The Doctrine of Ultravires
In this blog post, I will write about the doctrine of ultra vires according to Indian companies law 2013 with references to case law and relevant sections and explain the legal terms and concepts.
- The doctrine of ultra vires is a Latin term that means "beyond powers". It is a fundamental rule of company law that limits the powers of a company to the objects specified in its memorandum of association (MOA), which is the basic charter of the company.
- The MOA defines the scope and purpose of the company and its activities. If a company does an act or enters into a contract that is beyond the scope of its MOA, such an act or contract is ultra vires the company and null and void.
- The doctrine of ultra vires protects the interests of the shareholders, creditors and public by ensuring that the funds of the company are used only for lawful and authorized purposes. It also prevents the directors from abusing their powers or acting against the will of the shareholders.
- The doctrine of ultra vires originated in the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche [(1878) L.R. 7 H.L. 653], where the House of Lords held that a contract to finance the construction of a railway line was ultra vires the company, whose object was to make and sell railway carriages and wagons.
- Under the Indian Companies Act 2013, section 4(1)(c) requires every company to state in its MOA "the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof". Section 4(6) empowers the company to amend its MOA by passing a special resolution to alter its objects clause.
- Section 245(1)(a) of the Act gives a right to the members or depositors of a company to file an application before the National Company Law Tribunal (NCLT) to restrain the company from committing an act which is ultra vires its MOA or articles of association (AOA).
- Section 248(1)(c) of the Act provides that a company may be struck off from the register of companies if it has not commenced any business within one year of its incorporation or has not carried on any business for two immediately preceding financial years and has not made any application for obtaining dormant status under section 455.
- Some examples of ultra vires acts are: borrowing money for purposes other than those specified in the MOA, issuing shares at a discount without complying with section 53, investing in another company without obtaining approval under section 186, carrying on a business different from or inconsistent with the objects clause, etc.
- However, there are some exceptions to the doctrine of ultra vires, such as: acts done in good faith for the benefit of the company, acts done under statutory authority or direction, acts ratified by all shareholders, acts incidental or ancillary to the main objects, etc.
- The doctrine of ultra vires is not applicable to acts done by a company which are illegal or immoral or opposed to public policy. Such acts are void ab initio (from the beginning) and cannot be validated by any means.