CORPORATE LAW PROJECT || 2021-22

DR. RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

CORPORATE LAW PROJECT

“Discuss the consequences of Ultra Vires acts of a

company with the help of legal provisions and recent
cases”

Submitted to: Submitted by:

Dr. V. Visalakshi Sanket Khandelwal
(Assistant Prof.) Enrolment No: 190101127
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ACKNOWLEDGEMENT

I express my gratitude and deep regards t o my teacher, Dr. V. Visalakshi, for giving me such
a challenging topic and also for her exemplary guidance, monitoring and constant
encouragement throughout the curse of this project.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.
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CONTENTS

ACKNOWLEDGEMENT.........................................................................................................2

INTRODUCTION......................................................................................................................4

BASIC CONCEPT OF THE DOCTRINE OF ULTRA VIRES................................................5

NEED FOR THE DOCTRINE OF ULTRA VIRES.................................................................5

SCOPE OF THE DOCTRINE OF ULTRA VIRES..................................................................6

EXCEPTION TO THE DOCTRINE OF ULTRA VIRES........................................................7

EVOLUTION OF THE CONCEPT OF DOCTRINE OF ULTRA VIRES AND CURRENT

SCENARIO IN ENGLAND AND INDIA................................................................................8

England- Evolution of the Concept of Doctrine of Ultra Vires..............................................8

England- Current Scenario of the Applicability of the Doctrine of Ultra Vires..................10

India- Evolution of the Concept of Doctrine of Ultra Vires.................................................11

India- Current Scenario of the Applicability of the Doctrine of Ultra Vires........................12

ANALYSIS OF THE APPLICATION OF THE DOCTRINE OF ULTRA VIRES IN..........13

INDIA AND USA....................................................................................................................13

CONCLUSION........................................................................................................................14

BIBLIOGRAPHY....................................................................................................................15
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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 has to 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 India to USA, every company follows the doctrine of ultra vires. 1 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 associations2.

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
India, 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, I intend to give a clear understanding of the concept of ‘ultra vires’ and
its uses. Also, I will attempt to make certain suggestions that can be implemented in law to
better the applications of this doctrine and render it more effective.

1
Jiménez Sánchez, M. A. (2022). Conceptual Presentation of the Ultra Vires Doctrine. In The Ultra Vires
Doctrine in Corporate Law (pp. 9-23). Springer, Cham.
2
Section 2 (1) (c) of the United Kingdom Companies Act, 1985; Schedule I of the Companies Act, 2013.
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BASIC CONCEPT OF THE DOCTRINE OF ULTRA VIRES

‘Ultra vires’ comes from the Latin word meaning ‘beyond the powers of’. Any action or
transaction beyond the scope of the company or the authority endowed upon a care taker of
the company will fall under the doctrine of ultra vires and will be censured accordingly.3

The concept of ultra vires has basically been in existence since the beginning of man itself.
Even though it had never been codified formally, this concept is the basis of reasoning for
any man to determine whether an action is legitimate or illegitimate. This concept has been
elaborated upon by judges in various judgements given over a period of time.4

The concept of doctrine of ultra vires was acknowledged formally in 1612 in the United
Kingdom for the first time. In the case, Sutton’s Hospital of the year 1612, it was stated that
the doctrine will not be applied for any action or transaction of a chartered corporation 5,
despite the fact that such corporations are corporate personalities with a separate and distinct
identity.

In 1612, the country made use of documents called the ‘royal charters’ to incorporate
companies and give them an identity separate and distinct from its owner in the eyes of law.
Such royal chartered companies would have the same rights as a natural human being such as
the right to sue and the right to be sued without having any physical manifestation- an
artificial human being6. Thus, in the case of Sutton’s Hospital of the year, despite the fact that
the company had a separate existence in the eyes of law, the doctrine of ultra vires did not
apply. This case listed out an important exception to the doctrine of ultra vires and its scope.

NEED FOR THE DOCTRINE OF ULTRA VIRES

Even though United Kingdom acknowledged the existences of the doctrine of ultra vires in
1612, the first time it was adopted as an important concept of law was in the year 1855. 7 In

3
Singh, A. (2019). Company Law. EBC Publications.
4
Wendel, Mattias. "Paradoxes of Ultra-Vires Review: A Critical Review of the PSPP Decision and Its Initial
Reception." German Law Journal 21.5 (2020): 979-994.
5
(1612) 77 Eng Rep 960.
6
Baskin, Jonathan Barron. "The development of corporate financial markets in Britain and the United States,
1600–1914: Overcoming asymmetric information." Business History Review 62.2 (1988): 199-237.
7
Simpson V. West Minister Palace Hotel, (1860) 8 H.L.C. 712
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India, the concept was adopted officially in 1866 by way of a Bombay High Court
judgement.8

Prior to 1855 and 1866, respectively, there was no need for the doctrine of ultra vires because
the most common types of businesses were sole proprietorships and partnerships. In both
these types of companies, the owner(s) of the business had unlimited liability because of
which the creditors were always protected. Since there was no distinction between owners of
the business and business itself, the creditors were always assured of getting their money
back- even if it meant that the owners would have to attach their private and personal
property to the business in order to pay off the business loans. The creditors had the option of
juicing the owners/partners of the business down to their last penny to recover loans.9

In 1855, the Limited Liability Act introduced the Parliament of UK introduced the concept of
limited liability partnerships (LLPs).10 This concept basically means that partners will have a
limited extent of liability in their business beyond which they will be absolved of any
responsibility to clear the credit of the company. This concept distinguished the company
from the partners. Partners were no longer going to be held unconditionally liable for the
loans of the company. They would be liable only to the extent of the capital invested in the
business or the pre decided profit sharing ratio, as the case maybe.

After the Limited Liability Act, 1855, the creditors were suddenly worried about their ability
to recover loans given to LLPs. To give respite to creditors and ensure that the partners did
not take undue advantage of the limited liability concept, the doctrine of ultra vires found an
integral place in law. Any transaction beyond the capacity of the company will, thus, be
wholly void.

SCOPE OF THE DOCTRINE OF ULTRA VIRES

The doctrine of ultra vires is applicable to all those companies that have been incorporated
and have a separate existence in the eyes of law. All those companies that have not been
registered, such as partnerships and sole proprietorships will not come under the scope of the

8
Jahangir R. Modi v. Shamji Ladha, (1866) 4 Bom HCR 185.
9
Acheson, Graeme G., and John D. Turner. "The death blow to unlimited liability in Victorian Britain: The City
of Glasgow failure." Explorations in Economic History 45.3 (2008): 235-253.
10
Harris, Ron. "A new understanding of the history of limited liability: an invitation for theoretical reframing."
Journal of Institutional Economics 16.5 (2020): 643-664.
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doctrine of ultra vires. Only incorporated companies with an independent existence in the
eyes of law will be considered under this doctrine.11

Every illegal transaction or abuse of power by a director/ employee will not fall under the
ambit of the doctrine of ultra vires 12. Only those transactions that are beyond the scope of
what a company can do will be censured under the doctrine. What a company can do or the
purpose of the company is always mentioned in the object clause of the Memorandum of
Associations of the Company. Thus, if the company is exceeding the authority it has given
itself in the object clause of the Memorandum of Association, it will be censured under this
doctrine.

EXCEPTION TO THE DOCTRINE OF ULTRA VIRES

There are a few exceptions to the Doctrine of Ultra Vires. They are listed out as follows-
 An act which is within the scope of the object clause of the company but outside the
authority of directors can be ratified by the share-holders.

 The share-holders have the authority to validate an intra vires act performed in irregular
manner in the company.

 If the company acquires any property through an ultra vires investment, even then the
company right over that property shall be secured.

 An incidental or consequential effect of an act shall not be considered as ultra vires, unless
it is expressly prohibited by the statute.13

EVOLUTION OF THE CONCEPT OF DOCTRINE OF ULTRA VIRES AND

CURRENT SCENARIO IN ENGLAND AND INDIA

England- Evolution of the Concept of Doctrine of Ultra Vires

As previously mentioned, the first time England acknowledged the doctrine of ultra vires was
in 1612. However, after the introduction of the Limited Liability Partnership Act, the real
importance of the Doctrine of Ultra Vires came to light.

11
n4.
12
Rolled Steel Product (Holdings) Ltd v. British Steel Corp (1986) 1 Ch 306.
13
Sánchez, Marco Antonio Jiménez. "The Ultra Vires Doctrine in Corporate Law: A Comparative Review."
(2022).
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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 Hotel14. 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 re-
modelled in part. During the course of 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.

In 1875, in the case Ashbury Railway carriage & Iron Co. v. Riche,15 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 the
majority of the stakeholders in the company. Hence, it was binding.

The Court held that the object clause of the memorandum is, essentially, the purpose of the
company i.e. it states what a company is supposed to do. It is the most important document of
a company and cannot be over ridden by ratification of the stake holders. Thus, the contract
will be considered wholly void because of an invalid consideration. Mr. Riche was not

14
(1860) 8 H.L.C. 712.
15
(1875) LR 7 HL 653.
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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.

Over time, the importance and scope of the doctrine of ultra vires has reduced dramatically in
England.16 The reason for this was the straight jacketed approach utilized by Courts
previously. Sometimes, it may happen that an action/transaction is not explicitly mentioned in
the object clause, but is necessary and legitimate for the betterment of the business. In such
cases, the doctrine of ultra vires was becoming more of a hindrance than a protection to
shareholders and creditors.

In 1880, in the case, Attorney General v. Great Eastern Railway Co.17 the courts stated for
the first time that if a particular activity is for the benefit of the business, then despite the fact
that 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.

In 1966, in the case Bell House Ltd. V City Wall Properties Ltd 18, 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.

England- Current Scenario of the Applicability of the Doctrine of Ultra Vires

The straight jacketed method of following the object clause of the memorandum has, to a
very large extent, been done away with. S. 110 of the Companies Act, 1989 further reiterated
the importance of having an expansive object clause and judging each action on its merit
whether it is benefitting the business or not.
16
Nyombi, Chrispas. "The gradual erosion of the ultra vires doctrine in English company law." International
Journal of Law and Management (2014).
17
(1880) 5 AC 473.
18
[1966] 2 QB 656.
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Even S. 31 and S.39 of the Companies Act, 2006 has greatly reduced the significance of the
doctrine of ultra vires in the country. S. 31 clearly stated that any objective that is not
explicitly excluded from the object clause of the memorandum will not be deemed ultra vires.
Also, the object clause can be ratified by the consensus of the shareholders to remove or add
particular objectives to the object clause. Such an amendment will hold only after registration
by the registrar. However, after registration, the amendments to the object clause or non-
questionable. This was an important change from the stance taken by the Court in the
Ashbury case, where the Court had stated that no such an amendment made to the object
clause of the memorandum will hold true despite shareholder consensus. Similarly, S. 39 also
reiterated that the final decision on whether certain activities are within or outside the scope
of the business will be determined by Courts on the basis of the merit of the case.

As recently as in 2013, the case White and another v South Derbyshire District Council,19
the English Courts held that an ultra vires act does not become ultra vires immediately, the
Courts will first examine the credibility and legitimacy of the act and accordingly decide
whether it needs to be censured or can continue to remain in force.

It can be safely said that even though the doctrine of ultra vires has not been eradicated from
England completely- its applicability has been curbed. Till date, the doctrine can be invoked
in Courts of Law, but the final decision lies with the judge. Over a period of time, legislation
encouraging expansive object clauses and encouraging judges to consider each case on merit
have also contributed to the reduced emphasis on the doctrine of ultra vires. It is, however, a
brilliant concept that was the need of the hour back in 1855 when it was introduced. The fact
that it has stood the test of time and is still in operation, is, in itself, a great deal.

India- Evolution of the Concept of Doctrine of Ultra Vires

In India, prior to the introduction of LLPs, the need for the doctrine of ultra vires was not
very grave. Post the introduction of LLPs, 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 Ladha20 in 1866.

19
[2012] EWHC 3495.
20
(1866) 4 Bom HCR 185.
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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.

This case paved the way for the doctrine in India. With LLP’s just having been introduced,
there were several cases of partners/owners/directors of companies misusing their limited
liability position with respect to the company. Since this case, the scope of the doctrine of
ultra vires has increased manifold and is of great importance as of now.

Another important case that has helped in shaping the doctrine of ultra vires in India is A.
Lakshmanaswami Mudaliar v L.I.C.21 In this case, the company’s memorandum stated that
the directors should donate a part of the company’s profit to charitable organisations that help
the general public or undertake useful objects. In accordance with this, the directors donated
Rs. 2 lacs to a charitable organisation. 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 organisation. It should donate to a cause is related to the business in some
manner or furthers the business objectives of the company. The charitable organisation that
was donated to did not fall under either categories. 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.

Further, in National Provincial Bank v. Introductions Ltd22 it was stated that if a bank or
any other lending institution lends money to a company for a purpose that is out of the scope

21
1963 SCR Supl. (2) 887.
22
[1969] 1 Lloyd's Rep. 229.
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of the object clause of the memorandum of association of the company, then such a loan
cannot be recovered with the help of any remedy that would normally be used for the
recovery of such loans. This is because any action that is outside the scope of the object
clause falls under the doctrine of ultra vires and is wholly void.

India- Current Scenario of the Applicability of the Doctrine of Ultra Vires

In a developing country like India, the economy is still growing. New companies need to be
formed to increase the GDP of the country. In a country like ours, having the doctrine of ultra
vires is very important.23 The doctrine of ultra vires basically restricts the company from
acting outside the scope of its object clause as mentioned in the Memorandum of Association.
This gives new companies an opportunity to be formed. Thus, the doctrine is important in
India. Also, with new businesses being formed frequently, banks and lending institutions
need to give out loans to such new companies. The doctrine of ultra vires protects the lenders
by giving them a guarantee of money back should the companies act outside the scope of
their object clause. The doctrine of ultra vires plays a very important role in India till date.

In 2009, in the case, Radhabari Tea Company Private Limited vs. Mridul Kumar
Bhattacharjee and Other,24 the Court decided that any action taken by the board of directors
of a company or the company itself beyond the scope of powers conferred on the company
and/or its directors by the object clause of the memorandum of association of the company, is
ultra vires. In the new Companies Act, 2013, S. 245 (1) (a) states that any company that acts
outside the scope of the object clause of the memorandum of association will be censured
under the Doctrine of Ultra Vires. Thus, it is amply clear the doctrine of ultra vires is still
playing a very important and dominant role in the country. It will continue to retain its
importance in times to come. It is a safeguard for investors and shareholder. Its prominence is
not going to diminish any time soon.

ANALYSIS OF THE APPLICATION OF THE DOCTRINE OF ULTRA VIRES IN

INDIA AND USA

23
Vaidya, Nidhi, and Raghvendra Singh Raghuvanshi. "Applicability of Doctrine of Ultra Vires on Companies."
Available at SSRN 1558971 (2010).
24
2010 (153) CompCas 579 (Gau).
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The Model Business Corporation Act, 2002 majorly reduced the applicability of the doctrine
of ultra vires in USA. Its application could be found in certain not for profit organizations and
state run corporation. Apart from that, the doctrine of ultra vires is applied in -
1. Charitable contributions and political contributions
2. Guaranty of indebtedness of another person
3. Loans to officers or directors of the company
4. Pensions, bonuses, stock option plans, job severance payments, and other fringe
benefits given to employs
5. The power to acquire shares of other corporations
6. The power to enter into a partnerships

The reason why the applicability of the doctrine of ultra vires has been restricted so
prominently in USA is because of the economy. USA is a land of multinationals and big
corporations. A large part of the country’s GDP comes from such multinationals and big
corporations. The doctrine of ultra vires forces companies to stick to the object clause of the
company’s memorandum with very little scope to do something different- even if the
action/transaction will help the business eventually. Restricting business practices merely
because they are not included in the object clause of the company’s memorandum seems
redundant in the USA scenario.25 The government wants people to take such corporations to
expand and try new ways of raking in profits as this will eventually help in the country’s
growth.

Thus, the doctrine of ultra vires is fundamentally against the principles of the country’s
economy. On the other hand, in India, the doctrine of ultra vires has been codified in the most
recent Companies Act, 2013.26 This act of codification just emphasizes the need for the
doctrine to control unscrupulous business practices undertaken by directors and employees of
a company alike. India is still developing. If corporations are allowed to have expansive
object clauses, then new businesses will find it difficult to incorporate themselves for the lack
of new ideas in the market. No businessman is going to want to start a business that has
already been undertaken by another. Thus, the doctrine of ultra vires gives a fair playing field

25
Leacock, Stephen J. "Rise and Fall of the Ultra Vires Doctrine in United States, United Kingdom, and
Commonwealth Caribbean Corporate Common Law: A Triumph of Experience Over Logic." Depaul Bus. &
Comm. LJ 5 (2006): 67.
26
Section 4 (1)(c) of the Companies Act, 2013.
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to all and allows for the country’s economic growth at the same time. Also, the protection
given to creditors and shareholders is an important added benefit of the doctrine.

CONCLUSION

From the above discussion, we can see that the doctrine of ultra vires, which may seem
insignificant, plays a very big role in the companies. Almost, all actions/transactions of a
company come under the scrutiny of the doctrine of ultra vires. Even though the doctrine of
ultra vires had not been officially codified since the very beginning, its importance cannot be
discounted.

We can say that no company can function without borrowings, but it is also necessary to
protect the interests of the creditors and the shareowners. Any irresponsible act can result in
the insolvency or winding up of the company. This may cause considerable losses to them.
So to protect the interest of the investors and the creditors, specific provisions are made in the
memorandum of the company which defines the objectives of the company.

Directors of the company can act only within the purview of the authority provided to them
under these objectives. If any borrowing is made beyond the authority provided by these
objectives mentioned in the memorandum, it will be considered as ultra-vires. Any borrowing
which is made through an ultra-vires act is void-ab-initio, and hence, directors are personally
responsible for these acts. However, if such borrowings are ultra-vires only to the articles of
the company or ultra-vires directors, then they can be ratified by the shareholders. Then after
such ratification, they will be considered valid.

Thus, directors must be very cautious while borrowing funds, as it may not only make them
personally liable for the consequences of such acts but also may result in considerable losses
to investors and creditors.

BIBLIOGRAPHY

1. Singh, A. (2019). Company Law. EBC Publications.

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2. Harno, Albert J. "Privileges and Powers of a Corporation and the Doctrine of Ultra
Vires." The Yale Law Journal 35.1 (1925): 13-28.Avtar Singh, Law of Insurance 8 (3rd
ed. 2017).
3. Thompson, Seymour D. "The Doctrine of Ultra Vires in Relation to Private
Corporations." Am. L. Rev. 28 (1894): 376.E.L. Vaughan & T. Vaughan, Fundamentals
of Risk and Insurance 68 (2007).
4. Harno, Albert J. "Privileges and Powers of a Corporation and the Doctrine of Ultra
Vires." The Yale Law Journal 35.1 (1925): 13-28. Harno, Albert J. "Privileges and
Powers of a Corporation and the Doctrine of Ultra Vires." The Yale Law Journal 35.1
(1925): 13-28.