DOCTRINE OF
ULTRA VIRES :
A Company cannot go beyond the powers expressly
or impliedly conferred by statute or MOA. Moving away from the that field invites
‘Doctrine of Ultra Vires’. Ultra means beyond and vires means power.
·
An act done outside the MOA is beyond the power of Company
that is ultra vires.
·
Where the Act is ultra vires the directors, share holder can
ratify it.
·
Where the Act is ultra vires the Company it is void and
cannot be ratified by any such majority of share holders.
·
The powers in MOA not become independent objects by
themselves. They effectuate the objects of the Company .
·
Main objects = Rule of construction : it has been held that a
Co. does not have implied power
(i)
To use funds for
political purposes
(ii)
To give gifts and make donations or contributions for
charities not related to objects in memorandum
(iii)
To sell or dispose off whole Company undertaking
(iv)
To enter into contracts of surety or guarantee etc
(v)
To give loans to Company not engaged in financing or banking
Case
Law:
1)
Ashbury Railway carriage vs Riche (House of Lords)
The
apparent Company was formed with the objects of carrying on business as
mechanical engineer and general contractors. The Company entered into a
contract with Richie for financing the construction of a railway of Belgium.
An
Action was brought by Richie against for damages of breach of contract. The
House of Lords observed that the term General contractors must be taken to
indicate such contracts as are connected with the business of mechanical
engineers. It does not authorize making of contracts of any or every
description held the contract entered into by the Company for financing the
construction of railway was ultra vires, hence null and void. An ultra vires
contract, being void ab initio , cannot become intra vires by estoppel, lapse
of time , ratification , acquisance or delay.
2)
In Re John beauforte
The
Company authorize by its MOA to carry on business of costumes, gown, robe ,
dress and other activities of allied nature, entered into some contract in
order to carry out a business of venered panels, admittedly ultra vires the
objects of Company held contracts of ultra vires and Company was not liable for
any claims arising out of such contracts.
In
India, the doctrine of ultra vires was applied by Bombay high Court in Jahangir Modi vs. S Lodha and
reaffirmed by the SC in A Laxamana Swami Mudalliar Vs LIC.
3)
A Laxamana Swami Mudalliar Vs LIC:
In this case the directors of Company were authorized to make payment
towards any charitable or benevolent object or any general or useful object.
In accordance with the share holders
resolution the directors paid Rs 2 lacs to a trust form for promoting technical
or business knowledge. Subsequently
business was taken over by LIC. LIC asked for refund. The SC observed where the
primary object of Company was to carry on life insurance business, the
donations of charitable purposes could not be set to be incidental to or
naturally conducive to that object. An Act is incidental if it has ’reasonably
proximate connections with the objects.’ Power to do a thing and object of
Company are two different things. By
conferring power object clause cannot be extended. The articles may explain the
memorandum but cannot extend its scope. The
Court also laid down that an office bearer of a Company responsible for passing
a resolution which is ultra vires the Company will be personally liable to make
good the amount belonging to the Company.
Held Payment was ultra vires the Company.
They could spend the money for the
promotion of such charitable objects as would be useful for the attainment of
companies own objects and not for any other objects.
Effect of ultra vires transactions:
1.
Injunction
2.
Personal liability of directors (Jahangir Modi’s Case)
3.
Ultra vires acquired property – Property transferred to a
Company by formal transfer or conveyance
is in law duly vested in such Company, Even though Company not empowered to
aquire such property. This is so because property represents money of the
Company.
4.
Ultra vires contracts- null and void – even though dealing
with the Company under the impression that Act is intra vires.
5.
Ultra vires lending- Money lend by Company not authorized to
lend, Company can sue to recover it.
6.
Ultra vires tort – Company not liable for torts committed by
its employees unless committed in the courts of intra vires activities and
their employment.
