WHAT IS DOCTRINE OF ULTRA VIRES

WHAT IS DOCTRINE OF ULTRA VIRES

The purpose for which the company is founded is outlined in the object clause of the memorandum of the company. The object clause must not be violated for a company act to be valid, even if all members wish to ratify it. Otherwise, the act will be ultra vires and void. The ultra vires doctrine refers to this. "Ultra vires" is made up of the words "ultra" and "vires." Ultra is short for beyond, while vires is short for powers. The phrase "ultra vires" denotes an action that is beyond one's power. The term "ultra vires" in this context refers to a company's management that exceeds the authority granted to the company by the objects clause of its memorandum.

In Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7 H.L. 653., In this case, the objects of the company as stated in the objects clause of its memorandum, were ‘to make and sell, or lend on hire railway carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to carry on the business of mechanical engineers and general contractors to purchase and sell as merchants timber, coal, metal or other materials; and to buy and sell any materials on commissions or as agents.’ The directors of the company entered into a contract with Riches for financing a construction of a railway line in Belgium. All the members of the company ratified the contract, but later on the company repudiated it. Riche sued the company for breach of contract.

The House of Lords has held that an ultra vires act or contract is void in it inception and it is void because the company had not the capacity to make it and since the company lacks the capacity to make such contract, how it can have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be nothing but permitting them to do the very thing which, by the Act of Parliament, they are prohibited from doing. The House of Lords has expressed the view that a company incorporated under the Companies Act has power to do only those things, which are authorized by its objects clause of its memorandum, and anything not so authorized is ultra vires the company and cannot be ratified or made effective even by the unanimous agreement of the members.

When a company exceeds the authority granted to it by the objects clause of its memorandum, it is not bound by it because it lacks the legal ability to bear responsibility for the activity, but rather when the company's directors have gone beyond their authority. Because it is likely to lead to confusion between two completely different legal principles, this use must be avoided. As a result, we are limiting the definition of ultra vires in this instance to the company's memorandum's objects section.

PROTECTION OF INVESTORS AND CREDITORS

The doctrine of ultra vires was created to safeguard the company's creditors and investors. This doctrine forbids a firm from using investor funds for anything other than what is specified in the memorandum's objects section. This regulation can therefore provide the investors and the company with the assurance that their money will not be used for purposes that they did not initially have in mind when investing in the business. It enables investors to understand the purposes for which their money will be put to use. By guaranteeing that the money of the company, to whom they must seek for payment, are not lost in illicit operations, this approach defends the company's creditors. Insolvency, or the inability of the corporation to pay its creditors, may occur as a result of the improper use of the company's assets.

Additionally, the ultra vires doctrine imposes a check on the activity of the directors by prohibiting directors from departing from the purpose for which the corporation was founded. The directors might use it to determine the business areas in which they are permitted to act.

NB: This article is not a legal advice, and under no circumstance should you take it as such. All information provided are for general purpose only. For information, please contact chamanlawfirm@gmail.com

WRITTEN BY CHAMAN LAW FIRM TEAM

EMAIL: chamanlawfirm@gmail.com

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