Ultra Vires is a Latin word in which ‘Ultra’ is beyond and vires means ‘power’. This doctrine means an act done beyond the powers of the company. It is important when defining the purposes of the powers mentioned under the companies Memorandum of Association. The powers of the company are limited by the Object clause in the Memorandum of Association and provisions mentioned in the Companies Act, 2013. Anything that is not permitted shall be void by the Doctrine of Ultra Vires.
The Doctrine of Ultra Vires
The Memorandum of Association of a company is considered to be its constitution. MOA sets out the scope, powers, and objects of the company in which the operation of a company would be conducted. The activities of the company should be according to the objects mentioned in Memorandum of Association and anything goes beyond that would be considered Ultra Vires. The company can do anything which is within the provision of the main objects of the company or permitted by the provisions of the Companies Act, 2013.
Need and Purpose
The aim of this doctrine is to ensure shareholders and creditors of the company that the working of the company and the funds are utilized in accordance with the Memorandum of Association.
This doctrine helps to put a clear check on the activities done by directors and the same do not go outside the purview of the MOA.
Legal Provisions regarding Doctrine of Ultra Vires
The Companies Act, 2013 ensures the application of the doctrine by including the provisions regarding the same.
Section 4(1)(c) of the Act states the when the company is incorporated, it is being incorporated for a reason and such reason should be stated in the Memorandum of the company. Also, in Section 245(1)(b) of the Act states that all the members and the depositors consist of a right to file an application in the tribunal if they have a reason to believe that the conduct of the company is going against the Memorandum of Association and is also prejudicial to the very interest of the company.
The Effect caused by Ultra Vires Transaction
The effects of the Ultra Vires transactions are mentioned below;
- Injunction: When the conduct of the company goes beyond the scope of powers and limits set out in Memorandum and Articles of the Company. Then the court has the power to grant the injunction and puts a restraint from doing such ultra vires transaction.
- Personal Liability of Directors: The directors of the company will be personally liable if the acts of the company go beyond the scope of MOA of the company.
- Property acquired by Ultra Vires Transaction: If there is any property acquired by such an ultra vires act then the court has a right to protect and hold the property.
- Ultra Vires Contract: Any contract made which is in conflict with the MOA and AOA of the company, shall be deemed to be void ab initio.
- Ultra Vires Torts: Any kind of tort committed by the companies’ agent or employee during the ultra vires transaction, the company will not be liable.
- The company has a right to borrow from the lender if it has many ultra vires transactions related to lending;
- If the directors of the company make a payment which is an ultra vires transaction, they have a right to collect the refund;
- If an act ultra vires AOA but intra vires MOA then that could be involved in the conducts of the company;
- If an act ultra vires the company and is done in an irregular manner then shareholders can validate such an act;
- The directors have a right to protect a property purchased in ultra vires transaction.
The doctrine of Ultra Vires ensures that proper conduct of the company is maintained and its activities do not go beyond the scope of MOA and AOA. It brings faith in investors and creditors that their money is safe and is being used for acts mentioned in the Memorandum of the company. This doctrine is vital to maintaining the smooth functioning of the company.