DOCTRINE OF ULTRA VIRES WITH RESPECT TO COMPANY LAW

In my current blog, I shall discuss the concept of the doctrine of ‘Ultra Vires’ and its applicability in the Company Law with reference to India. I shall try to discuss this doctrine and its myths which are unknown to many. This blog shall help the readers to understand the concept of the doctrine and its applicability and extent with reference to Company Law in India. My blog shall cover the following topics enumerated below: -

1. Introduction to the Doctrine of Ultra Vires
2. Origin of the Doctrine of Ultra Vires
3. Ultra Vires is an Illegal Act – The Myth
4. Utra Vires and Company Law
5. Development of the Doctrine in Foreign
6. Development of the Doctrine in India
7. Legal Position in India

Introduction to the Doctrine of Ultra Vires

Before understanding the relation between the doctrine and Company Law, one should understand what this doctrine is. What is the meaning of ‘Ultra Vires’. Going by the very terms, the meaning of the term ‘Ultra’ is beyond and ‘Vires’ is power.

When we talk about Company Law, we can say that any act done by the company which does not fall under the object clause of the Company is an act done ultra vires. The said act is ‘Void’ and the same cannot be ratified at any cost. Not even if all the Board of Directors consent to such ratification.

Origin of the Doctrine of Ultra Vires

Under this heading we shall study about the origin of this concept/doctrine and how did this concept/doctrine come into the legal framework.

To sum it up, this doctrine was firstly introduced with relation to statutory companies. It was only after the year 1855 that this doctrine was paid heed to in India, before 1855 no attention was given to this doctrine. It is after the year 1855 that certain developments took place and the concept of ‘Limited Liability’ came into play. The companies were asked two have two statutory documents namely – Articles of Association (AOA) and Memorandum of Association (MOA) for the purpose of their working and control.

The history of this doctrine can be traced back to as early as 1878. The origin of this doctrine is said to take place in the Case of Ashbury Railway Carriage & Iron Co. Ltd. Vs Riche (L.R. 7 H.L. 653).

This matter went up for consideration to the House of Lords whereby it was decided that the contract entered into by the parties was ultra vires to the memorandum of the company and therefore stood null and void. It was also stated that (MOA) cannot be amended with retrospective effect and no ultra vires act can be ratified at a later stage.

Ultra Vires is an Illegal Act – The Myth

To the ordinary human being, an act being ‘Ultra Vires’ and an act being illegal shall mean one and the same. Both these terms have been used synonymously and interchangeably on a variety of occasions. However, ‘Untra Vires’ and ‘Illegal’ are not the same thing and they have their own differences. 

An ultra vires act is something done beyond the object clause, scope and ambit of the company and something which is not described in the (MOA) of the company. Such an act may or may not be illegal. On the other hand, an illegal act is something which has been expressly been stated to be violative of the law of the land, is an offence and draws penal provisions with civil liabilities and/or is expressly prohibited by the law. The only similarity between the two is – ‘Both are void – ab – initio’

Utra Vires and Company Law

The doctrine of ultra vires is described in Sections 4(1)(c) and 245(1)(b) of the Companies Act, 2013.

Section 4(1)(c) of the Act – It states that all proposed objects of the company listed for its incorporation and other matters which are considered in furtherance to serve the objectives must be stated in the (MOA) of the company.

Section 245(1)(b) of the Act – It states that the members and depositors have the right, and they can exercise such a right to file an application before the appropriate tribunal if they believe that the company is conducting its affairs prejudicial o the interests of

1. The Company itself,
2. The members   or        
3. The depositors.

And as such can restrain the company from acting in violation to the (MOA).

Development of the Doctrine in Foreign

The following cases throw some light on the development of doctrine of ultra vires in the foreign land;

• Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76) L.R. 1 Ex. D. 88
• The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.
• Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B. 9
• In Re New British Iron Company, [1898] 1 Ch. 324
• Rayfield v Hands and Others, [1957 R. No. 603.]

Development of the Doctrine in India

The concept of ultra vires can be traced back to the case of Jahangir R. Modi vs Shamjhi Ladha (1866-67) 4 Bom HCR 185. It is said to be the first case in India wherein this doctrine was found to be used and has evolved ever since.

Also, in the important case of Laxmi Narayan Mudaliar vs LIC of India – It was decided to donate a sum of Rs. 2 lacks from the Share Holders Dividend Fund in the year 1955. However, the LIC Act came into force in the year 1956 and as such in accordance to the same; such a donation was not allowed. It thus became ultra vires.

Another important case in this context is the Case of S. Shivashanmugam and Others vs Butterfly Marketing Pvt Ltd (2001) 5 Comp LJ Mad 76

Legal Position in India

1. The Indian Law does not have any separate legal provision for ultra vires transactions
2. The Indian Courts apply the ruling of Ashbury Railway Carriage without any modifications whatsoever.