Meaning of Doctrine of Ultra Vires
The doctrine of ultra vires applies to the memorandum of association of a company. The memorandum of association contains the permitted range of activities in its objects clause and a company cannot practice any other activity which is not defined under the scope of objectives mentioned in the memorandum. Any activity done out of the purview of the memorandum is considered as an ultra vires activity. Such activities are null or void and all ultra vires transactions can never be subsequently ratified or validated, not even by the consent of the shareholders.
This rule is meant to protect the interests of the shareholders and creditors of the company.
Effects of Doctrine of Ultra Vires
The effects or the consequences of the Doctrine of Ultra vires are –
PERSONAL LIABILITY OF THE DIRECTORS – The funds of the company can only be used for authorised objectives. In case if any director makes an unauthorised payment, he will be compelled to refund the money to the company. The director will be personally liable for any loss suffered by the company due to him.
ULTRA VIRES ACQUIRED PROPERTY- If the money has been spent on purchasing ultra vires property, the company will have the secured right over the property. If the property is legally and formally transferred, it will become the asset of the corporation, even though the company was not entitled to acquire such property.
ULTRA VIRES CONTRACT- Any contract by the company officials outside its scope is completely void and it has no legal effect.
ULTRA VIRES LENDING – When the company makes any ultra vires lending or when a person borrows money from the company under an ultra vires contract, he can be sued by the company to recover the amount. The promise to get back the money on the borrowed amount is not illegal.
ULTRA VIRES TORT- A company cannot be liable for any tort committed by its officers in connection with the business outside its scope of objectives. If officers have performed a tort which is intra-vires, the company will be held liable.
Exceptions of Doctrine of Ultra Vires
Following are the exceptions to the doctrine of ultra vires –
- If the company has made any ultra vires lending, it has the right to recover the amount from the borrower.
- If the company has acquired any property under ultra vires contract, the amount can be recovered from company by the order of the court.
- If the director makes payment which is ultra vires the company, the director can be compelled to refund the amount and he also has the right to be indemnified.
- An act which ultra vires the articles but intra vires the memorandum of the company, it may be altered and included in the acts of the company.
- An act which is intra vires the company but ultra vires the director, the director is liable and but if it is out of the authority of the directors the company can ratify it in proper form.
- If the act is ultra vires the company but it is done in an irregular manner, it can be validated by the consent of the shareholders.