DOCTRINE OF ULTRA VIRES

DOCTRINE OF CONSTRUCTIVE NOTICE

DOCTRINE OF INDOOR MANAGEMENT

BY
NAVEEN DAS
 MEANING OF DOCTRINE
• Doctrine(Latin: doctrina):
A set of beliefs or principles held and taught
by a religious, political, or other group.
• Legal Usage:
A legal doctrine is a body of inter-related rules
(usually of common law and built over a long
period of time) associated with a legal concept
or principle.
DOCTRINE OF ULTRA VIRES
 MEMORANDUM OF ASSOCIATION
(MOA)
• The MOA of a company is its Charter
• Contains fundamental conditions upon which
alone the company can be incorporated
• Tells the objects of the company
• Defines the utmost possible scope of the
company’s operations
 MOA In a Nutshell
• It’s a document which defines and confines
the powers of the company
• If anything is done beyond those powers, that
will be ultra vires
ORIGIN OF DOCTRINE OF ULTRA VIRES

• First introduced in relation to statutory

companies
• Not paid due attention up to 1855
• Reason: Doctrine not felt necessary to protect
the investors and creditors
• Principle of limited liability introduced in 1855
 MEANING AND PURPOSE
• Company cannot go beyond its objectives
mentioned in its memorandum
• If company goes beyond its objects, such acts
will be ultra vires
• Object of declaring an act ultra vires:
1.To protect the interests of the shareholders,
2. and all others who deal with the company.
 IS IT ULTRA VIRES OR ILLEGAL?
• Ultra vires act different from illegal act,
although both are void.
• An act of the company which is beyond its
objects clause is ultra vires, hence void even if
it is legal.
• An illegal act is void even if it falls within the
objects of the company.
 POINTS WORTH NOTING
• Company exists only for the objects which are
expressly stated or implied in its MOA
• Any act done outside the express or implied
objects is ultra vires.
• The ultra vires acts are void ab initio.
• Members of company can get an order of
injunction
• If directors exceed authority, such act can be ratified by
the general body of the shareholders, provided company
has capacity to do so by its MOA.

Example: Company has the power to borrow money, but

the Articles of the company provide that in case the
directors borrow more than Rs.50000,they should get
prior approval by the company in general meeting.
However, the directors issue debentures to the extent of
Rs.75000 without getting the approval from shareholders
 The company in general meeting may ratify the
act of directors as it is intra vires the company,
though ultra vires the powers of the directors.
• Any property aquired by a company under an
ultra vires transaction may be protected by
the company against damage by third persons.
• Directors and other officers can be held liable to
compensate the company for any loss
occasioned to it by an ultra vires act
• Directors and other officers shall be personally
accountable to the third parties
• Money and property gained through an ultra
vires transaction available in specie or capable
of being identified shall be restituted(restored)
to the third party.
• In case an ultra vires loan taken by a company
is used for payment of an intra vires debt, the
lender of the ultra vires loan is substituted in
place of the creditor who has been paid off
and as such can recover the money.
 LANDMARK CASES
• Ashbury Railway Carriage and Iron company
Ltd v. Riche, 1875
• Attorney General v. Great Eastern Railway
Co.,1880
In India:
• Jahangir R Modi v. Shamji Ladha,1866-67
• Dr. A. Lakshmanaswami Mudaliar v. Life
Insurance Corporation of India, 1963
   Dr. A. Lakshmanaswami Mudaliar v LIC of India
[1963]

• HELD: Articles cannot extend scope of

memorandum.
• Articles cannot extend scope of
memorandum. The memorandum of
association has to be reabiguoud with the
articles of association where the terms are
ams or silent. The articles may explain the
memorandum but cannot extend its scope.
 SHORT COMINGS OF THE DOCTRINE

• Creates hardships for management

• Creates hardships for outsiders

 EXPERT’S OPINION
• Ballantine has described it as a mischievious
doctrine
• Cohen Committee has recommended
abolition
• Jenkin Committee also expressed
dissatisfaction
 STEPS TOWARDS IMPROVING THE
DOCTRINE
• European Communities Act,1972:
Has made many modifications to the Doctrine
of Ultra Vires

• Principles Developed by Court:

1. Powers implied by statute
2. The principle of implied and incidental
powers
 PRESENT STATUS
ENGLAND:
• Doctrine restricted by European Communities
Act, 1972
• U/S 9(1) of the act any act or transaction decided
by the directors deemed within capacity of the
company.
INDIA:
• No legislation like the European Communties Act.
 ARTICLES OF ASSOCIATION
• Bye laws and regulations which govern the
management
• Defines the duties, rights, powers and
authority of the shareholders
DOCTRINE OF CONSTRUCTIVE
NOTICE
 MEANING AND PURPOSE
• Every person dealing with the company is
treated as having the knowledge of the
contents of the memorandum. (Public
documents of the company).
• It seeks to protect the company against the
outsider.
• Imputation of knowledge –whether the party
concerned has actual knowledge or not.
 EXAMPLES
• One of the articles of the company provides
that a bill of exchange to be effective must be
signed by two directors. A bill of exchange is
signed only by one of the directors. The payee
cannot claim under the bill
 CASE
Kotla Venkataswamy v. Ram Murthy AIR(1934)
• The articles provided that all deeds and
documents of the company shall be signed by
the managing director,secretary and working
director
• A mortgage deed was accepted with secretary
and working director’s signature only.
• Held, the deed was invalid
DOCTRINE OF INDOOR
MANAGEMENT
 MEANING AND PURPOSE
• The rule is beneficial for convenience in
business relations.
• An outsider is presumed to know the
constitution of a company, but not what may
or may not have taken place within the doors
that are closed to him.
• It operates to protect outsiders against the
company.
 CASE
Royal British Bank v. Turquand(1856)
• Persons dealing with the company are
assumed to have read the public documents
of the company and to have ascertained that
the proposed transactions are not inconsistent
there with,they need not inquire into the
regularity of the internal proceedings and may
assume that all is being done regularly.
THANK YOU