The Companies Act requires that the memorandum of every company must state the object of the company. The objects clause must “delimit and identify the objects in such plain and unambiguous manner as that the reader can identify the field of industry within which corporate activities are to be confined.” A company has the power to carry out the objects set out in the memorandum and also everything which is reasonably necessary to enable it to carry out those objects. The object clause requires that the company should devote itself only to the objects set out in the memorandum and to no others. The memorandum is thus the area beyond which a company cannot travel. Any activities not expressly or impliedly authorized by the memorandum are ultra vires the company.in this article, we will discuss Ultra Vires-meaning, consequences, effects.
Ultra Vires-meaning, consequences, effects
Meaning of Ultra Vires:
‘Ultra’ means beyond, ‘vires‘ means powers. An action outside the memorandum is ultra vires the company. An act is said to be ultra vires when it is performed which, though legal in itself, is not authorized by the objects clause in the memorandum of association or the statute. Such an act is void and cannot be ratified even by unanimous resolution of all the shareholders.
Effects/Consequences of Ultra Vires Acts
The effects of ultra vires transactions are discussed under the following heads.
1. Void ab intio. Where a company does an act, which is ultra vires, no legal relationship or effect ensues therefrom. Such as act is absolutely void and cannot be ratified even if all the shareholders agree. The company is not bound by these acts; even the company cannot sue or be sued upon it.
A complaint alleging that a Company was indulging in activities not mentioned in Objects Clause of its MOA has to be filed within six months of the date of knowledge.[NEPC India Ltd. [1999122SCL94]
2. Injunction. The company has the capacity to do those acts which are within the powers conferred on it by its memorandum. As such a company may be restrained by an injunction to do an act if it is ultra vires of its objects.
Example: The Council had the power to run tramways. It ran omnibus to feed the tramways. It was held that the running of the omnibus was ultra vires and the council was restrained from running the omnibus.
3. Breach of warranty of authority. The directors of a company are its agents and as such it is their duty to act within the limits of the company’s powers. Every agent warrants that his principal has the power to make the contract which the agent is making on his behalf. Where the directors of a company persuade a third party to enter into a contract which is ultra vires the company, an action may lie against them for breach of warranty of authority. The fact that the company cannot be made liable as a result of the ultra vires rule does not militate against allowing an action against the company’s agents. Certainly, a third party cannot be denied such a right.
4. Personal liability of directors. It is the duty of the directors to see that the corporate money is used only for the legitimate business of the company. If any money is unlawfully disbursed, the directors shall be personally liable to make good the amount. Thus, the shareholders can maintain an action against the directors to compel them to restore to the company the funds of the company that have been employed in transactions that they have no authority to enter into.
5. ultra vires contracts. A contract by a company outside its objects is wholly void and of no legal effect. Neither side is capable of enforcing the contract against the other. The knowledge of the third party is immaterial. Persons dealing with the company are deemed to have knowledge of the memorandum. Accordingly, if they make a contract which is to their knowledge, actual or constructive, ultra vires the company, they cannot enforce it.
6. Ultra vires acquired property. A company can protect its property acquired by an ultra vires expenditure. Thus, in a case where the company’s telephone wires were cut and it had no power in the memorandum to put up the wires, it was held entitled to recover damages for the injury.
7. Ultra vires borrowing. Where a person lends money to a company and the company either has no borrowing powers or has already exceeded them, or the borrowing is for the purpose which is ultra vires, then the contract of loan is void and no action can be brought under it to recover the money lent. Ultra vires borrowing does not create the relationship of creditor and debtor and the only possible remedy in such case is in rem and not in personam.
8. Ultra vires torts. A company will be liable for torts or crimes committed in the pursuit of its stated objects. But a tort or crime committed in the course of the activity which is ultra vires the company, the company would not be liable in respect of it. However, the officer, agent or servant of the company who commits the act would be personally liable in such a case.
It is worth noting that the doctrine of ultra vires is nowadays very largely frustrated by the Smartness of company promoters, who, by enumerating all objects possible under the sun have in actual practice fouled the doctrine and made it ineffective, except in very rare cases.
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