit of the objects specified in the MOA and
should be utilized only for the authorized objectives. 13 If any director utilizes the company’s
fund for any ultra vires investment, he could be held personally liable and refund the same to
the company. Even without making the company a party to the suit, a shareholder can initiate
a proceeding against an alleged director and make him restore to the company the funds he
had invested without any appropriate authority. In case of intentional misuse of company
fund, a suit for deceit or fraud could be brought against a director personally.14

What are the Consequences of Doctrine of Ultra Vires?

The Doctrine of Ultra Vires's consequence states that any act done or contract made by the
company which goes beyond the powers of the directors and company is completely void and
inoperative and hence not binding on the company. By considering this all, a company can be
restrained from using these funds for purposes other than those sanctioned by the
memorandum. Also, it can be restrained from carrying out any trade different from the one it
is authorized to carry out.

5. ADVANTAGES AND DISADVANTAGES OF ULTRA VIRES

13
(1889) AC 409
14
Iron Traders v. Hiralal Mittal, AIR 1962 Punj 277.
While the main advantage of the Doctrine of Ultra Vires is the protection of shareholders and
creditors, it has disadvantages too. This doctrine prevents the company from changing its
activities in a direction agreed by all members. Further, a special resolution can alter the object
clause of the Memorandum. This defeats the core purpose of the doctrine.

Advantages of the Doctrine of Ultra Vires

The objects or reasons for the development of this doctrine is summed up as follows:
1. Protection of investors: The capital of the company is a contribution by the
shareholders and the company is a trust for them. Thus the investors in a company may
be assured by this rule that their investment will not be employed for the objects or
activities which they did not have in mind at the time of investing their money in the
company. Gower expressed his view that this doctrine enables the investors in the
company to know the objects in which their money is to be employed.

2. Protection of creditors: This doctrine protects the creditors of a company, and the
creditors trust the corporation for the repayment only out of its assets and business
concern. The very idea is that the company’s capital cannot be spent on any project or
business. Outside the orbit of the objects clause. This gives the creditors a feeling of
security.

3. Protection to the Public: The statement of objects serves public interest by confirming
the corporate activities within a defined field. It prevents diversification of a company’s
activities in directions not closely connected with the business for which the company
may have been initially established. Any change of objects would require approval of
the CLB thus giving the board an opportunity to examine whether the proposed plan of
diversification would not be against public interest.

5. CONCLUSION
The ultra vires doctrine safeguards the investors and the creditors’ interest. Repeated and
continuous unbarred ultra vires activities within a company could be detrimental to its
operability, resulting in winding up where a loss to the company is evident. Therefore, it is
essential to incorporate the MOA’s objectives to protect the creditors and investors’ interests.
Prevention of the ultra vires acts mostly depends on the directors while borrowing funds. It is
of utmost necessity for a director to ensure that such an action must be within the company’s
purview or those mentioned in MOA. The consequences of an ultra vires act would result in
the directors’ liability and be effective in causing considerable losses to the investors and the
creditors.
A corporation’s functioning largely depends upon this doctrine as almost every action of a
corporation is being adjudged based on this principle. Albeit being uncodified for a
considerable term, this doctrine has always been an evergreen one in continuing holding
immense importance whenever the context of analyzing any corporate actions came into
prominence. Critical analysis of a corporate action under the spotlight of the doctrine could
prove resourceful for a company to determine its nature and objectives, achieve investors and
creditors’ confidence, preserve the company reputation and goodwill, and safeguard any
consequential or incidental losses and also in facilitating the business procedure. Implied
incorporation of the doctrine under Section 245 (1) (b) of the 2013 Act further helped
enhance the value and the objectives of the ultra vires concept.15
Abuse of power by a corporation and acting beyond the purview of its objectives often differs
in the interpretation of individual cases. It must be strictly analyzed by treating each action
independently based on its objectives stated in the company’s MOA and AOA. It is primarily
essential to prevent such confusion. Courts must also be specific while interpreting the ultra
vires and intra vires actions of a company. Therefore, corporations must incorporate their
MOA objectives to avoid their members’ ultra vires actions resulting from any confusion or
misinterpretation of facts. The doctrine of ultra vires has always been a perpetual remedy in
restraining potential corporate crimes and frauds and shall continue holding intact importance
in the long term.
By now it is clear that the doctrine of ultra vires constitutes one of the most significant
doctrines in the arena of the company law. We find the application of the doctrine specifically
in section 20 of the Company’s act 1965. While it is true that doctrines remain uncodified till
date, its important cannot be discounted. To sum up, an act shall be deemed to be ultra vires
if:
15
Mutual Guaranty Fire Ins. Co. v. Barker (i899) I07 Iowa, I43, 77 N. WV. 868.
(1) it is beyond the main objective of the company given under the MOA, and
(2) exceeds the special power expressly given by the statute to effectuate the main purpose.

BIBLIOGRAPHY
Primary Sources: Books and Legislations.

 A. Ramaiya Guide to Companies Act, Lexis Nexis Butterworths, Wadhwa, Nagpur.

 Taxman’s Company Law: A Comprehensive Text Book on Companies Act 2013,
University Edition.
 Companies Act, 2013.
 Companies Act, 1956.

Secondary Sources: Materials Available on the internet.