Ultra virus will not have affect under the new companies law. Explain briefly
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Answer:
Introduction
Companies have to borrow funds from time to time for various projects in which they are engaged. Borrowing is an indispensable part of day to day transactions of a company, and no company can be imagined to run without borrowing from time to time. Balance sheets are released every year by the companies, and you will hardly find any balance sheet without borrowings in the liabilities clause of it. However, there are certain restrictions while making such borrowings. If companies go beyond their powers to borrow then such borrowings may be deemed as ultra-vires.
What is the doctrine of ultra-vires?
Ultra-vires
It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning power or authority. So we can say that anything which is beyond the authority or power is called ultra-vires. In the context of the company, we can say that anything which is done by the company or its directors which is beyond their legal authority or which was outside the scope of the object of the company is ultra-vires.
Doctrine of Ultra-Vires
Memorandum of association is considered to be the constitution of the company. It sets out the internal and external scope and area of company’s operation along with its objectives, powers, scope. A company is authorized to do only that much which is within the scope of the powers provided to it by the memorandum. A company can also do anything which is incidental to the main objects provided by the memorandum. Anything which is beyond the objects authorized by the memorandum is an ultra-vires act.
Origin of the doctrine
The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by the House of Lords. In this case the company and M/s. Riche entered into a contract where the company agreed to finance construction of a railway line. Later on, directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company. Riche filed a suit demanding damages from the company. According to Riche, the words “general contracts” in the objects clause of the company meant any kind of contract. Thus, according to Riche, the company had all the powers and authority to enter and perform such kind of contracts. Later, the majority of the shareholders of the company ratified the contract. However, directors of the company still refused to perform the contract as according to them the act was ultra-vires and the shareholders of the company cannot ratify any ultra-vires act.