The Doctrine of Ultra Vires

Section 6 then makes clear that the Act overrides the memorandum, and section 10 makes the memorandum bind the company and its members as a statutory contract. So the objects clause is not a private arrangement that the parties can waive; it is a registered public limit.

The four kinds of ultra vires, and only one of them is fatal

Students lose marks by treating every irregularity as ultra vires. There are four situations and the consequences differ sharply.

1. Ultra vires the company. The act is outside the objects in the memorandum. The company had no capacity to do it. The act is void, cannot be ratified by anyone, and is the true doctrine.

2. Ultra vires the Act. The act is forbidden by the Companies Act itself, for example a buy-back in a circumstance barred by section 70. Void, and no memorandum can authorise it, because of section 6.

3. Ultra vires the articles but intra vires the memorandum. The company had capacity; its internal rules were not followed. This is curable: the members can alter the articles under section 14, or ratify.

4. Ultra vires the directors but intra vires the company. The directors exceeded their own authority. Again curable: the company in general meeting can ratify, and an outsider may in any event be protected by the rule in Turquand, which is the next chapter but one.

Only the first two are void. The third and fourth are irregularities.

The consequences of a true ultra vires act

1. The act is void and unenforceable both ways. Neither the company nor the other party can sue on it. The company cannot enforce it even if the bargain was good for the company.

2. It cannot be ratified. This is the consequence that surprises people, and the reason is logical rather than punitive: ratification presupposes that the principal could have done the act. A company that never had the capacity cannot acquire it by a vote. Even a unanimous resolution of every member fails. The proper route is to alter the objects under section 13 and act afresh, and even that does not validate the earlier act.

3. Any member may restrain it. A member can seek an injunction to stop a proposed or continuing ultra vires act. He does not need to show loss.

4. The directors are personally liable to the company. They applied the company's funds to a purpose the company could not pursue, so they must make good the loss. Their duty to act within the memorandum is now also part of the statutory duties in section 166.

5. The company may trace its property. Where the company's money has been spent ultra vires and is identifiable in another's hands, the company can follow it.

6. An ultra vires lender is not simply left out in the cold. A lender whose money was in fact used to pay off the company's own lawful debts may stand in the place of the creditors who were paid off, because the company has been enriched to that extent. This is the practical qualification that keeps the doctrine from being absurd, and it is worth a sentence.

7. Ultra vires torts. A company is liable for a wrong committed by its servant only where the servant was acting within the scope of employment on business the company could lawfully carry on. Where the whole activity was ultra vires, the company's liability is doubtful, and this is the least settled corner of the doctrine.

The case, and how to answer on it

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche is the decision every syllabus names. It established that a company's capacity is limited to its stated objects, that a contract outside them is void, and that the shareholders cannot ratify it, however unanimous they are.

It is named here without a citation and without facts, deliberately. No law report carrying it could be opened from where this book was written, and the house rule is that a citation goes only with a report that has been read. See authorities/cases.json and FINDINGS.md section 5.1.

How to answer. State the doctrine, ground it in section 4(1)(c), name Ashbury as the decision that settled that an ultra vires contract is void and unratifiable, and then take the consequences in order. An examiner is testing whether you know that ratification is impossible and why, not whether you can recite a nineteenth century railway dispute.

How the doctrine has been weakened, and why it still matters

Drafting killed most of it. Once companies learned to write objects clauses running to forty sub-clauses ending "and to carry on any other business which in the opinion of the Board can be advantageously carried on", almost nothing was outside the objects. The doctrine survived in form and shrank in practice.

Section 4(1)(c) has narrowed the drafting trick, because the objects must be stated for which the company is proposed to be incorporated, with matters necessary in furtherance, rather than an open catalogue of everything the promoters could imagine.

Section 13(8) is the modern successor to the protection. Where a company has raised money from the public through a prospectus and still holds any unutilised amount, it shall not change its objects unless a special resolution is passed and:

• (i) the prescribed details of the resolution are published in two newspapers, one English and one vernacular, in circulation where the registered office is, and placed on the company's website, with the justification for the change; and
• (ii) the dissenting shareholders are given an exit opportunity by the promoters and controlling shareholders, in accordance with SEBI regulations.

That is the same protective idea as ultra vires, delivered by disclosure and an exit rather than by voiding the act.

Section 245(1)(b) is the members' modern weapon. In a class action, members or depositors may apply to the Tribunal to restrain the company from committing an act which is ultra vires the articles or memorandum of the company. So the doctrine has a named statutory remedy in the current Act, which is the citation to give.

A worked example

Konkan Fisheries Limited has one object: to catch, process and sell fish. Its memorandum says nothing else.

The Board resolves to lend eight crore rupees to a film production house on the view that the returns will be better than fishing. A member, Deepa, objects.

Is it ultra vires? Yes. Financing film production is not within the object of catching, processing and selling fish, and it is not a matter necessary in furtherance of that object in the section 4(1)(c) sense. Buying a lorry to move fish would be; funding a film is not.

What can Deepa do? She may seek an injunction to restrain the payment. If it has already been made, she may press the company to recover from the directors personally, and under section 245(1)(b) she may join a class action asking the Tribunal to restrain the company from an act ultra vires its memorandum.

Can the shareholders fix it? No. Even if all of them vote to approve the loan, it remains void, because the company never had the capacity. What they can do is alter the objects under section 13(1) by special resolution, after which the company may lend afresh. The earlier loan is not thereby validated.

Where does that leave the film house? It cannot sue on the contract. But if it can show that its eight crore rupees were used by the company to pay off its own lawful trade creditors, it may stand in the shoes of those creditors to that extent, because the company has been enriched.

Change one fact. Suppose the memorandum did allow investment in other businesses, but the articles required Board loans above five crore rupees to be approved in general meeting, and the Board skipped that step. That is not ultra vires the company at all. It is ultra vires the articles, the company had capacity, and the members can ratify it.

Distinctions that carry marks

What this does NOT mean

It does not mean every act the directors were not allowed to do is ultra vires. Most such acts are within the company's capacity and are curable.

It does not mean the company keeps a windfall. The other party is not simply robbed; tracing and the subrogation of a lender whose money paid lawful debts both cut the other way.

It does not mean the objects clause can be ignored because clauses are widely drafted. Section 13(8) and section 245(1)(b) both assume it is real, and the second gives a direct remedy for breach of it.

It does not mean altering the objects validates what was already done. Alteration operates for the future.

Quick revision

• Meaning: beyond the powers. Capacity comes from section 4(1)(c), objects plus matters necessary in furtherance.
• Four kinds: ultra vires the company (void); ultra vires the Act (void, section 6); ultra vires the articles (curable); ultra vires the directors (curable, ratifiable).
• Consequences: void and unenforceable both ways; no ratification even by unanimous consent; injunction at a member's instance; directors personally liable; tracing; a lender whose money paid lawful debts may be subrogated; ultra vires torts doubtful.
• The case: Ashbury, for void and unratifiable. Named without a citation.
• Modern successors: section 13(8), no change of objects while prospectus money is unutilised without a special resolution, newspaper and website publication with justification, and an exit for dissenting shareholders; section 245(1)(b), class action to restrain an act ultra vires the memorandum or articles.

Test yourself

1. What does ultra vires mean, and what is its effect on a contract? Beyond the powers. A contract outside the objects stated in the memorandum under section 4(1)(c) is beyond the company's capacity and is void, so neither party can enforce it.

2. Can the shareholders ratify an ultra vires contract? No, not even unanimously. Ratification assumes the principal could have done the act; a company that lacked capacity cannot acquire it by vote. The only route forward is to alter the objects under section 13, which operates for the future.

3. Distinguish an act ultra vires the company from one ultra vires the directors. The first exceeds the company's capacity under the memorandum and is void and unratifiable. The second exceeds the directors' authority; the company had capacity, and the act can be ratified in general meeting.

4. What statutory remedy does a member have against an ultra vires act? Section 245(1)(b): in a class action, members or depositors may apply to the Tribunal to restrain the company from committing an act ultra vires the articles or memorandum. A member may also seek an injunction.

5. A company that raised money by prospectus still holds part of it. Can it change its objects? Only by special resolution and by complying with section 13(8): publishing the prescribed details in one English and one vernacular newspaper in circulation where the registered office is, and on its website, with the justification; and giving dissenting shareholders an exit through the promoters and controlling shareholders in accordance with SEBI regulations.

6. A company's sole object is running schools. It buys a bus to carry pupils. Ultra vires? No. Carrying pupils is a matter necessary in furtherance of the object of running schools, and section 4(1)(c) covers it expressly without a separate object clause.