Topics Covered in this article
Setting the Frame
The term ultra vires is a Latin locution for “beyond the powers” or “beyond the authority”. It is used to describe acts which require legal authority to perform but are done without such authority. Such acts are considered void in the eyes of law. It means that if a person or an entity does any act which it is legally not authorised to do and by such act, it causes any damage (violation of any legal right), such act cannot be enforced against that entity in a court of law. In other words, it means that if later, the person or entity refuses to perform the act, no specific performance of that act can be claimed because the act is ultra vires or void. Doctrine of Ultra Vires
For instance, ABC Ltd. is a company engaged in the business of providing fire and marine insurance. It enters into a contract with Mr. X to provide him life insurance and takes a sum of money as advance. Later if the company refuses to perform the contract or there is a loophole in the life insurance policy, the company cannot be held liable since providing life insurance was beyond the powers of the company. This is known as ultra vires.
The doctrine of ultra vires and the legal issue giving rise to the doctrine can arise in three areas of law:
- Company Law: When the company undertakes any activity not specifically provided for in the object clause of the Memorandum of Association (hereinafter referred as ‘MoA’) of the company.
- Constitutional Law: When the Centre or State Government passes any legislation that it does not have the authority to pass under Schedule 7 of the Constitution.
- Administrative Law: When a subordinate or delegated legislation is passed without the authority to make such legislation.
This article endeavours to analyse the doctrine of ultra vires under Company Law and more specifically under the Companies Act, 2013. The article shall delve into the questions such as meaning of the rule, its application in various areas of company law and exceptions to the rule.
Memorandum of Association – Form and Content
A company is said to be established after the certificate of incorporation from the Registrar of Companies is granted after a duly filled application form in Form INC-1 is submitted. The form requires two most essential documents to be attached with it, i.e. the Memorandum of Association (hereinafter referred as MoA) and the Articles of Association (hereinafter referred as AoA). The MoA is the primary document of a company, also known as the Charter or the Constitution of the company. The principalismunus of the MoA is to define the relationship of the company with outsiders, i.e. its customers or investors (excluding shareholders).
Palmer believes that the MoA is “a document of great importance in relation to the proposed company”. According to Section 4 of the Companies Act, 2013, the MoA of the company must contain the following information about the company:
- Name of the company with indication as to whether it is a public limited company or private limited company.
- Name of the State where the registered office of the company is situated.
- The objectives of the company for which it is incorporated.
- Extent of liability of the members and/or shareholders and
- The amount of share capital with which the company is to be incorporated and the division of such capital into requisite number of shares.
The Objects Clause – Meaning Thereof
The Companies Act, 2013 provides that every MoA must state the objects of the proposed company. Hence, as it rests with the subscribers to the MoA to declare the objects, it follows that the subscribers are, by the Act, furnished with the means not merely to initiate the creation of a corporation authorised by statute but also to form the body for such purposes as they think fit, provided, of course, that those purposes are not illegal.
The Objects Clause – Categories Thereof The object cause is usually divided into three categories, i.e. ‘the main object’, ‘the ancillary objects’ and ‘other objects’. Accomplishing the main objects in the object clause is the raison d’être of a company, and performing any activities or entering into any transactions by the company in furtherance of achieving the main object are the ancillary objects.
The Objects Clause – Purpose interpreted by the Courts
The object clause is considered to be the heart and soul of the MoA; it defines the objects for the existence and operation of the company. As was observed in Cotman v. Brougham, the purpose of the objects clause is “to enable the shareholders, creditors and those dealing with the company to know what its permitted range of enterprise is”. There are three essential legal functions that make the object clause momentous and needed to be considered. Firstly, to define the capacity of the company with respect to third parties. Secondly, to provide the limits on the authority of the directors as agents of the company. Lastly, since the object clause is a part of the MoA of the company, it becomes a binding contract between the members of the company inter se and between each member and the company under Section 10 of the Companies Act, 2013.
Interpretation of the Objects Clause
Section 10 makes every terms and clauses in the MoA of a company binding upon the company and its members. It means that the company is also bound by the objectives enlisted in the objects clause of the MoA. Therefore, interpretation of the MoA acquires significant importance to determine the scope of activity of the company. Lord Chelmsford observed in Scott v. Corporation of Liverpool that to construe a document means to arrive at the meaning intended to be given to the document by the concerned parties. Similarly, the Court of Appeal pointed out that ‘the natural and ordinary meaning of the language used in several clauses should be taken into consideration for determining whether a particular transaction falls or does not fall within the objects stated in the MoA’.
Strict interpretation of Object Clause
In general, the courts have adopted a strict sense of interpretation or in legal terms, the literal rule of interpretation of object clause. It means that the object clause is construed according to the words prescribed in the clause and very slight swaying from such objects can be allowed. In Re: Eastern Telegraph Co. Ltd., the English Chancery Division held that ‘if the objects clause has a specific main object followed by general words, the general words should not be interpreted as enabling the company to throw its main object altogether’.
To sum up, in modern law, the courts are unlikely to hold any contract (in the form of transaction) to be null and void unless, on a reasonable construction of the objects clause, there are compelling grounds to arrive at the result.
The Doctrine of Ultra Vires
A company is incorporated under the Companies Act, 2013 and in accordance to the terms set out in its MoA. Thus, a company which owes its incorporation to a statutory authority, cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by the Statute or the MoA. In precise terms, a company is bound by the provisions of the Companies Act, 2013 and that agreed and enlisted in the MoA. Any act or transaction conducted beyond such powers will be ineffective and void. This is known as the ‘doctrine of ultra vires’.
The Joint Stock Companies Act, 1856, enacted in the United Kingdom brought the dawn of an era of emerging joint stock companies. The legislation provided a lucid administrative procedure enabling any group of seven persons or more to incorporate a limited liability company and commence the business. This resulted in the indiscriminate augmentation in the incorporation of joint stock companies and diluted the regulatory mechanisms. As a result, companies started ignoring the objective for which they were established but focussed only on maximising profits, and also, since liability was limited, there was no threat of personal loss.
After the advent of joint stock companies, the rule of ultra vires was for the first time laid down by the House of Lords in the much celebrated case of Ashbury Railway Carriage & Iron Co. v. Riche. In this case, the objects clause of the MoA of the appellant company allowed it to “make or sell or lend on hire, railway carriages and waggons; to carry on the business of mechanical engineers and general contractor … and to do all such other things as are necessary and incidental to all or any of such objects”. The company entered into a contract with the plaintiff (here, Riche) for financing of the construction of a railway line in Belgium.
The House of Lords held that the contract is ultra vires the objects of the company and void. It further stated that any act which becomes void due to the vice of ultra vires cannot be ratified even by unanimous consent of all the shareholders. Holding such, Lord Cairns explained the purpose of the doctrine in the following two points:
- To allow the investors and stakeholders to know the objects of the company in which their money is employed and thereby protect them from any unauthorised act or transaction; and
- To protect the creditors by ensuring that the funds of the company generated through the creditors are not dissipated in unwarranted or forbidden activities.
Evolution of the Doctrine of Ultra Vires
After the doctrine was propounded in Ashbury, all it required was exposition; guidelines as to how the rule should be applied and in what circumstances should companies be exempted. In the absence of any particular legislation, this burden fell on shoulders of the judiciary which engaged itself in the task of evolution of this rule. Five years after Ashbury was decided, the English Court of Appeal ruled in Attorney General v. Great Eastern Railway that the rule must be “reasonably understood and applied”. The court held that if any act can fairly be regarded as an act incidental or ancillary to what is allowed by the statute or the MoA, the courts ought not to declare such act ultra vires.
One of the earliest cases to adopt the doctrine in India was Dr. Lakshmanaswamy Mudaliar v. LIC.The apex court in this case held that it is ‘proscribable for a company to act beyond the scope of its MoA. An act beyond the objects mentioned in the MoA is ultra vires and void and cannot be ratified’. The Doctrine of Ultra Vires was further upheld by the Calcutta High Court in Radha Cinemas & Co. v. Chitralipi Films. The court averred that ‘where no connection or nexus exists between the exercise of a power and the attainment of the prescribed object, the exercise of such power will be ultra vires’.
Application of the Doctrine
The Doctrine of Ultra Vires has to be applied reasonably and only after due consideration to the interests of the company. In the case of Lee Behrens & Co. ltd., Eve J. laid down the three fundamental tests to be followed by a company to avoid the application of the doctrine of ultra vires. These are:
- Is the transaction reasonably incidental tothe company’s business?
- Is it a bona fide transaction?
- Is it done for the benefit of and to promote the prosperity of the company?
If the answer to these questions is in affirmative, the court shall hold the transaction intra vires. This test was found to be ambiguous and subjective as it raised several questions such as whether the transaction has to be outside the capacity of the company or merely an abuse of authorised power will amount to an ultra vires act. Therefore, to fill the lacuna in the law existing at the time of Lee’s case, a new four point rule was established by the court in Rolled Steel Products Ltd. v. British Steel Corp.
The rules as laid down by Wilkinson J. are:
- To be ultra vires, a transaction has to be outside the capacity of the company and not merely in excess or abuse of the powers of the company.
- The capacity of the company is determined from its objects. There can be provisions in the objects clause that provide only power to the company but do not lay down any object. Thus, to determine the capacity, those objects must be considered which are able to exist independently irrespective of other objects.
- If a company enters into a transaction which is intra vires but in excess or abuse of its powers, such transaction is voidable at the option of the shareholders.
- A third party, who has the notice of any activity performed by the company in excess of its powers, cannot enforce such transaction against the company and shall be held accountable for any money received by the company from the third party.
These rules form the basis for application of the doctrine in the present company law jurisprudence. Besides the above rules, if the company engages into any activity contrary to the law but enabled by its MoA, such activity shall also be ultra vires and void.
Who Can Plead and When?
The main object of the Doctrine of Ultra Vires is to protect the interest of the company from zealous directors and members who act beyond their authorised powers motivated to earn profits. This doctrine enables the company to avoid any such act or transaction that the members were not authorised to perform and which shall be detrimental to the interest of the company. Since the doctrine was propounded to protect the company’s interest, it is obvious that it cannot be used against the interest of the company. It means that a person (a creditor or investor) who enters into a contract with the company knowing it to be beyond the powers of the company cannot avoid the performance on his part using the doctrine of ultra vires.
The question was posed before the Queen’s Bench in Anglo Overseas Agencies Ltd. v. Greenbut however, the court did not require to answer the same as it concluded that the transaction was intra vires. It was again raised in Bell Houses Ltd. v. City Wall Properties Ltd.. In this case, the managing director, representing the company, provided consultancy services outside the scope of company’s objects and later refused to pay the consultancy charges collected from the customers to the company claiming that the transaction was ultra vires and hence, void ab initio. The court made a very critical observation in this case stating that “others cannot defeat the claims of the company on grounds of ultra vires when such claim has already matured”. The court held that the plea of ultra vires can be taken only when the act or transaction is in an executory stage.
In India, the issue was resolved by the division bench of the Madras High Court in Sivashanmugham (S) v. Butterfly Marketing Pvt. Ltd.. The court held that ‘a third party may not take advantage of the doctrine of ultra vires in order to avoid the performance of obligations voluntarily taken with full opportunity to know the extent of the company’s power before entering into the transaction’.
Rights of the Shareholders vis-à-vis the Rule of Ultra Vires
According to the rule laid down in Foss v. Harbottle, the shareholders of a company do not have a separate cause of action for any wrong done to the company. It means that the company and only the company can bring action against the wrongdoer to protect the interests of the shareholders. However, it is considered to be an accepted exception to this rule that a shareholder can bring a direct action to restraint the company and the managers from pursuing any ultra vires activities. Consequently, the shareholders can also bring an action against the directors or managing authorities of the company to get an order to make good the loss caused to the company owing to their unauthorised acts.
Rights of Minority Shareholders
Now, when the unauthorised act affects the majority shareholders, it is very convenient to file a suit and get an order of injunction against the company and the directors. However, the question arises can minority shareholders bring action to restrain the joint decision of the company directors and the majority shareholders. The question was answered in two vital cases, i.e. the Australian case of Oatmont Pty. Ltd. v. Australian Agriculture Company Ltd. and the Indian case of Bharat Insurance Co. Ltd. v. Kanhaya Lal Gauba..
The courts in both the cases held that the minority shareholders of a company may bring an action to restraint the controllers of the company from jeopardising the assets of the company. The court further added that even a single member of a company can maintain a suit if it relates to the interpretation of the true meaning of the objects clause of the MoA of the company.
Charitable Expense and Ultra Vires Rule
Under Section 181 of the Companies Act, 2013, the board of directors of a company can contribute any amount to a bona fide charitable trust. The upper limit of Rs. 50,000 under the Companies Act, 1956 has been removed by the Companies Act, 2013, however, prior permission of the company in general meeting is necessary to contribute any amount exceeding 5% of the average net profits of three immediately preceding financial years. This power of the company is derived from the statute itself and its vires cannot be challenged before any court of law
Case of Simmonds v. Heffer
‘League against Cruel Sports Ltd.’ was a not for profit corporation working to prevent sports hurling cruelty upon animals. The company contributed £ 80,000 to a political party which claimed to ban certain sports that exhibit animal cruelty after it came to power. The money was donated in two parts; £ 30,000 was given with specific direction to use it to advertise the objectives of the company and the remaining £ 50,000 was given without any direction. The payment of £ 30,000 was held to be proper since it was bona fide contribution to advertise the commitment of the company towards animal welfare. However, the court held that £ 50,000 contribution was ultra vires the company’s powers.
Conclusion – Reformation Brought to the Doctrine of Ultra Vires
The first attempt to reform the rule was made by the British Parliament in 1972 by enacting the European Communities Act. Under Section 9 of the Act, the first European Economic Community’s Company Law Directive was implemented. The Directive required coordination of safeguards to protect the interests of the company and the shareholders and one such safeguard was the rule of ultra vires. For the first time, the doctrine was penned down in the form of a statute but as Palmer states, its purpose was only to do the minimize necessity to comply with the community guidelines. Not very late, the European Communities Act was substituted by a new Companies Act, 1989 which added a new provision, Section 35 which provides:
“The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s memorandum”.
The effect of the section was to abolish the doctrine
of ultra vires completely and leave
the legal consequence of violation of objects clause in the hands of common
law. The doctrine is still applicable in India and by virtue of Section 10 of
the Companies Act, 2013, a company or its controllers cannot go beyond the
capacity of the company as enumerated in the objects clause of the MoA.
A.K. Majumdar et al, Taxmann’s Company Law and Practice 119 (2014).
Ibid at 110.
1 Palmer & Morse, Palmer’s Company Law 2067 (2004).
Companies Act, No. 18, Act of Parliament, §4(1) (a), 2013 (India).
Companies Act, No. 18, Act of Parliament, §4(1) (b), 2013 (India).
Companies Act, No. 18, Act of Parliament, §4(1) (c), 2013 (India).
Companies Act, No. 18, Act of Parliament, §4(1) (d), 2013 (India).
Companies Act, No. 18, Act of Parliament, §4(1) (e), 2013 (India).
Companies Act, No. 18, Act of Parliament, §4(1) (c), 2013 (India).
Cotman v. Brougham, 1918 AC 514.
1 M.C. Bhandari, Guide to Company Law Procedure 167 (20th ed. 2017).
Scott v. Corporation of Liverpool, (1858) 3 De G. & J. 334.
Bell Houses Ltd. v. City Wall Properties Ltd. (1966) 2 All ER 674 (CA).
In Re: Eastern Telegraph Co. Ltd., (1947) 2 All ER 104.
Palmer, supra note 3 at 2126 – 27.
Majumdar, supra note 1 at 119.
 Mayson et al., Mayson, French and Ryan on Company Law 606 – 07 (31st ed. 2014 – 15).
Ashbury Railway Carriage & Iron Co. v. Riche, (1875) L.R. 7 H.L. 653.
Palmer, supra note 3 at 2604.
Majumdar, supra note 1 at 120.
Attorney General v. Great Eastern Railway, (1880) 5 AC 473.
Dr. LakshmanaswamyMudaliar v. LIC, AIR 1963 SC 1185.
Radha Cinemas & Co. v. Chitralipi Films,
Bhandari, supra note 11 at 191.
Re: Lee Behrens & Co. ltd., (1932) 2 Ch 46.
Rolled Steel Products Ltd. v. British Steel Corp., 1984 BCLC 466.
Ibid at 517 – 18.
 1 A. Ramaiya, Guide to the Companies Act 367 (16th ed. 2004).
Anglo Overseas Agencies Ltd. v. Green, (1960) 3 All ER 244.
Sivashanmugham (S) v. Butterfly Marketing Pvt. Ltd., (2001) 105 Com. Cases 763.
Foss v. Harbottle, (1843) 67 ER 189.
Ramaiya, supra note 24.
Oatmont Pty. Ltd. v. Australian Agriculture Company Ltd., (1991) 5 ACSR (Aust).
Bharat Insurance Co. Ltd. v. Kanhaya Lal Gauba, (1934) 4 Com. Cases 411 (Lah).
 Bhandari, supra note 11 at 211 – 12.
Simmonds v. Heffer, 1983 BCLC 298 (Ch. D).
Directive 68/151 of March 9, 1968, ( J.O. L65/8).
Palmer, supra note 3 at 2129 – 30.