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Legopedia

Doctrine of Ultra Vires (Exception and Need)

The doctrine of ultra vires is which adopted from a Latin word, is the basic doctrine in the law of administration meaning, “beyond its power or beyond the power of.” Any type of action or any transaction beyond the scope of any organization mainly the company or the authority endowed upon a manager of the company will fall under the ambit of the doctrine of “ultra vires” and will be censured accordingly. Basically, it is to be understood by the concept that, when a piece of delegated legislation is declared to be ultra vires, it is void and becomes unenforceable. It cannot affect the rights and duties of any person, until a rule or a law is declared not valid by a court, it only presumed to be valid.

Issues in the doctrine of Ultra Vires

The “Doctrine of Ultra Vires” is a fundamental rule of Company Law mainly. That is why, if the company takes any action or enters into a contract beyond the powers of the directors and/or the company itself, then that particular action or the contract is not enforceable in the eyes of the law and not binding on the company legally.

Following are some important legal issues relating to doctrine, i.e.,  ultra vires, which can arise in a variety of contexts: –

  1. Companies or company-related organization and other Person (Legal)) sometimes have the limited legal capacity to take action, and different attempts to engage in different activities beyond their capacity (Legal) may be ultra vires. Most of the countries in the world have restricted the doctrine of ultra vires in relation to companies by Law (statute).
  2.  Similarly, statutory and governmental bodies may have limits upon the action or the conduct and activities which they engage in legally.

The object defined under the manifesto of any company contains some essential object for which the company is formed and shall be obeyed by every legal person. An act or conduct of the company must not be under the objective clause; otherwise, it will be considered as “ultra vires” and, therefore, void and cannot be ratified even if all the present members wanted to ratify it. This is known as the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. Thus, the expression of ultra vires means an action taken place beyond the powers. Here also the expression ultra vires are also using to indicate an action of the company which is outside the powers conferred on the company by the objects clause of according to their memorandum or manifesto. Sometimes the expression “ultra vires” is used to explain the situation when the directors of a company have exceeded the powers whichever delegated to them. So, where a company or organization exceeds their powers as give by the objects clause of its memorandum, it is not legally bound by it the reason behind this is, it lacks legal capacity to incur responsibility for the action or the conduct, but when the directors of a company or any organization do have exceeded the powers delegated to them, then this kind of use must be avoided, it is apt to cause confusion between two wholly distinct legal principles. Henceforth, here we restrict the meaning of the term “ultra vires” according to their objects clause of the companies or organization manifesto or memorandum.

In the Indian scenario, the doctrine of “ultra vires” was recognized in the case of Jahangir R. Modi v. Shamji Ladha and has been well explained by the Supreme Court in the case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India, where court delivers that, the company has their own power to mention the objects as set out in the objects clause of their memorandum, and also anything, which is to be considered as reasonably necessary to carry out those particulars objects. For example, an association of a director for a particular company which has been authorized by its memorandum to purchase land had implied authority to let it and to sell it, if necessary. That is why it has been made clear by the Apex court i.e., Supreme Court that the company has, the certainly the power to carry out the objects stated in the objects clause and also what is conclusive to or spontaneously to those objects, but it has no power given to go beyond the objects or to do any kind of act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company.

SCOPE OF THE DOCTRINE OF ULTRA VIRES: –

The doctrine of “ultra vires” is applicable to all kind of companies but especially those companies that have been incorporated and have a separate existence in the eyes of the law. All those kind of companies that have not been registered, example, partnerships, and sole proprietorships will not come under the ambit of the doctrine of “ultra vires.” Only incorporated companies or organization with an independent existence in the eyes of the law will be considered under this particular doctrine.

Also, any kind of transaction which is illegal in nature or abusing of power by any director/ employee will not fall under the ambit of the doctrine of “ultra vires.” Only those type of transaction that is outside the scope of what a company can do will be censured under the doctrine. Every action or the conduct of a company shall e mentioned in the object clause of that particular memorandum of the company; Hence, if the company is exceeding their own authority which was given their self in the object clause of the Memorandum of Association, it must be censured under this doctrine.

EXCEPTION TO THE DOCTRINE OF ULTRA VIRES: –

There are a few important exceptions to the Doctrine of Ultra Vires.” They are discussed follows-

  1.  An action or the conduct which is within the scope of the object clause of the company but outside the
    the authority of directors can be ratified by the shareholders.
  2. The shareholders have the authority to validate an intra vires act performed in a not regular manner in that specific company.
  3. If the company acquires any property under the principle doctrine of “ultra vires” investment, even then the company right over that property shall be secured
  4.  The consequential effect of an act shall not be taken into consideration as “ultra vires” unless it is expressly prohibited by the statute.

Lastly, The doctrine of ultra vires has ceased to be any vital restraint upon corporate action. To the person who has their profession in the field of business, it was always obnoxious. Even after incorporating a company, he wants the same freedom of action which they enjoy as an individual entrepreneur. To the creditors, it was the only imaginary protection for some and a real trap for others. So, this particular article has made it clear at some extent that the doctrine is an integral safeguard to be followed in all companies and organization registered under and their application, which is not going to be done away with any time soon.

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by Ketan Srivastava

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