Company Law_Doctrine of Ultra Vires

Doctrine of Ultra Vires 

  1. Ultra Vires is the Latin phrase, which means beyond the powers.
  2. The Memorandum of Association of the Company provides the objects of the company for which the company is established. The act of the Company should not be beyond the object clause, otherwise the said act will be treated as ultra vires, i.e. beyond the powers of the Company
  3. The ultra vires act is completely different from an illegal act. However, both are void.
  4. The ultra vires act is void act and therefore it cannot be ratified even if all the directors of the company want to ratify the same.
  5. The motive behind the doctrine of ultra vires is to protect the investors and creditors of the company.
  6. This doctrine prohibits the Company to use the money of the investors for the purpose other than that are stated in object clause of the Company enumerated in Memorandum of Association.
  7. In the case of Ashbury Railway Carriage and Iron Company V/s Riche, (1875) L.R.7, H.L.653,  the doctrine of ultra vires had been established. This was the landmark decision. 
  8. The details of the case is as under: 
    • Facts of the Case
        • Ashbury Railway Carriage and Iron Company Ltd., this company was incorporated under the Companies Act 1862. As per the Memorandum Clause No. 3 of the said company,  its objects were "to make and sell, or lend on hire, railway-carriage and wagon and also to carry on the business of mechanical engineers and general contractors.
        • The Clause No. 4 of the Memorandum contained that activities beyond this objects needed a Special Resolution.
        • The Directors of ARC&IC Ltd. entered into contract with Riche, in order finance the construction of railway-line in Belgium. 
        • However, after few days, the company repudiated the said contract with Riche on the contention that, the said contract was ultra-vires. 
        • As a result, Riche filed a case for damages for breach of Contract. The main contentions of Riche that, the said contract was within the ambit of the word General Contractors and therefore, it was within the power of company. Thus, the said contract was ratified by the majority of the company's shareholders.
    • Issue before the Court
        • Whether the contract executed between the company and Riche was valid and if not, whether it could be ratified by the members of the company?
    • Judgment
        • The Court held that, the contract was ultra-vires and therefore such contract was void and the company had no capacity to ratify the said contract.
        • The company has power to do only those things which are authorized by its object clause enumerated in the Memorandum of Association.
        • The shareholders has no power to ratify the ultra-vires contract. The business objectives of the company  must be specified in the Memorandum.

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