Ultra Vires word originated form Latin phrase which basically means that
'beyond the powers of' So, Ultra Vires basically means that any activity or
conduct that is beyond the limits of the company or power granted to the owner
of the company.
Memorandum of Association (MOA) which is also known as the constitution of a
company So, basically MOA consists of company's powers, its area of work and
most importantly its objectives. MOA provides a overview to the people working
in that corporate to make sure that they must be aware of what lines they
shouldn't and may not cross.
If the corporate performs or conducts any sort of activity which is far from the
scope of powers given in the memorandum then that act will be called as an ultra
vires act. The Doctrine of Ultra Vires is a kind of policy that reassures the
shareholders of the company and the creditors of the company that there will be
no misuse of funds or assets for any kind of function which beyond the power
mentioned in the Memorandum of the corporate.
The doctrine of ultra vires might be a fundamental element of corporate law. It
specifies that a corporation's purposes, as stated in its Articles of
Association, may be deviated from only to the degree permitted by the Act. As a
result, if the corporation acts or enters into a contract outside of the
authorities of the administrators or the corporate itself, the act/contract is
void and not wrongfully binding on the corporate.
If we apply the term Ultra Vires in Legal terms, so it solely means that any
which is performed in way above or over the legal power of someone. Doctrine of
ultra vires restrains the corporate from carrying out any kind of trade which is
different from the one which has been licensed. It also restricts from
exploiting the funds for any sort of function apart from those which are present
in the Memorandum.
The corporation cannot sue for illegal conduct. Furthermore, it cannot be sued.
If a company produces a product, provides a service, or loans money in violation
of a contract, it cannot be paid or reclaim the loan. However, if an investor
lends money to a business that has not been extended, he will use an injunction
to prevent the corporation from parting with it.
Because it is ultra vires to
the corporation, the investor has this right because the corporate does not
become the owner of the money and the investor stays the owner. Furthermore, if
the corporation borrows money via extra vires transactions to repay a lawful
loan, the investor has the right to collect his money from the corporate.
Sometimes an extra vires act might be legalised by the company shareholders. For
example, if an act violates the authority of the administrators, the
shareholders will approve it. If an act violates the corporation's Articles, the
corporate will change the Articles.
Effects Of Ultra Vires Act
- Acts that violate the law are not permitted. This means that when
someone does an ultra vires act, that conduct cannot be made legitimate
retrospectively. It is forever invalid and outside the scope of that actor's
abilities as authorised by the company's memo.
- The Articles are violated, yet the corporation is not. These are
activities conducted outside of the corporate's rights provided by its
Articles of Association, but within the corporate's responsibility. These
activities are outside the scope of the Articles, but within the scope of
- Acts undertaken by the corporation that are on the far side or beyond
the authority provided to that inside the memo are ultra vires the memo.
- The administrators are in violation, but the corporation is not. These
are actions taken by the company's administrators that are outside their
power but within the scope of the corporation as a whole.
Can Ultra Vires Act Be Ratified?
An ultra vires act cannot be sanctioned by the whole shareholder body and made
binding on the corporation. In other words, even the stockholders cannot engage
in an extra vires conduct. This is a common aspect of this philosophical
Lord Cairons, L.J. was the one who firstly, pronounced principle of law on this
subject in the case of Ashbury Railway Carriage & Iron Co. Ltd V. Riche
an organisation is been shaped with following objectives:
- To make, sell, lend or rent railway carriage and wagons,
- To sell, purchase, lease, work mines, land & buildings and minerals.
The board of directors agreed to finance the construction of a railway line in
Belgium with Mrs Riche. The Court ruled that the contract was extra vires
corporate and invalid, and that even the subsequent approval of the whole body
of shareholders could not formalise it.
However, the House of Lords later ruled in alternative decisions that the
philosophical notion of supra vires should be used equally and that, unless
specifically banned, an organisation might conduct Associate in Nursing act that
is critical to, or attendant to, the achievement of its aims.
Core Cases Of Doctrine Of Ultra Vires
Ashbury Railway Carriage and Iron Company Ltd. V. Riche, (1875) L.R. 7 H.L.
Facts of the Case:
In this case, the corporate's objects, as stated in the objects clause of its
memorandum, were to build and sell, or lend on rent, railway carriages and
waggons, and all styles of railway plaint, fittings, machinery, and wheeled
vehicle, to carry on the business of mechanical engineers and general
contractors, to acquire and sell as merchants timber, coal, metal, or other
materials, and to shop for and sell any materials on commissions or as agents.
The corporate administrators entered into a deal with a material resource to
fund the building of a railway line in a European country. The contract was
legalised by all of the corporate members; however, it was afterwards
unacknowledged. Riche filed a contract breach lawsuit against the corporation.
Issues of the Case:
The core issue in this case was Whether the contract was valid and if not,
whether or not it may be legal by the members of the company?
The House of Lords says that:
The contract was outside the scope of the objects as defined in the object's
clause of their memorandum, and hence it was null and invalid. The company was
unable to formalise the deal.
The House of Lords has authority that an associate ultra vires act or contract
is invalid in its genesis and void because the corporation did not have the
competence to make it. However, the corporate will have the power to formalise
it. If the shareholders are permitted to formalise an extra vires act or
contract, it will be nothing more than permitting them to attempt and do the
terribly factor that they are barred from doing by Act of Parliament.
The House of Lords has stated that a corporation incorporated under the
Companies Act has the authority to try and do solely those things that are
approved by its objects clause of its memorandum, and anything not thus approved
is ultra vires the corporate and cannot be legal or created effective even by
unanimous agreement of the members.
Evans v/s Brunner Mond & Company
Fact of the Case
In this example, a corporation was formed to conduct the business of creating
chemicals. The corporate memorandum approved the corporate to try and do all
such business and things as may be incidental or semi-conducting to the
attainment of the higher than objects or any of them by a resolution the
administrators were approved to distribute a hundred thousand out of surplus
backlog to such universities in the United Kingdom as they may choose for the
furtherance of research projects and education.
The resolution was contested on the grounds that it was outside the scope of the
memorandum's purposes clause and so exceeded the corporate's authority. The
administrators well-tried that the corporation had a good problem finding
trained men, and the goal of the resolution was to promote scientific coaching
of extra individuals to change the corporation to attract employees and maintain
The court determined that the spending authorised by the resolution was required
for the corporate's continued advancement as chemical manufacturers, and
therefore the resolution was incidental or semiconducting to the achievement of
the corporate's primary goal, and thus it was not supra vires. Acts incidental
or ancillary are those that have a reasonable proximate relation to the purposes
stated in the memorandum's object clause.
No corporation can be said to be running without borrowings. At the same time,
it is vital to protect the interests of creditors and investors. Any irregular
and devil-may-care behaviour may result in the corporate's economic position or
closure. This might result in significant losses for them. To protect the
interests of investors and hence creditors, various clauses are incorporated
inside corporate memos that outline the company's aims.
Corporate directors will operate strictly within the scope of the power granted
to them under these goals. Any borrowing made outside of the permission afforded
by the objectives specified in the memorandum would be considered ultra-vires.
Any borrowing generated by an ultra-vires act is invalid ab initio, and so
administrators are personally liable for the given acts. However, if such
borrowings are ultra-vires simply to the corporate articles or ultra-vires
administrators, they will be considered legitimate by the shareholders. When
such compliments are made, they will be considered valid.
Thus, executives should exercise extreme caution when borrowing cash, since
doing so may not only hold them personally liable for the consequences of such
actions, but may also result in substantial losses for investors and creditors.