Explain the doctrine of ultra vires in company law
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The doctrine of ultra vires applies to the memorandum of a company. The memorandum of association contains the permitted range of activities in its objects clause and a company cannot practice any other activity which is not defined under the scope of objectives mentioned in the memorandum. Any activity done out of the purview of the memorandum is considered as an ultra vires activity. Such activities are null or void and all ultra vires transactions can never be subsequently ratified or validated, not even by the consent of the shareholders.
This rule is meant to protect the interests of the shareholders and creditors of the company.
The effects or the consequences of the Doctrine of Ultra vires are –
PERSONAL LIABILITY OF THE DIRECTORS – The funds of the company can only be used for authorised objectives. In case if any director makes an unauthorised payment, he will be compelled to refund the money to the company. The director will be personally liable for any loss suffered by the company due to him.
ULTRA VIRES CONTRACT- Any contract by the company officials outside its scope is completely void and it has no legal effect.
ULTRA VIRES LENDING – When the company makes any ultra vires lending or when a person borrows money from the company under an ultra vires contract, he can be sued by the company to recover the amount. The promise to get back the money on the borrowed amount is not illegal.
ULTRA VIRES TORT- A company cannot be liable for any tort committed by its officers in connection with the business outside its scope of objectives. If officers have performed a tort which is intra-vires, the company will be held liable.
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The doctrine of ultra vires applies to the memorandum of a company. The memorandum of association contains the permitted range of activities in its objects clause and a company cannot practice any other activity which is not defined under the scope of objectives mentioned in the memorandum. Any activity done out of the purview of the memorandum is considered as an ultra vires activity. Such activities are null or void and all ultra vires transactions can never be subsequently ratified or validated, not even by the consent of the shareholders.
This rule is meant to protect the interests of the shareholders and creditors of the company.
The effects or the consequences of the Doctrine of Ultra vires are –
PERSONAL LIABILITY OF THE DIRECTORS – The funds of the company can only be used for authorised objectives. In case if any director makes an unauthorised payment, he will be compelled to refund the money to the company. The director will be personally liable for any loss suffered by the company due to him.
ULTRA VIRES CONTRACT- Any contract by the company officials outside its scope is completely void and it has no legal effect.
ULTRA VIRES LENDING – When the company makes any ultra vires lending or when a person borrows money from the company under an ultra vires contract, he can be sued by the company to recover the amount. The promise to get back the money on the borrowed amount is not illegal.
ULTRA VIRES TORT- A company cannot be liable for any tort committed by its officers in connection with the business outside its scope of objectives. If officers have performed a tort which is intra-vires, the company will be held liable.
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Ultra means 'beyond' or 'in excess of' and 'vires' means powers. Thus, Ultra vires means an act or transaction beyond or in excess of the powers of the company.
An act or transaction shall be ultra vires if :
a) It is not permitted or authorised by the Companies Act,2013.
b) It falls outside the objects clause of memorandum; and
c) Its attainment is not incidental or ancillary to the attainment of main objects.
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