‘Ultra’ means beyond, and ‘vires’ means powers. Memorandum of Association of a company defines the powers of a company. Any act done contrary to or in excess of the scope of the activity of the company as laid down by its memorandum of association is ultra-vires the company, i.e., beyond the legal powers and authority of the company, and shall be wholly void and not binding on the company.
Acts ultra-vires the company can neither be legalized nor ratified even with the unanimous consent of all the members of the company. This doctrine tries to protect the interest of the investors and creditors. A company only has the capacity to do those acts which fall within its objects as set out in its memorandum of association or are reasonably incidental to the attainment of such objects.
Acts of a company may also be ultra-vires the Articles or ultra-vires the powers of the directors. Acts ultra-vires the Articles can be valid and made binding upon the company by altering the Articles of Association with special resolution at a general meeting.
Image Source: dunedinstadium.files.wordpress.com
ADVERTISEMENTS:
Alteration of Article of Association with retrospective effect, if to the benefit of the company, shall be valid. An act beyond the scope of the powers of the directors may also be ratified by the general body of the shareholders.
The application of the Doctrine of Ultra-vires was explained in details by the House of Lords in Ashbury Railway Carriage Co. Ltd. v. Riche.
The Memorandum of Association of Ashbury defined its objects as “to make and sell, or lend on hire railway carriages and wagons and all kinds of railway plants etc.; to carry on the business of mechanical engineering and general contractors.”
ADVERTISEMENTS:
The company entered into a contract with M/s. Riche, a firm of railway contractors, to finance the construction of a railway line in Belgium. On repudiation of his contract by the company on the ground of its being ultra-vires, Riche brought an action for damages for breach of contract on the ground that the word “general contractors” gave power to the company to enter into such contract and, that, it was well within the powers of the company.
The House of Lords held the contract as ultra vires the company and, therefore, declare it null and void. “The term ‘general contractors’ must be taken to indicate the making generally of such contracts as are connected, with the business of mechanical engineers.
If the term ‘general contractors’ is not so interpreted, it would authorise the making of contracts of any and every description, would, therefore, be altogether unmeaning. Hence the contract was entirely beyond the objects in the “memorandum of association.”
However, the doctrine of ultra-vires should not be unreasonably understood and applied. It does not restrain a company from doing such things which are reasonably fair and incidental to its objects or which it is authorised to do under the Companies Act.
Illustration:
ADVERTISEMENTS:
(i) A chemical manufacturer, distributed £ 1,000,000 to universities and science institutions for furtherance of scientific education and research. It was held that distribution was intra vires since it was conducive to the continued growth of the company as chemical manufacturers.
(ii) A company was authorised to keep boats for the purpose of a ferry. It used excursion trips to the sea when they were otherwise unemployed. The act was held to be ultra vires.
(iii) Payments to widow of ex-employees have been held to be intra vires since such payments encouraged persons to enter the employment of the company. Similarly, ex gratia payments to workers have also been held to be intra vires since it would encourage the workers to work hard.
There is difference between objects and powers. Powers are not to be stated in the memorandum. Even if they are stated, they can be used only to achieve the objects of the company. In no case, they can become independent objects by themselves.