Doctrine of Ultra Vires

The Introduction to Doctrine of Ultra Vires. ... 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.
Objects clause is contained in the memorandum of association and sets out the
powers of the directors in running the company. Traditionally, each power of the
company had to be enumerated, which resulted in detailed statements as to the
powers of the company. Companies are now able to use the phrase ‘to carry on
the business of a general commercial company’ rather than use exhaustive lists
of enumerated powers.
 Introduction to 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 member 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 accompany 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 are restricting the
meaning of ultra vires objects clause of the company’s memorandum.
 Protection Of Creditors And Investors
Doctrine of ultra vires has been developed to protect the
investors and creditors of the company. This doctrine prevents a
company to employ the money of the investors for a purpose
other than those stated in the objects clause of its
memorandum. Thus, the investors and the 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
contemplation at the time of investing their money in the
company. It enables the investors to know the objects in which
their money is to be employed. This doctrine protects the
creditors of the company by ensuring them that the funds of the
company to which they must look for payment are not
dissipated in unauthorized activities.
 Protection of Creditors and Investors
The wrongful application of the company’s assets may
result in the insolvency of the company, a situation
when the creditors of the company cannot be paid.
This doctrine prevents the wrongful application of the
company’s assets likely to result in the insolvency of
the company and thereby protects creditors. Besides
the doctrine of ultra vires prevents directors from
departing the object for which the company has been
formed and, thus, puts a check over the activities of
the directions. It enables the directors to know within
what lines of business they are authorized to act .
 The Doctrine of Ultra Vires
The action/transaction may be reviewed in two the position under
common law and under the companies Act 1965. According to
Company Law :
Business/Company that Ultra Vires acts are invalid.
 Business/Company that Ultra Vires acts are invalid
In Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875)
L.R. 7 H.L. 653., In this case, the objects of the company as stated in
the objects clause of its memorandum, were ‘to make and sell, or
lend on hire railway carriages and wagons, and all kinds of railway
plaint, fittings, machinery and rolling stock to carry on the business
of mechanical engineers and general contractors to purchase and
sell as merchants timber, coal, metal or other materials; and to buy
and sell any materials on commissions or as agents.’ The directors of
the company entered into a contract with Riches for financing a
construction of a railway line in Belgium. All the members of the
company ratified the contract, but later on the company repudiated
it. Riche sued the company for breach of contract.
 Issue:
• Whether the contract was valid and if not, whether
it could be ratified by the members of the company?
The House of Lords held unanimously that:
• The contract was beyond the objects as defined in
the objects clause of its memorandum and therefore
it was void.
• The company had no capacity to ratify the contract.
 Decision:
The House of Lords has held that an ultra vires act or contract is
void in it inception and it is void because the company had not the
capacity to make it and since the company lacks the capacity to
make such contract, how it can have capacity to ratify it. If the
shareholders are permitted to ratify an ultra vires act or contract, it
will be nothing but permitting them to do the very thing which, by
the Act of Parliament, they are prohibited from doing.
The House of Lords has expressed the view that a company
incorporated under the Companies Act has power to do only those
things, which are authorized by its objects clause of its
memorandum, and anything not so authorized is ultra vires the
company and cannot be ratified or made effective even by the
unanimous agreement of the members.
The Company cannot be prosecuted based on an Ultra
Vires Contract
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 maybe 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
finding trained men and the purpose of the resolution was to encourage
scientific training of more men to enable the company to recruit staff and
continue its progress.
 Decision:
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.
 Ascertainment of the Ultra Vires
To ascertain whether a particular act is ultra vires or not, the main
purpose must first be ascertained, then special powers for effecting
that purpose must be looked for, if the act is neither within the main
purpose nor the special powers expressly given by the statute, the
inquiry should be made whether the act is incidental to or
consequential upon. An act is not ultra vires if it is found:
• Within the main purpose, or
• Within the special powers expressly given by the statute to
effectuate the main purpose, or
• Neither within the main purpose nor the special powers expressly given by
the statute but incidental to or consequential upon the main purpose and a
thing reasonably done for Effecting. incidental to or consequential
upon the main purpose and a thing reasonably done for Effecting .
 Attorney General v. Mersey Railway Co, (1907)
In Attorney General v. Mersey Railway Co, (1907) 1 Ch. 81,
There was a company and it was incorporated for carrying on
a hotel business. It entered into 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 a 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 be held as ultra vires.
 Issue: Whether the transaction was ultra vires?
Decision: 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 because these are reasonably necessary to effectuate the purpose for
which the company has been incorporated and consequently these are
within the powers of the company, although these are not expressly
mentioned in the objects clause of the memorandum of the company, or
the statute creating it.
Thus a company which has been authorized to deal with its property has
implied power to pledge or Mortgage the property for its debts. It is to be
noted that if the act of the company is neither within the objects clause in
its memorandum or the statute creating it, nor necessary for or incidental
to or consequential upon the attainment of the objects stated in the
objects clause of the memorandum.
 Ultra Vires Doctrine in the Companies Act 1965
Section associated with the doctrine of ultra vires of the Companies
Act is Section 20 (1), 20 (2) (a), (b), (c) and 20 (3). Section 20 (1)
provides’ no action prosecuted as an act of…shall be invalid by reason
only the fact that the company does not have the ability or authority
to act. This means that, if companies do an action outside the
company (acting ultra vires), it was valid.. However, Section (2) affect
the three situations where the doctrine of ultra vires is still applicable
in Malaysia. Nepal Co. Act 2063 s.180 makes such action ultra vires.
Section 20 (2) (a) – a member of the company or in which the
company has issued debentures are available with a floating charge,
then the debenture / debenture trustee referred to the holders above
may be claimed from the company to take any action outside the
company. Name that mentioned above maybe request for restrictions
or injuksi to stop an ultra vires action.
 Hawkesbury Development Co Ltd v Landmark Finance
Pty Ltd ( 1969 )
This can be seen in the case of Hawkesbury Development Co Ltd
v Landmark Finance Pty Ltd ( 1969 ) 2 NSWR 786. In this case, H
holds all of the shares in the LF. LF has issued two debentures of
United Dominion Corp. ( UDC ). H requested from the court to
declare the both debentures was invalid because it is a Company
Object Ultra Vires. H also requested to the court to issues ‘
tegahan’ to UDC by enforcing the debentures. The question is,
can H ask the court issued prohibiting to the UDC. The court has
decided even thought this action was Ultra Vires. In this case,
UDC is the third party while section 20 (2) (a) may only be used
to sue company only.
 Continuation of Hawkesbury Development Co
Ltd v Landmark Finance Pty Ltd ( 1969 )
Section 20 (2) (b) provides, “ … any action by company or any
action by company members toward the current or the pass
company officer “. This means that the company or members of
the company can sue any pass or current officer that who have
committed Ultra Vires. Ultra Vires action must be completed
and realised. This is difference with Section 20 (2) (a).
Section 20 (2) (c) provides that minister may conduct petition
to the court to wind up the company that has committed ultra
vires action.
 Transfer of Company Object
The Company Act 1965 of USA has been precisely
devoted with the provision authority and the
rules for amendment :
• Clause Name – Section 23 of Companies Act
1965
• Capital Clause – Section 62 and Section 64 of
Companies Act 1965
• Object Clause – Section 28 of Companies Act
All Answers ltd, 'Doctrine of Ultra Vires' (Lawteacher.net, March 2019) 1965 available at https://www.lawteacher.net/free-law-essays/company-law/the-doctrine-of-ultra-vires-company-law-essay.php accessed on 16 March
2019.
 The Case Law on Company

The act of a Company must be limit of its object clause. This is

the fundamental rule of the Company Law which had been
established by the Ashbury Railway Carriage Case. The author
discusses origin of the doctrine and their evolution in different
phases in English law. In addition, he tries to discuss present
scenario in the context of United Kingdom and of Nepal in brief.
Concept: 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 objects clause, otherwise
it will be ultra vires and, therefore, void and cannot be ratified
even if all the members wish to ratify it. This is called the doctrine
of ultra vires, which has been firmly established in the case of
Ashbury Railway Carriage and Iron Company Ltd v. Riche.
 Continuation of The Case Law on Company
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 is 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 restrict the meaning of ultra vires to the
objects clause of the company’s memorandum.
 Origin of the Doctrine:
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 of the partners and also 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. On account
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.
 Continuation of Origin of the Doctrine:
The doctrine 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 the
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 moulded 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.
 The Retreat from Ashbury:
In Ashbury it was careful considered in respect of the drafting of objects clauses.
the courts would use two techniques to set limits on the proliferation of clauses.
The first was to distinguish between objects and powers and to state, in an
application of the ejusdem generis rule, that powers could only be used in
furtherance of the objects. The second was to locate, even where only objects
were concerned, the paragraph which appeared to the courts to contain the main
or dominant object and to construe all others as ancillary to this main purpose.
‘Cotman’ Clauses- to be called ‘independent objects’ or ‘Cotman’ clauses.
A consequence of the Ashbury case was to again throw into focus the distinction
between powers and objects, Lord Wrenbury being of the view that: ‘Powers are
not required to be and ought not to be specified in a memorandum. The Act
intended that the company, if it be a trading company, should by its memorandum
define the trade, not that it should specify the various acts which it should be
within the power of the company to do in carrying on the trade.
 Continuation of The Retreat from Ashbury
Ashbury is also represented by the qualification on the use of the ultra vires
doctrine to limit this to issues of capacity and not to include the mere exercise of
powers by directors, even if wrongful or mistaken.
This is reflective in part of the difficulty courts had in distinguishing between
objects and powers, but is also the problem generally with ultra vires, in that it is
used in a number of related, but distinct, senses to cover questions of capacity,
questions of excess of authority by the institutions of the company as well as
instances of breach of statutory prohibitions.
The excess of authority or illegal exercise of powers to be decided by reference to
the ordinary law governing directors’ breach of duty to act bona fide in the interests
of the company. Substantial agreement is to be found in the view that the abuse of
powers doctrine, which was clearly set out in Re David Payne, was subsequently
misinterpreted and confused with the ultra vires rule in cases beginning with Re
Lee Behrens, only being resolved at a much later date by the line of authority
stemming. from Charterbridge and including Rolled Steel. This episode is illustrative
of the unsatisfactory state of the ultra vires doctrine that ‘doomed [it] to a slow and
sometimes painful demise almost from the time of its strongest judicial support.’
 Reform Initiatives and Legislative Responses:
In 1945, the Cohen Committee, tasked with the updating of companies legislation that saw the
enactment of the Companies Act 1948, proposed that it should be made easier for companies
to alter their objects clauses by special resolution. It is argued that this reform failed to protect
third parties in situations where alterations to objects had not been made to ensure the
company had the requisite capacity, potentially allowing the company itself to set up ultra vires
as a bar to its performing the contract. The committee also made the suggestion that the
doctrine as a whole should be abolished as regards third parties, by giving the company the
powers of a natural person, but would be retained as an internal doctrine, enabling control by
the members of the company to carry on as a feature of the balance of powers between
shareholders and directors. This reform was not enacted, ostensibly because the reform was
not accompanied by the abolition of the constructive notice doctrine, whose utility the
government of the day wished to retain.
The Jenkins Committee in 1962 recommended abandonment of the constructive notice rule by
the introduction of rules protecting persons dealing with the company in good faith, subjecting
liability to actual knowledge of the contents of the memorandum except where the third party
‘honestly and reasonably’ failed to appreciate the memorandum prevented the company from
transacting. Curiously, it did not recommend abolition of the ultra vires doctrine itself.
UK enacted the Companies Act, 2006 as Nepal followed
As discussed above the United Kingdom enacted the Companies Act, 2006 having new
provisions about the objective clause and the single company constitution. Unless a
company’s articles specifically restrict the objects of the company, its objects are
unrestricted. Where a company amends its articles so as to add, remove or alter a
statement of the company’s objects it must give notice to the registrar; on receipt of the
notice, the registrar shall register it; and the amendment is not effective until entry of
that notice on the register. Any such amendment does not affect any rights or
obligations. of the company or render defective any legal proceedings by or against it
(Companies Act, 2006, Section 31}.
The validity of an act done by a company shall not be called into question on the ground
of lack of capacity by reason of anything in the company’s constitution {Section 39}.
In favor of a person dealing with a company in good faith, the power of the directors to
bind the company, or authorize others to do so, is deemed to be free of any limitation
under the company’s constitution. For this purpose a person “deals with” a company if
he is a party to any transaction or other act to which the company is a party.
 Continuation of the Previous Slide
A person dealing with a company is not bound to enquire as to any limitation on the
powers of the directors to bind the company or authorize others to do so; is
presumed to have acted in good faith unless the contrary is proved, and is not to be
regarded as acting in bad faith by reason only of his knowing that an act is beyond
the powers of the directors under the company’s constitution (Section 40).
The references above to limitations on the directors’ powers under the Company’s
constitution include limitations deriving from a resolution of the company or of any
class of shareholders, or from any agreement between the members of the company
or of any class of shareholders. This provision does not affect any right of a member
of the company to bring proceedings to restrain the doing of an action that is beyond
the powers of the directors. But no such proceedings lie in respect of an act to be
done in fulfillment of a legal obligation arising from a previous act of the company.
This Section does not affect any liability incurred by the directors, or any other
person, by reason of the directors’ exceeding their powers. (Section 40).
 Nepal
Any company incorporated under the Companies Act must have the objects of
the company in its MOA {Section 8(1) (C)}. In any transaction made to third party
by the company, if the limits of MOA are crossed, the third party is protected
even if the transaction is ultra vires. No transaction done by a company with
another person shall be void or invalid merely on the ground that such
transaction is beyond jurisdiction based on any matter contained in the
memorandum of association of the company {Section 103(1)}. It shall be the
duty of every director and officer to do such transaction within the ambit of
jurisdiction specified in the memorandum of association of the company
{Section 103(2)}.
 Continuation of the Previous Slide (Vicarious Concern)
Any act done or action taken by or document signed by at least one
director authorized by a company or any person authorized to act for
the company shall be binding for the company {Section 104 (1)}. Where
any person does any transaction with a company in good faith, such
transaction shall be binding for the company; and nothing contained in
memorandum of association, articles of association of the company or
in any resolution adopted by the general meeting or in any agreement
concluded between the company and its shareholder shall be deemed
to have made any limitation in or restriction on the authority of the
director or the authorized person to do such transaction {Section 104
(2)}. Prakash Dhungana, Doctrine of Ultra vires to Third Party Protection: A Changed

Philosophy in the Business World available at file:///C:/Users/Narayan%20P/Downloads/RS43_Prakash %20Dhungana.pdf accessed on 16 March 2019.
 The Slide
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