DOCTRINE OF ULTRA VIRES
COMPANY LAW
COMPANY LAW
DR SHASHI AGGARWAL
A COMPANY HAS THE POWER TO DO ALL SUCH THINGS AS ARE:-
1.
AUTHORIZED TO BE DONE BY
COMPANIES ACT 2013
2.
ESSENTIAL TO THE
ATTAINMENT OF ITS OBJECTS SPECIFIED IN MOA
3.
REASONABLY AND FAIRLY
INCIDENTAL TO ITS OBJECTS
4.
THE OBJECT CLAUSE REQUIRES
THAT THE COMPANY SHOULD DEVOTE ITSELF ONLY TO THE OBJECTS SET OUT IN THE
MEMORANDUM AND TO NO OTHERS
5.
MEMORANDUM IS THE AREA
BEYOND WHICH A COMPANY CANNOT TRAVEL
VIRES MEANS POWERS
AN ACTION OUTSIDE THE MEMORANDUM IS ULTRAVIRES THE COMPANY
AN ACT IS SAID TO BE ULTRAVIRES WHEN IT IS PERFORMED WHICH THOUGH LEGAL ITSELF IS NOT AUTHORISED
BY THE OBJECT 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.
DOCTRINE OF ULTRA VIRES THE PURPOSE
THE PURPOSE OF THESE RESTRICTIONS IS TO PROTECT-
1.
ARE ASSURED TO
SHAREHOLDERS THAT THEIR INVESTMENT IS
SPENT ON AUTHORISED ACTIVITIES
2.
IT ALSO SAFEGUARD THE
INTERESTS OF THE CREDITORS AS THE PROPERTY OF THE COMPANY CANNOT BE DIVERTED TO
UNAUTHORIZED OBJECTS
THE RATIONALE BEHIND THE
DOCTRINE IS COMPETENCY TO ENTER INTO CONTRACT. FOR AN INDIVIDUAL COMPETENCY IS
DETERMINED BY THE AGE AND SOUNDNESS OF
MIND BUT A COMPANY BEING AN ARTIFICIAL PERSON DOES NOT HAVE A BODY OR MIND.
COMPETENCY FOR A COMPANY IS DETERMINED BY ITS OWN CHARTER NAMELY THE
MEMORANDUM.
ASHBURY RAILWAY CARRIAGE AND IRON CO LTD V RICHE
1.
THE MEMORANDUM GAVE THE COMPANY
POWER TO MAKE AND SELL OR LEND ON HIRE RAILWAY CARRIAGES AND WAGONS
2.
TO CARRY OUT THE BUSINESS
OF MECHANICAL ENGINEERS AND GENERAL CONTRACTORS
3.
THE COMPANY ENTERED INTO A
CONTRACT WITH RICHIE FOR THE FINANCING OF THE CONSTRUCTION OF A RAILWAY LINE IN
BELGIUM AND THERE WAS EVIDENCE THAT CONTRACT HAD BEEN RATIFIED BY ALL THE
MEMBERS
4.
THE COMPANY REPUDIATED THE
CONTRACT
5.
THE OTHER PARTY BROUGHT AN
ACTION FOR DAMAGES FOR BREACH OF THE CONTRACT
6.
THE CONTENTIONS WERE :-
1.
THE CONTRACT IN QUESTION
CAME WELL WITH IN THE MEANING OF THE WORDS GENERAL CONTRACTORS WAS WITHIN THE
POWERS OF THE COMPANY
2.
CONTRACT WAS RATIFIED BY
THE MAJORITY OF THE SHAREHOLDERS
HELD BY THE LORDS THAT CONTRACT WAS ENTIRELY BEYOND THE
OBJECTS IN THE MEMORANDUM OF ASSOCIATION AND HENCE VOID
THE POINTS DECIDED WERE :
1.
IF AN ACT IS ULTRAVIRES
THE MEMORANDUM,IT IS NOT BINDING UPON THE COMPANY
2.
A CONTRACT ULTRAVIRES A
COMPANY IS VOID AND INCAPABLE OF RATIFICATION EVEN IF EVERY MEMBER WISHES TO
RATIFY IT
3.
AN ULTRAVIRE CONTRACT CAN
NEVER BIND THE COMPANY. IT CANNOT BECOME INTRAVIRES BY REASON OF ESTOPPEL,LAPSE
O TIME,RATIFICATION ETC
4.
MEANT TO PROTECT THE
PROSPECTIVE SHAREHOLDERS AND PUBLIC AT LARGE WHO DEAL WITH THE COMPANY
THE DOCTRINE OF ULTRAVIRES WAS RECOGNIZED IN INDIA FROM
1866
APPLIED IN THE CASE :
A LAKSHAMANASAWAMI MUDALIAR V LIFE INSURANCE
CORPORATION OF INDIA
1.
THE DIRECTORS OF A COMPANY
WERE AUTHORISED TO MAKE PAYMENTS TOWARDS ANY CHARITABLE OR FOR ANY GENERAL
PUBLIC OR USEFUL OBJECT
2.
IN ACCORDANCE WITH A
SHAREHOLDERS RESOLUTIONS THE DIRECTORS PAID TWO LAC RUPEES TO A TRUST FORMED
FOR THE PURPOSE OF PROMOTING TECHNICAL AND BUSINESS KNOWLEDGE
3.
THE COMPANY HAS TAKEN OVER
BY LIC AND IT HAD NO BUSINESS LEFT OF ITS OWN
4.
HELD BY THE COURT THAT
DIRECTORS COULD NOT SPEND COMPANY’S MONEY ON ANY CHARITABLE WHICH THEY MIGHT
CHOSE
5.
PAYMENT WAS THERFORE
ULTRAVIRES
DOCTRINE OF ULTRA VIRES
1.
ANY ACT NOT AUTHORIZED BY
MOA
2.
IF TRANSACTION ULTRA VIRES
DO NOT BIND COMPANY AND OTHER PARTY AND ALSO CANNOT BE RATIFIED
3.
IF A PERSON LENDS MONEY TO
THE COMPANY FOR ULTRA VIRES PURPOSE , CANNOT BE RECOVERED BUT GOODS PURCHASED
OUT OF IT CAN BE RECOVERED.
4.
ANY ACT WHICH IS
ULTRAVIRES THE DIRECTORS BUT INTRAVIRES THE COMPANY CAN BE RATIFIED
5.
EVEN THE ACTS ULTRA VIRES
THE AOA BUT WITH IN MOA CAN BE RATIFIED BY AMENDING AOA BY PASSING SPECIAL
RESOLUTION.
EFFECTS
VOID AB INTIO:- WHEN A COMPANY DOES NOT
AN ACT WHICH IS ULTRAVIRES. SUCH AN ACT IS ABSOLUTELY VOID
INJUNCTION :-THE COMPANY HAS NO THE
CAPACITY TO DO THOSE ACTS WHICH ARE BEYOND THE
SCOPE OF THE POWERS CONFERRED ON IT BY ITS MOA.AS SUCH A COMPANY MAY BE RESTRAINED BY AN
INJUNCTION TO DO AN ACT IF IT IS ULTRAVIRES OF ITS OBJECTS.
LONDON
COUNTRY COUNCIL V ATTORNEY GENERAL
1.
THE COUNCIL HAD POWER TO
RUN TRAMWAYS. IT RAN OMNIBUS TO FEED THE
TRAMWAYS
2.
RUNNING OF OMNIBUS WAS
UTLRAVIRES AND THE COUNCIL WAS RESTRAINED FROM RUNNING THE OMNIBUS
BREACH OF WARRANTY OF AUTHORITY :-`
1.
DIRECTORS OF THE COMPANY
ARE ITS AGENTS AND IT DUTY IS TO ACT
WITHIN THE LIMITS OF COMPANY’S POWERS
2.
EVERY AGENT WARRANTS THAT
HIS PRINCIPAL HAS POWER TO MAKE THE CONTRACT WHICH THE AGENT IS MAKING ON HIS
BEHALF
3.
WHERE THE DIRECTORS OF THE
COMPANY PERSUADE A THIRD PARTY TO ENTER INTO TRANSACTION WHICH IS ULTRAVIRES
THE COMPANY AN ACTION MAY LIE AGAINST THEM FOR BREACH OF WARRANTY
WEEKS V PROPERT
(BREACH OF WARRANTY)
(BREACH OF WARRANTY)
1.
A RAILWAY COMPANY HAD ALREADY ENTRUSTED ITS
BORROWING POWERS
2.
THE DIRECTORS OF THE
COMPANY INVITED PROPOSALS FOR LOANS ON DEBENTURES
3.
MR WEEK OFFERED A LOAN OF 500 POUND WHICH WAS ACCEPTED AND DEBENTURES WERE ISSUED
4.
THE LOAN BEING ULTRAVIRES
WAS HELD TO BE VOID
5.
HELD THAT DIRECTORS BY
INSERTING THE ADVERTISEMENT HAD WARRANTED THAT THEY HAD THE POWER TO BORROW
WHICH IN FACT THEY HAD NOT
6.
THE DIRECTORS WERE
PERSONALLY LIABLE FOR BREACH OF WARRANTY
PERSONAL LIABILITY OF DIRECTORS :
•
DUTY OF THE DIRECTORS TO
SEE THAT THE CORPORATE MONEY IS USED ONLY FOR THE LEGITIMATE BUSINESS OF THE
COMPANY
•
IF ANY MONEY IS USED ONLY
FOR THE LEGITIMATE BUSINESS OF THE COMPANY
•
IF MONEY IS UNLAWFULLY DISBURSED THE DIRECTORS SHALL BE
PERSONALLY LIABLE TO MAKE THE AMOUNT
•
SHAREHOLDERS CAN MAINTAIN
THE ACTION AGAINST DIRECTORS TO COMPEL THEM TO RESTORE TO THE COMPANY THE FUNDS
OF THE COMPANY
·
A LAKSHAMANASAWAMI
MUDALIAR V LIFE INSURANCE CORPORATION OF
INDIA
1.
THE DIRECTORS OF A COMPANY
WERE AUTHORISED TO MAKE PAYMENTS TOWARDS ANY CHARITABLE OR FOR ANY GENERAL
PUBLIC OR USEFUL OBJECT
2.
IN ACCORDANCE WITH A
SHAREHOLDERS RESOLUTIONS THE DIRECTORS PAID TWO LAC RUPEES TO A TRUST FORMED
FOR THE PURPOSE OF PROMOTING TECHNICAL AND BUSINESS KNOWLEDGE
3.
THE COMPANY HAS TAKEN OVER
BY LIC AND IT HAD NO BUSINESS LEFT OF ITS OWN
4.
HELD BY THE COURT THAT
DIRECTORS COULD NOT SPEND COMPANY’S MONEY ON ANY CHARITABLE WHICH THEY MIGHT
CHOSE
5.
PAYMENT WAS THERFORE
ULTRAVIRES
•
DIRECTORS MUST REFUND THE
SAME
·
SHARPE RE
1.
THE DIRECTORS OF A COMPANY
PAID DIVIDEND ON SHARES OUT OF CAPITAL
2.
WAS AN ULTRAVIRES ACT
3.
THE COMPANY WAS WOUND UP
4.
THE DIRECTORS WERE HELD
LIABLE TO REFUND THE MONEY TO THE COMPANY
5.
BUT THE PERSON WHO
RECEIVES THE MONEY WITH THE KNOWLEDGE THAT THE PAYMENT TO HIM WAS ULTRAVIRES IS LIABLE TO INDEMNIFY THE DIRECTORS WHO REFUNDED
THE MONEY TO COMPANY
ULTRAVIRES ACQUIRED
PROPERTY: A COMPANY CAN PROTECT ITS PROPERTY ACQUIRED BY AN ULTRAVIRES EXPENDITURE.
LIKE IN A CASE WHERE THE COMPANY’S TELEPHONE WIRES WERE CUT. AND IT HAD NO
POWER IN THE MOA TO PUT UP THE WIRES.HELD THAT ENTITLED TO RECOVER DAMAGES
·
UTLRAVIRES CONTRACTS :- A COMPANY BY A COMPANY OUTSIDE ITS OBJECTS IS WHOLLY VOID AND NO LEGAL
EFFECT
REPORT CANNING AND LAND
INVESTMENT COMPANY :- A COMPANY OPERATED A
RICE MILL BEYOND ITS POWERS
·
THE COMPANY SOLD RICE TO
CERTAIN BUYERS AND THE BUYERS HAD TO SELL THE RICE OWING TO ITS INFERIOR
QUALITY AT CONSIDERABLE LOSS
·
THE COMPANY GAVE THEM
DRAFTS PROMISING TO PAY FOR THE LOSS AND THE COMPANY WENT INTO LIQUIDATION
·
HELD THAT THE PURCHASERS
COULD NOT SUE THE COMPANY FOR DAMAGES AS TRADING IN RICE WAS TRANSACTIONS
ULTRAVIRES THE COMPANY
·
ULTRAVIRES BORROWING :-
1.
WHERE A PERSON LENDS MONEY
TO A COMPANY AND THE COMPANY HAS EITHER NO BORROWING POWERS OR HAS ALREADY
EXCEEDED THEM OR BORROWING FOR THE PURPOSE
WHICH IS ULTRAVIRES
1.
CONTRACT SI VOID AND NO
ACTION CAN BE BROUGHT
2.
ULTRAVIRES BORROWING DOES
NOT CREATE THE RELATIONSHIP OF CREDITOR AND DEBTOR
3.
ONLY SOLUTION IS IN REM
AND NOT IN PERSONAM
4.
THE LENDER MAY BE ABLE TO
RECOVER HIS MONEY :
1.
IT MAY BE ABLE TO ASSERT A
CLAIM TO SUBROGATION WHERE THE COMPANY HAS USED THE MONEY TO PAY INTRAVIRES
DEBTS
1.
THE LENDER MAY BE ABLE TO
TRACE HIS MONEY INTO ASSETS WHICH THE COMPANY HAS PURCHASED
2.
SINCLAIR V BROUGHAM
3.
A BUILDING SOCIETY STARTED
AN ULTRA VIRES BANKING BUSINESS AND BORROWED LARGE SUMS OF MONEY
4.
THE SOCIETY WENT INTO
LIQUIDATION
5.
THE HOUSE OF LORD HELD
THAT CUSTOMERS WHO HAD LENT ON
ULTRAVIRES CONTRACT COULD NOT SUE
6.
BUT WERE ALLOWED TO TRACE
THEIR FUNDS INTO MONEY ON THE SOCIETY
·
ULTRAVIRES TORTS
1.
A COMPANY WILL BE LIABLE
FOR TORTS OR CRIMES COMMITTED IN THE PURSUIT OF THE STATED OBJECTS
2.
BUT A TORT COMMITTED IN
THE COURSE OF ULTRAVIRES THE COMPANY IS NOT LIABLE
·
EXCEPTIONS TO DOCTRINE OF
ULTRAVIRES
1.
AN ACT WHICH IS INTRA
VIRES THE COMPANY BUT OUTSIDE THE AUTHORITY OF THE DIRECTORS MAY BE RATIFIED BY
THE SHAREHOLDERS IN PROPER FORM
2.
AN ACT WHICH IS INTRAVIRES
THE COMPANY BUT DONE IN IRREGULAR MANNER MAY BE VALIDATED BY THE CONSENT OF THE
SHAREHOLDERS
3.
IF THE COMPANY HAS ACQUIRED
ANY PROPERTY THROUGH AN INVESTMENT WHICH IS ULTRAVIRES THE COMPANY’S RIGHT OVER
SUCH A PROPERTY SHALL BE SECURED
4.
WHILE APPLYING THE
DOCTRINE OF ULTRAVIRES THE EFFECTS WHICH ARE INCIDENTAL OR CONSEQUENTIAL TO THE
ACT SHALL NOT BE INVALID UNLESS THEY ARE EXPRESSLY PROHIBITED
5.
CERTAIN ACTS WHICH ARE
IMPLIED
6.
IF AN ACT OF THE COMPANY
IS ULTRAVIRES THE AOA,THE COMPANY CAN ALTER ITS AOA
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