What is Doctrine of Ultra-Vires?
The term ‘Doctrine of Ultra-Vires’ denotes the set of principles that determines which acts are Beyond the power of the company. Considering the company, any transaction or act, performed by the company or its directors which is beyond their power or legal authority, or which is external to the scope of its objects, would be regarded as ultra vires.
In simple words, any act or transcaction, which is outside the company’s objectives, as mentioned in its memorandum, is considered as ultra vires.
- The Memorandum of Association of Company is regarded as the constitution of the company, that determines the scope of its operations, in addition to the objectives and powers.
- The company should perform only those acts which are within the scope of its powers, as stated in the MOA.
- Company can also undertake the act which is incidental to its primary object, as provided by the memorandum.
Basic Principles of Doctrine of Ultra-Vires
The basic principles of dostrine of ultra-vires are discussed hereunder:
- Even if all the shareholders wish to ratify the Utra Vires Act, it cannot be ratified.
- If one party has completely performed their part, hoping the protection of the doctrine was typically prevented in the doctrine of estoppel.
- If both the parties have completely performed their part, then it can’t be violated based on the doctrine.
- Any party to the transaction can raise the protection of Ultra Vires.
- When there is partial performance of the contract, and the performance was not sufficient to effect doctrine of estoppel. A suit can be fined to recover the benefits conferred.
- When any default or tort is committed by the agent of the company, which is within the scope of his/her employment, it cannot be defended from the outcome by the company, by saying that it was an ultra vires act.
Exceptions to the Doctrine of Ultra-Vires
- Act performed irregularly, but contrarily it is within the limits of the company, i.e. intra vires. Such an act can be validated by the company’s shareholders by giving their consent.
- Act external to the power/authority of the company’s directors, but contrarily it is within the scope of the company, then also the act can be ratified by the shareholders.
- When property is acquired by the company in a way which is ultra-vires of the contract, the company’s rights on that property will be kept intact.
- Incidental or consequential impact of the ultra-vires act will be valid, uless the Companies Act, 2013 xpecifically prohibits such act.
- Act deemed to be within the limits of the company by the Company’s Act, it is not regarded as Ultra Vires, even when it is not exclicitly specified in the meorandum.
- Retrospective alteration in the company’s articles of association so as to validate the act, which is beyond the limits of the company’s AOA.
Types of Ultra-Vires Acts
There are four types of Ultra-Vires Acts:
1. Acts ultra-vires to the Companies Act
Acts which are ultra-vires the companies act considered as void, even if the company’s memorandum of association and articles of association authorizes it.
In the same way, there are certain acts which are regarded as intra-vires to the company, despite the fact that there are not stated in the memorandum and articles of the company, as they are authorized by the Companies Act.
2. Acts ultra-vires to the company’s Memorandum of Association (MoA)
When the act is performed beyond the powers provided by the company’s memorandum.
When a certain portion of the act or contract is internal to the scope of the memorandum, while the rest is beyond its authority, and both the parts can be distinguished, then the part which is outside the powers will be regarded as ultra-vires, whereas the part which is within the authority, it will be regarded as intra-vires.
In case the two parts can’t be seaparted then the entire act or contract will be regarded as ultra-vires, which is void, and cannot be ratified by the shareholders.
3. Acts ultra-vires to the company’s Articles of Association (AoA), but intra-vires to the company
Acts or Contract which are performed or entered into, and are beyond the powers conferred by the companies AOA, but are within the company’s MOA, are called as ultra-vires the AOA and intra-vires the MOA. These acts can be ratified by the shareholders for which alterations are to be made to the company’s articles.
4. Acts ultra-vires to the company’s directors, but intra-vires to the company
Those acts or contracts that are performed or entered into by the directors and are beyond the powers conferred to the directors are called as acts ultr-vires the directs but intra-vires the company. Such acts can be ratified by the company, then they will be binding.
Memorandum of Association of a company delegates powers or legal authorities to carry out the tasks and duties. However, when the performance of work is done beyond the power, such an act is considered as Ultra Vires Act. And hence, it is regarded as invalid.