A PROJECT ON
Doctrine of Ultra Vires
SUBMITTED TO:
Mr.Mukesh Kumar Ghosh
(ASSISTANT PROFESSOR)
Company Law
SUBMITTED BY:
SHUBHAM BAJPAYEE
ROLL NO. 40, SEMSTER, V
DATE OF SUBMISSION- 4/10/2017
SCHOOL OF LAW
GURU GHASIDAS UNIVERSITY, BILASPUR (C.G)
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DECLARATION
I, SHUBHAM BAJPAYEE, ROLL NUMBER 40, B.COM.L.L.B Semester V of
Guru Ghasidas University do hereby that, this project is my original work and I
have not copied this project or any part thereof from any source without due
acknowledgement. I am highly indebted to the authors of the books and I have
referred in my project as well as all the writers of the articles and the owners of the
information taken from the websites for it. It is only because of their contribution
and proper guidance of my subject Professor Mukesh Kumar Ghosh,that I was able
to gather light on the subject.
SHUBHAM BAJPAYEE
ROLL NO. 40
B.COM LLB Semester V
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CERTIFICATE
I am glad to submit this project on"The Doctrine of Ultra Vires".In this project
firstlyIn this project firstly I have discussed the meaning of doctrine of ultra vires
in brief .Then I have discussed the effects of doctrine of ultra vires .I have also
discussed how this doctrine protects investers and creditors of the company.I have
also discussed in brief the case of Ashbury Railway Carriage & iron Ltd.At last I
have discussed the ascertainment of ultra vires .I hope this would be significant for
academic purposes as well as prove informative to all readers.
Here through I declare that this paper is an original piece of research and all the
borrowed texts and ideas have been duly acknowledged.
SHUBHAM BAJPAYEE Faculty Signature:
ROLL NO. 41
B.COM LLB 4’ th Semester
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ACKNOWLEDGEMENT
I would like to express my earnest and deepest gratitude to, professor Mukesh
Kumar Ghosh, Faculty for Company Law for giving me this opportunity to make
project on this valuable topic of "doctrine of Ultra Vires” . I am grateful for the
assistance, guidance, and support that were extended during the course of excellent
research. I am also thankful to the University administration for providing the
resources necessary for the research work. I thank my parents and friends for their
moral support and love throughout my research work and project preparation.
Above all I thank the God Almighty for blessing me with the health and vitality to
complete this project.
Shubham Bajpayee
ROLL NO. 40
B.COM LLB Semester V
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INTRODUCTION
The doctrine of” ultra vires” is a Latin term which means beyond powers. This term is usually
used to mean and refer to the acts of the corporations or the companies that are taken outside the
power or authority granted to them by law or under the charter of the corporation. The
memorandum of association is the charter of the companies, which contain objects clause within
it, which serves two fold purpose as explained by Lord Parker in famous case of Cotman V
Broughm 1that it puts on notice of (a) the members as to the purposes of the company on which
the money subscribed by them would be laid out to protect themselves and (b) the other outsiders
intending to deal with the company on the extent of the company’s powers to protect themselves,
as a corollary to the doctrine of constructive notice. The corporations or their officers cannot
pursue any objects beyond those objects which are mentioned in the objects clause. If the
corporate capital is spent beyond the objects clause contained in the memorandum of association
than the doctrine of ultra vires will operate against it. This doctrine was not given much attention
up to the period of 1855. The reason behind this was that before 1855 companies used to be in
the form of enlarged partnerships and these were governed by the rule of partnership. As per the
partnership rule no change in the business of partnership could be made without the consent of
all the partners. These rules of partnership were considered sufficient to protect the investors. On
account of the limited liability of the members, the creditors also felt themselves protected and
did not require any other device for their protection
However in the year 1855 some important developments took place. One of them was the
introduction of the principles of limited liability. After the introduction of the principle of limited
liability, it was possible to make the liability of the members limited. Hence so long as the
liability of the members was unlimited up to 1855, the creditors of the company considered them
selves protected, but after the 5 development of the principle of limited liability, they found
themselves in unsecured and miserable state of affairs. This necessitated a device which could
protect the creditors and this further molded the minds of the pioneers towards the doctrine of
ultra vires
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(1918) AC 514 at page 520
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MEANING OF ULTRA VIRES
The term “Ultra” means beyond and “Vires” means powers. The term, therefore, means the
doing of an act, which is beyond the legal power, and authority of the company. It is considered
as an act outside the scope of the object of the company. The Memorandum, being the
constitution of the company sets out the principal objectives, powers, scope and its area of
operation, both internal and external. A company, therefore, can do anything within the scope of
the powers specified in the Memorandum.
It has also an implied power to do all such things that are fairly incidental to its main objects. If
the company does anything which is beyond the powers specified in the Memorandum it shall be
construed as an Ultra Vires act.
The objective of the Doctrine of Ultra Vires is to ensure the shareholders and the creditors that
the fund and assets of the company will not be used for any purpose other than those specified in
the Memorandum. Especially the creditors, while dealing with the company can make
themselves aware of the fact whether his transaction with the company is ultra vires or not. If it
is found ultra vires, he can avoid such transaction and thereby safeguard his interest.
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
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between two entirely distinct legal principles. Consequently, here are restricting the meaning of
ultra vires objects clause of the company’s memorandum.
Accordingly in a case 2, the council having statutory power to work tramways was restrained
from running omnibus in connection with tramways. The court found that the omnibus business
was in no way incidental to the business of working tramways.
In another famous English case3 which was decided in the year 1953 the three number suppliers
of materials to their factory manufacturing veneered panels could not recover their payments,
since the objects contained in the memoranda of the company was to carry on the business of
costumer, gown, robe, dresses and tailoring activities of allied nature and not of veneered panels
for which they supplied material. Hence all the three applications of suppliers were dismissed.
The doctrine of ultra vires has been given a premature death in England in the case of 4where the
objects clause of the company authorized the board of directors to carry on such trade or business
which in their opinion could be carried out advantageously with the existing business of the
company. Although their main object of business was the acquisition of vacant sites and erection
there-on housing estates. In the course of transaction of their business, the company acquired the
knowledge of source of finance for property development and introduced the financer to the
defendant company. The Company claimed the agreed fee of 20,000 pounds for its services.
Defendant contested the claim on the ground that the contract was ultra vires the plaintiff
company and therefore void. 7 The Court of Appeal held that since the directors honestly
believed that the transaction could be advantageously carried on as ancillary to the company’s
main objects, it was not ultra vires. The defendant company was held to pay the required amount.
Where
PROTECTION OF CREDITORS AND INVESTERS
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
2
London County Council V Attorney General in 1902
3
Beauforte (Jon) London, Ltd. Re 1953,
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Bell House Ltd. V City Wall Properties Ltd. in the year 1966
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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. 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 .
Is It Ultra Vires Or Illegal?
The ultra vires act or transaction is different from an illegal act or transaction, although both are
voide. 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.
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EFFECTS OF THE DOCTRINE OF ULTRA VIRES
1. Injunction:
Any member of the company can bring injunction against the company to restrain it from doing
ultra-vires acts.
2. Personal Liability of Directors:
The directors of the company are personally liable to make good those funds of the company
which they have used for ultra-vires purposes. It is the duty of the directors of the company to
employ funds and properties of the company for the purposes laid down in the memorandum of
association of the company.
3. Contracts Void:
Any contract which is ultra-vires the company, will be void and of no effect whatsoever. “An
ultra vires contract being void ab initio cannot become intra vires by reason of estoppel, lapse of
time, ratification, acquiescence or delay”.
However, if the contract is only ultra-vires the powers of the directors but not ultra-vires the
company, it may ratify such a contract in the general meeting and thereby be bound by it.
4. Ultra-vires Acquisition of Property:
When money of a company is spent ultra vires in acquiring a property, the right of the company
over that property would be secure. This is because the property represents corporate capital,
though acquired wrongly.
However, where the payment for an ultra vires acquired property/asset has not been made, the
vendor can obtain a tracing order to recover the property from the hands of the company. A
company cannot be allowed to benefit from such transactions at the cost of the other party
5. Ultra-vires Borrowings:
A bank or other person lending to company for purposes ultra-vires the memorandum cannot
recover the money under that loan agreement. But nothing prevents the company from repaying
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that money. The lender is also entitled to a tracing order, and if the money lent is traced in specie
or into any investment held by the company, the lender can recover it from the company.
Further, if that money is used by the company in discharging any debts or liabilities of the
company, the lender will, on accounts of principle of subrogation, step into the shoes of the
creditors whose claims have been paid off by the company and acquire their rights against the
company.
6. Ultra-vires Lending:
If the money has been lent by the company and the lending is ultra-vires, the contract void. No
action can be brought on it, but the company can sue for recovery of its money. This is because
the borrower who has made a promise to repay that money cannot be allowed to refrain from
paying it back on the ground that it is without authority.
7. Ultra-vires Torts: (i) The tort was committed in the course of an activity which falls within the
purview of the company’s memorandum, and
(ii) The tort was committed by the employee in the course of his employment.
In order to make the company liable for the torts (civil wrongs) of its employees, it is to be
proved that: (i) The tort was committed in the course of an activity which falls within the purview of the
company’s memorandum, and
(ii) The tort was committed by the employee in the course of his employ
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ASHBURY RAILWAY CARRIAGE & IRON CO.LTD VS.RICHE5
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
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(1875) L.R. 7 H.L. 653.,
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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.
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ASCERTAINMENT OF 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:
a. Within the main purpose, or
b. Within the special powers expressly given by the statute to effectuate the main purpose,
or
c. 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.
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
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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.
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CONCLUSION
In this project firstly I have discussed the meaning of doctrine of ultra vires in brief .Then I have
discussed the effects of doctrine of ultra vires .I have also discussed how this doctrine protects
investers and creditors of the company.I have also discussed in brief the case of Ashbury
Railway Carriage & iron Ltd.At last I have discussed the ascertainment of ultra vires.
In India the Bombay High Court for the first time applied the doctrine of ultra vires in Jahangir
R. Modi V Shamji Ladha in 1866. The facts of the case were that the plaintiff was the registered
share-holder of 601 shares in a company of which the defendants were the directors. The object
of the association, neither included dealing in shares, nor the purchase of company’s own shares;
yet the defendant directors did deal in share and they incurred losses on behalf of company, and
did purchase 1422 shares of the company. Therefore, the plaintiff contended that the defendant
should account for such unauthorized dealings and should pay all losses thereby incurred to the
company. Similar to the celebrated English case of Ashbury, in India, the Supreme Court of
India in A. Lakshmanaswami Mudaliar V L.I.C. in 1963 held that an ultra vires 8 contract
remains ultra vires even if all the shareholders agree to it. A company cannot be allowed to work
beyond the scope of its objects. The commercial corporations are bound by their memorandum
of association that being the charter of the company, and it was remarked by Lord Cairn in
Ashbury’s case that memorandum of association is the charter of the corporation, which must be
adhered to by the companies and their members. This doctrine has been constantly invoked in the
cases of railways, Water, Gas and other public undertakings. These companies are bestowed by
the legislature with very large and arbitrary powers derogating from private rights and are
consequently most necessary that they should not be allowed to exceed or abuse such powers.
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BIBLIOGRAPHY
1)Eastern Book Company,company Law,Avtar Singh,2016
SITES REFERRED
1)file:///C:/Users/user/Downloads/doctrine%20of%20ultra%20vires.pdf
2)http://www.shareyouressays.com/112346/top-7-effects-of-ultra-vires-transactions-indian-
companies-act-1956
3)http://www.bbamantra.com/doctrine-of-ultra-vires/
4)https://accountlearning.com/doctrine-of-ultra-vires-objectives-effects-ratification-types/
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