Doctrine of Ultra-Vires

The doctrine of ultra vires is a fundamental law of the Indian Companies Act. ‘Ultra’ means ‘beyond’, ‘Vires’ means ‘Powers’. It lays down that if any act of the company or any contract entered into by the directors, on behalf of the company, is beyond powers vested in the directors and company by object clause of the Memorandum of Association is considered as void, and it does not create any legal relationship.

In other words,  Ultra Vires of a company means that the act is beyond the legal powers and authority of the company. This fundamental law is to protect Investors in the company so that they may know the objects in which their money is to be employed and  to protect Creditors by ensuring that funds are not wasted in unauthorised activities.

It need not necessarily illegal; it may be or may not be. Company should not be fined or punished for its acts or of its agents. If it exceeds its authority, it is good up to the extent of authority and bad as to the excess. If it is excess, the whole transaction is affected and is void. It is decided on the construction of the terms of the Memorandum.

Effects of Ultra Vires Transactions

1. Injunction

If a company commits an ultra-vires act, any member of the company can bring injunction against the company to prevent it from doing  it.

2. Void Act

An ultra vires act will be wholly void and it will not bind the company; neither the company nor the outsider can enforce the contract.

3. Personal Liability

It is the duty of the directors of the company to ensure that the funds of the company are used for the good purpose as stated in the objects. If not, the directors of the company will be personally liable to make good the funds used for the ultra vires acts.

4. Breach of warranty of authority

The directors of a company are its agents and as such must act within the limits of the company's powers. When an agent exceeds his authority, he is personally liable for breach of warranty of authority if a suit filed by a third party in the case of ultra vires acts.

4. Ultra vires acquired property

If a company has acquired some property under an ultra vires transaction, it has the right to hold that property and protect it against damage by other persons as it is the share capital which ultimately belong to the shareholders, is invested on such property.

5. Ultra vires contracts

A contract of a company which is ultra vires the company is void ab initio and of no legal effect. It will not give any legal right either to the company or the outsider or against each other.

6. Ultra vires torts

The Company may not be held liable for torts or civil wrongs of its employees. However, the company will be liable only if

a. The torts was committed in the the course of an activity which falls within the scope of company's memorandum

b. The employee committed the tort within the course of his employment.

Exceptions

Following are the exceptions to Doctrine of Ultra Vires

1. If an act is ultra vires the directors of a company but is intra vires the company, the company may ratify it.

2. An act intra vires of the company but done in an irregular manner. It can turn into valid by shareholders consent.

3. If an act is ultra vires the AOA of a company, it may be altered to include the act within the powers of the company.

4. If any person borrows money from company, if it is ultra vires contract, then company may sue him for recovery.

5. If an act is ultra vires the company, independent rights are not affected. While applying doctrine of ultra vires, the effects incidental or consequential to the act shall not invalid unless they expressly prohibited by the Company’s Act.

6. If any contract is ultra vires, the party may exercise his rights.  If any loan is ultra vires, the lender is substituted in the place of creditor.