The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association (MOA), can be departed from only to the extent permitted by the Act.
Ultra vires acts are any acts which lie beyond the authority of a company to perform. Ultra vires acts fall outside the powers that are specifically listed in a corporate or company charter or law. The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association (MOA), can be departed from only to the extent permitted by the Act. Hence, if the company enters into a contract or does an act beyond the powers of the directors and/or the company itself, then the said contract/act is not legally binding on the company and is void.
The term Ultra Vires means 'Beyond Powers'. In legal terms, it applies only to the acts performed more than the legal powers of the company. This works on the assumption that the powers are limited in nature as the MOA guides it.
The doctrine Memorandum of association is considered to be the fundamental of the company. It sets out both the internal and external area of the company's operation along with its objective, power and scope. A company is authorized to do only that much, which is within the object of the powers provided to it by the memorandum. This can also be referred to as any action that is specifically prohibited by the company charter. A company can also do anything incidental to the main objects provided by the MOA, anything which is beyond the objects authorized by the memorandum is an ultra-vires act. An act of the company must not be beyond what is specified in MOA else it will be ultra vires and therefore void. Such an act cannot be ratified even if all the members wish to do so.
The need or the purpose of the doctrine of ultra vires is that it assures the creditors and the shareholders of the company that the finances of the company will be utilized only for the purpose specified in the MOA. In this manner, the shareholders of the company can get assured that their money will not be utilized for a purpose except for what is specified in the memorandum at the time of investment. This doctrine helps to prevent such a situation where if the assets of the company are wrongfully applied, which may result in the company's insolvency and which in turn means the creditors will not be paid. The doctrine of ultra vires draws a clear line beyond which directors of the company are not authorized to act. This doctrine helps to put a check on the activities of the directors and restrict them from departing from the objective specified in the MOA of the company.
An act of the company is ultra-vires if it is done beyond the scope mentioned in the memorandum of the company. Suppose the part of the memorandum can be separated. In that case, the part of the Act or contract within the authority provided by the memorandum is considered to be intra-vires, and the part beyond the powers is considered as ultra-vires. However, if the Act or the contract as a whole cannot be separated, it will be considered to be an ultra vires act and hence, void. Such acts cannot be ratified even by shareholders as they are void-ab-initio.
The effects of ultra vires transactions are that ultra vires acts are null and void ab initio, meaning that such acts are not binding on the company. An ultra vires act cannot be converted to intra vires act by means of Estoppel or ratification. By getting an injunction from the court, the members of the company can stop the company from undertaking an ultra vires act. The directors must ensure that all the funds of the company are used for legitimate purposes. If such funds are not used for a purpose as authorized in the memorandum of the company, it will attract the personal liability of the directors.
While the Doctrine of Ultra Vires has advantages like the protection of shareholders and creditors, it has disadvantages too. Even if all the members of the company agree to change the direction of the company, this doctrine prevents it from doing so. Further, the object clause can be altered through a special resolution of the memorandum. This defeats the core purpose of the doctrine.
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