Updated: Dec 16, 2021
What is Ultra Vires?
The term “Ultra” means beyond and “Vires” means powers. The term, therefore, means the doing of an act, which is beyond the legal power, and authority of the company. It is considered as an act outside the scope of the object of the company.
Doctrine of Ultra Vires
The Memorandum, being the constitution of the company sets out the principal objectives, powers, scope and its area of operation, both internal and external. A company, therefore, can do anything within the scope of the powers specified in the Memorandum.It has also an implied power to do all such things that are fairly incidental to its main objects.
If the company does anything which is beyond the powers specified in the Memorandum it shall be construed as an Ultra Vires act.
Why the Doctrine?
The objective of the Doctrine of Ultra Vires is to ensure the shareholders and the creditors that the fund and assets of the company will not be used for any purpose other than those specified in the Memorandum. Especially the creditors, while dealing with the company can make themselves aware of the fact whether his transaction with the company is ultra vires or not. If it is found ultra vires, he can avoid such transaction and thereby safeguard his interest.
Effects of an Ultra Vires Act
The effects of an ultra vires act can be summed up as follows:
1. An ultra vires act will be wholly void and it will not bind the company; neither the company nor the outsider can enforce the contract.
2. Any member of the company can bring injunction against the company to prevent it from doing any ultra vires act.
3. The directors of the company will be personally liable to make good the funds used for the ultra vires acts.
4. Where a company’s money has been used ultra vires to acquire some property, the right of the company over such property is held secure.
5. Since Ultra Vires contracts are treated as invalid from the outset, it cannot become Intra Vires by reason of estoppel or ratification.
6. Ultra Vires borrowing does not create the relationship of debtor and creditor. The only possible remedy in such case is in rem and not in personam.
Can an Ultra Vires Act be Ratified?
An ultra vires act cannot be ratified even by the whole body of the shareholders and make it binding on the company. In other words, even the shareholders cannot do an ultra vires act. This is the peculiar feature of this doctrine.