Doctrine of Ultra Vires under Companies Act: Meaning, Development and Important Cases
Doctrine of Ultra Vires under Companies Act
Meaning of Ultra Vires
Ultra Vires is a Latin term meaning "beyond the powers."
In company law, it refers to acts or transactions done beyond the scope of powers conferred on the company by its Memorandum of Association (MOA) or Articles of Association (AOA).
Such acts are considered void and unenforceable against the company.
Key Concept
A company, being an artificial legal entity, can only act through its objects clause mentioned in the MOA.
Any act outside these objects is ultra vires the company and thus invalid.
Purpose of Doctrine
To protect shareholders and creditors by ensuring the company does not engage in activities beyond its stated objectives.
To provide certainty and legality in the company’s operations.
Development of the Doctrine
| Phase | Description |
|---|---|
| Strict Application (19th - Early 20th Century) | Courts strictly enforced ultra vires doctrine; any act beyond MOA was void. Third parties could not enforce contracts with the company if acts were ultra vires. |
| Relaxation of Doctrine (Mid-20th Century onwards) | Courts began protecting innocent third parties, allowing contracts to be upheld if done in good faith and within apparent authority of directors. |
| Statutory Modifications (Companies Act, 2013 & Predecessors) | Modern company laws limit the strictness by allowing companies to have unrestricted objects clause, reducing ultra vires issues. Statutes now protect third parties dealing in good faith. |
Doctrine in Companies Act, 2013
The Companies Act, 2013 has softened the ultra vires doctrine by:
Allowing companies to have unrestricted objects clause (Section 4(1)(c))—companies can specify that objects include "any lawful business."
Section 62 and Section 180 restrict the powers of directors but provide protection to third parties acting in good faith.
Contracts made by companies outside the objects clause may still be valid if done in good faith with third parties.
Important Cases on Doctrine of Ultra Vires
| Case Name | Summary | Significance |
|---|---|---|
| Ashbury Railway Carriage Co. v. Riche (1875) | Company entered contract outside its objects clause. The court held the contract ultra vires and void. | Established strict application of ultra vires doctrine. |
| Attorney General v. Great Eastern Railway Co. (1880) | Company engaged in activities beyond MOA. Court invalidated the acts. | Reinforced the doctrine. |
| Bell Houses v. City Wall Properties (1966) | Introduced idea of protecting third parties acting in good faith. | Moderated strictness, allowing contracts to stand if parties acted in good faith. |
| Rolled Steel Products (Holdings) Ltd. v. British Steel Corp. (1986) | Further protection for third parties and directors acting within apparent authority. | Limited doctrine impact on third parties. |
| Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964) | Held that ultra vires acts are void and cannot bind the company. | Affirmed doctrine in Indian context. |
Summary
| Aspect | Explanation |
|---|---|
| Meaning | Acts beyond company’s powers (MOA) |
| Effect | Ultra vires acts are void |
| Protection to Third Parties | Modern law protects bona fide third parties |
| Current Position (Companies Act, 2013) | Companies can have broad objects reducing ultra vires risks |
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