Q 19) Discuss the Doctrine on ultra-vires vis--vis a Company, The

Directors & the Articles. What is the legal effort of ultra-vires acts?
Every register company is required to have two documents stamp register and
file with the registrar of the company. They are
1. Memorandum of Association
2. Articles of Association
They are also known as fundamentals of the company. Out of this Memorandum
of association contains following important things for shareholders & outsiders
as well as prospective shareholders.
1. It lays down the area of operation of the company &
2. It regulates the external affairs of the company in relation to the outsiders
i.e., mainly shareholders.
3. It shows the object of the formation of the company to the shareholders.
Purpose of Memorandum of Association:
1. The prospective
2. The Outsiders
Contents of Memorandum of Association:
1. Name of the company with the word limited for eg. Larsen & Tubro ltd,
Philips ltd, Allana Industries ltd.
2. The state in which registered office of the company is located.
3. Objects of the company. Here the objects are of two types,
a. Main Objects It contents the object pursued by the company on its
incorporation.
b. Other objects.
4. In case of the companies with objects not confined to 1 state they have to
clearify which other states the company will be extended.
5. Limited liability In this the company declares that liability of its
members will be limited to the extent of their shares.
6. Share Capital here company clearifies how many sharesit wants to give
to the outsiders & the total amount of it. Ther are two types of share
capitals.
a. Authorised Share Capital
b. Subscribed Share Capital
Doctrine Of Ultra-Vires

A company has the power to do all such things which are permitted by,
1. The Companies Act of 1956 &
2. The Objectives clarified by the memorandum of association &
3. Other Incidental or related Objectives
Generally Ultra means beyond and Vires means power. Thus, the term
ultra-vires means doing that act which is beyond the legal power & authority of
the company which means something done beyond the power.
The company is not allowed to go beyond its legal powers & authority because
it may go against the interest of the shareholders. It protects,
1. Investors in the company so that they may know the objects of the
company where their money is going to be utilised.
2. Creditors of the company should know the objects so that their funds are
not wasted on unauthorised activities.
Ultra-Vires act is void (illegal). If an act is ultra-vires to the company it does
not create any legal relationship. Such an act which is void cannot be ratified by
the whole body of shareholders.
Ashbury Rly. Carriage ltd and iron co ltd vs Riche(1875) L.R. 7 H.L.653. A
company was incorporated with the following objects:
a. To make , sell , or lend on hire, railway carriages and wagons;
b. To carry on the business of mechanical engineers and general
contractors.
c. To purchase, lease, work and sell mines, minerals, land & buildings.
The company entered into a contract with Riche for the financing of
construction of railway line in Belgium(it was stated that it comes within the
terms of general contract).
The question raised was whether that contract was covered within the meaning
of general contractors. The House of Lords held that the contract was ultra
vires the company and void. Therefore even a subsequent approval of the
whole body of shareholders can not ratify it.
When the case goes before the court, court decides the case on the basis of
whether a particular act on the part of the company is within its powers or not it

all depends upon the facts of the case & the case is decided after referring
memorandum of association.
Ultra-Vires in regards to company:
In case any act is done contrary to the provisions of the act or which is
inconsistent to these provisions, these acts are considered ultra-vires the act and
shall be void. Well this shows that the acts cannot be rectified even by complete
agreement of all the shareholders.
Lets take an example to understand it better, payment of dividend out of
capital, Free distribution of bonus shares, purchasing its own shares and
reducing the share capital without complying with legal formalities laid down in
this act, are ultra-Vires the act.

Ultra-Vires in regards to Directors:

It lays down and defines the powers of the company. The object of the company
is also determined by it. A company cannot do anything beyond the purview of
object clause, therefore any act done in contravention of the object clause shall
be ultra-vires the memorandum and shall be void. It cannot be confirmed even
by passing complete agreement resolution by all the shareholders.

Ultra-Vires in regards to the Articles of Association:

The acts which are ultra-vires the articles of association but are within the
powers of the company are considered as ultra-vires the articles.
Lets take an example to understand it well, payment of interest on advance
calls at a rate higher than allowed by the articles. Such acts are also void, but the
company in General meeting may alter articles by passing special resolution and
confirming unauthorised acts.

The legal effects of Ultra-Vires Acts:

Any act ultra-vires the company shall be void and it cannot be enforced against
the company.

An act ultra-vires the company cannot be confirmed even by complete

agreement resolution of all the shareholders.
Not only outsiders against the company but also the company cannot enforce
such transactions or acts against the outsiders.
When the ultra-vires acts have been done or is about to be done, the member of
the company can approach the court and get an injunction restraining the
company from proceedings with such acts.
The directors of the Company can be held personally liable for any loss caused
by an ultra-vires transaction.