Question

Explain the doctrine of ultra vires and its effect

Answer 1

The Doctrine of Ultra Vires

The Doctrine of Ultra Vires is a fundamental rule of the Company Law. It states that the objects of a company, as specified in its Memorandum of Association, can be departed from only to the extent permitted by the Act. Hence, if the company does an act, or enters into a contract beyond the powers of the directors and/or the company itself, then the said act/contract is void and not legally binding on the company.

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the acts done in excess of the legal powers of the doers. This works on an assumption that the powers are limited in nature. Since the Doctrine of Ultra Vires limits the company to the objects specified in the memorandum, the company can be:

Restrained from using its funds for purposes other than those specified in the MemorandumRestrained from carrying on trade different from the one authorized.

The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If a company supplies goods or offers service or lends money on an ultra vires contract, then it cannot obtain payment or recover the loan.

However, if a lender loans money to a company which has not been expended yet, then he can stop the company from parting with it via an injunction. The lender has this right because the company does not become the owner of the money as it is ultra vires to the company and the lender remains the owner.

Further, if the company borrows money in an ultra vires transaction to repay a legal loan, then the lender is entitled to recover his loan from the company.

Sometimes an act which is ultra vires can be regularized by the shareholders of the company. For example,

If an act is ultra vires the power of directors, then the shareholders can ratify it.If an act is ultra vires the Articles of the company, then the company can alter the Articles.