What is doctrine of Ultra Vires?

Every company has an objective of performing its core business activities and these predominant anticipations are mentioned in the Object Clause [i]of the Memorandum of Association (MOA[ii]) which is the third mandatory clause mentioned under section 4(1)[c] [iii]of companies act 2013.

The doctrine of Ultra Vires means " beyond the power " this doctrine prohibits those operations that are not in the ambit of the object of the companies which are mentioned in the Memorandum in other words if a company performs any business operations which is beyond its power then only this doctrine comes into existence.

As a consequence of above mentioned general rules, The act of ultra vires becomes void which never binds the company, and both companies as well as the parties who are entitled to the contract do not have the authority to sue or to be sued.

Origin of Ultra vires.

The House of Lords first articulated the doctrine of ultra vires in a landmark case, Asbury Railway Carriage and Iron Co. Ltd. V . Riche, [1878] L.R 7 H.L.653.[iv] to understand this concept in a better manner let's have a brief analysis of the case;

The Object clause mentioned in the Memorandum stated:
"The main objective of incorporating the company was to make a sell or land or hire railways plants for carrying out furtherance of business related to mechanical engineers and general contractor".

There was a contract between the company and M/S Riche which was a firm related to railway contractors and dealt with providing finance to construct railway lines in Belgium. Riche brought allegations by claiming damages against the company assuming that the word General contractors mentioned in the Object Clause permits the company to execute the contract So it comes under the authority of the company though it was also approved by a majority of the shareholders.

Question raised before the honorable House of Lords:

1. Whether the denial of the company for entering into the contract of that particular work which was not mentioned in the Object of the Memorandum even after the shareholders' approval valid or not?
2. Second was what did the term General contractors actually meant?

Finally, the House of Lords declared that the contract was ultra vires concerned which should be null and void irrespective of the fact that shareholders admitted "The contract which they desire to make will be authorized to directors "even after this it will be ultra vires. So the company was not liable for those activities which is not in the power. The term general contractor was implemented and specified to mechanical engineers.

Significance Of The Doctrine

An act that is ultra vires in nature is always incompetent for ratification however if the act falls within the jurisdiction of the company but outside the authority of the directors, it can be ratified.

Illustration: A is a director of X private limited company and does not have the authority to grant or take loans but Y who is a shareholder has the authority to do so as mentioned in the Memorandum Y can grant or take loans because it's in the ambit of the company even if the directors cannot.

Conclusion
The application of the Doctrine of Ultra vires shall be reasonable unless it is prohibited in my opinion if the operations act in furtherance of business then after amending the object in Memorandum and implementing the principle of reasonable constructions only matters shall be taken into consideration. The main intention of this doctrine is to protect the interest of shareholders and creditors. Members have the privilege of attending an injunction in case of an ultra vires act.

End-Notes:

1. Out of 6 mandatory clause object clause is the third one where the main objective of business activities are mentioned
2. MOA and AOA are also known as backbone of the company as mentioned in the companies act 2013 and are responsible for external and internal affairs of the company respectively.
3. Companies Act 2013
4. Asbury Railway Carriage and Iron Co. Ltd. V . Riche),[1878] L.R 7 H.L.653.

Written by Dharmashoka Panda, Institution; Birla Global University, Birla School of Law (4th year).

Also Read:

• An Analysis: Doctrine of Ultra Vires
• Doctrine of Ultravires
• Note: Doctrine Of Ultra Vires
• Doctrine Of Ultra Vires, Doctrine Of Constructive Notice And Doctrine Of Indoor Management