CORPORATE LAW

DOCTRINE OF ULTRA

VIRES

INTRODUCTION: The object clause of the Memorandum of the company contains

the object for which the company is formed. An act of the company

must not be beyond the objects clause, otherwise it will be ultra

vires and, therefore, void and cannot be ratified even if all the

members wish to ratify it. This is called the doctrine of ultra

vires, which has been firmly established in the case of Ashtray

Railway Carriage and Iron Company Ltd v. Riche1.

In this case the memorandum of association of a company thus

defined its objects: “The object for which the company is

established are to make and sell, or lend on hire, railway

carriages and wagons and all kinds of railway plants, etc., to

carry on the business of mechanical engineers, and general

contractors ….” The company entered into a contract with Riche, a

firm of railway contractor to finance the construction of a

railway line in Belgium. The company, however, repudiated the

contract as ultra vires. And Riche brought an action for damages

for breach of contract. His contentions were that the contract in

question came well within the meaning of the words “general

contractors” and, was, therefore, within the power of the1 (1875) LR 7 HL 653 

1

CORPORATE LAW company, and, secondly, that the contractor was ratified by a

majority of the shareholders. But the House of Lords held that

the contract was ultra vires and, therefore, null and void.

The expression ultra vires consist of two words: ultra and

vires. Ultra means beyond and vires means power. Thus, the

expression ultra vires means an act beyond the powers. Here the

expression ultra vires is used to indicate an act of the company

which is beyond the powers conferred on the company by the

objects clause of its memorandum. An ultra vires act is void and

cannot be ratified even if all the directors wish to ratify it.

The ultra vires act or transaction is different from an illegal

act or transaction, although both are void.

ORIGIN AND DEVELOPMENT:   Doctrine of ultra

vires has been developed to protect the investors and creditors

of the company. The doctrine of ultra vires could not be

established firmly until 1875 when the Directors, &C., of the

Ashbury Railway Carriage and Iron Company (Limited) v Hector

Riche, was decided by the House of Lords. Later on, in the case

of Attorney General v. Great Eastern Railway Co.2, this doctrine

was made clearer. In this case the House of Lords affirmed the

2

CORPORATE LAW principle laid down in Ashbury Railway Carriage and Iron Company

Ltd v. Riche but held that the doctrine of ultra vires “ought to

be reasonable, and not unreasonable understood and applied and

whatever may fairly be regarded as incidental to, or

consequential upon, those things which the legislature has

authorized, ought not to be held, by judicial construction, to be

ultra vires.”  

The doctrine of ultra vires was recognized in Indian

the case of Jahangir R. Mod v. Shamji Ladha 2  and has been well

established and explained by the Supreme Court in the case of A.

Lakshmana swami Mudaliar v. Life Insurance Corporation Of India3.

Even in India it has been held that the company has power to

carry out the objects as set out in the objects clause of its

memorandum, and also everything, which is reasonably necessary to

carry out those objects. For example, a company which has been

authorized by its memorandum to purchase land had implied

authority to let it and if necessary, to sell it. However it has

been made clear by the Supreme Court that the company has, no

doubt, the power to carry out the objects stated in the objects

clause of its memorandum and also what is conclusive to or

incidental to those objects, but it has no power to travel beyond

the objects or to do any act which has not a reasonable proximate

connection with the object or object which would only bring an

indirect or remote benefit to the company.   To ascertain whether

a particular act is ultra vires or not, the main purpose must

2 (1866-67) 4 Bom HCR 1853 1963 AIR 1185, 1963 SCR Supl. (2) 887

3

CORPORATE LAW first be ascertained, then special powers for effecting that

purpose must be looked for, if the act is neither within the main

purpose nor the special powers expressly given by the statute,

the inquiry should be made whether the act is incidental to or

consequential upon. An act is not ultra vires if it is found:  

(a) Within the main purpose, or

(b) Within the special powers expressly given by the statute to

effectuate the main purpose, or

(c) Neither within the main purpose nor the special powers

expressly given by the statute but

incidental to or consequential upon the main purpose and a thing

reasonably done for effectuating the main purpose.

The doctrine of ultra vires played an important role in the

development of corporate powers. Though largely obsolete in

modern private corporation law, the doctrine remains in full

force for government entities. An ultra vires act is one beyond

the purposes or powers of a corporation. The earliest legal view

was that such acts were void. Under this approach a corporation

was formed only for limited purposes and could do only what it

was authorized to do in its corporate charter. This early view

proved unworkable and unfair. It permitted a corporation to

accept the benefits of a contract and then refuse to perform its

obligations on the ground that the contract was ultra vires.

4

CORPORATE LAW

The doctrine also impaired the security of title to property

in fully executed transactions in which a corporation

participated. Therefore, the courts adopted the view that such

acts were voidable rather than void and that the facts should

dictate whether a corporate act should have effect. Over time a

body of principles developed that prevented the application of

the ultra vires doctrine. These principles included the ability

of shareholders to ratify an ultra vires transaction; the

application of the doctrine of estoppel, which prevented the

defense of ultra vires when the transaction was fully performed

by one party; and the prohibition against asserting ultra vires

when both parties had fully performed the contract. The law also

held that if an agent of a corporation committed a tort within

the scope of the agent's employment, the corporation could not

defend on the ground that the act was ultra vires. Despite these

principles the ultra vires doctrine was applied inconsistently

and erratically.

Accordingly, modern corporation law has sought to remove the

possibility that ultra vires acts may occur. Most importantly,

multiple purposes clauses and general clauses that permit

corporations to engage in any lawful business are now included in

the articles of incorporation. In addition, purposes clauses can

now be easily amended if the corporation seeks to do business in

new areas. For example, under traditional ultra vires doctrine, a

corporation that had as its purpose the manufacturing of shoes

could not, under its charter, manufacture motorcycles. Under

5

CORPORATE LAW modern corporate law, the purposes clause would either be so

general as to allow the corporation to go into the motorcycle

business, or the corporation would amend its purposes clause to

reflect the new venture. State laws in almost every jurisdiction

have also sharply reduced the importance of the ultra vires

doctrine. For example, section 3.04(a) of the Revised Model

Business Corporation Act, drafted in 1984, states that "the

validity of corporate action may not be challenged on the ground

that the corporation lacks or lacked power to act." There are

three exceptions to this prohibition: it may be asserted by the

corporation or its shareholders against the present or former

officers or directors of the corporation for exceeding their

authority, by the attorney general of the state in a proceeding

to dissolve the corporation or to enjoin it from the transaction

of unauthorized business, or by shareholders against the

corporation to enjoin the commission of an ultra vires act or the

ultra vires transfer of real or personal property. Government

entities created by a state are public corporations governed by

municipal charters and other statutorily imposed grants of power.

These grants of authority are analogous to a private

corporation's articles of incorporation.

Historically, the ultra vires concept has been used to

construe the powers of a government entity narrowly. Failure to

observe the statutory limits has been characterized as ultra

vires. In the case of a private business entity, the act of an

employee who is not authorized to act on the entity's behalf may,

6

CORPORATE LAW nevertheless, bind the entity contractually if such an employee

would normally be expected to have that authority. With a

government entity, however, to prevent a contract from being

voided as ultra vires, it is normally necessary to prove that the

employee actually had authority to act. Where a government

employee exceeds her authority, the government entity may seek to

rescind the contract based on an ultra vires claim.

EFFECT OF ULTRA VIRES TRANSACTIONS:  

A contract beyond the objects clause of the company’s memorandum

is an ultra vires contract and cannot be enforced by or again1st

the company as was decided in the cases of In Re, Jon Beaufore

(London) Ltd4 ., In S. Sivashanmugham And Others v. Butterfly

Marketing Private Ltd5., A borrowing beyond the power of the

company (i.e. beyond the objects clause of the memorandum of the

company) is called ultra vires borrowing.   However, the courts

have developed certain principles in the interest of justice to

protect such lenders. Thus, even in a case of ultra vires

borrowing, the lender may be allowed by the courts the following

reliefs:  

4

54 [2001] 105 Comp Mad 763

5 (2005) 5 CompLJ 117 Mad

7

CORPORATE LAW (1) Injunction --- if the money lent to the company has not been

spent the lender can get the injunction to prevent the company

from parting with it.

(2) Tracing--- the lender can recover his money so long as it is

found in the hands of the company in its original form.

(3) Subrogation---if the borrowed money is applied in paying off

lawful debts of the company, the lender can claim a right of

subrogation and consequently, he will stand in the shoes of the

creditor who has paid off with his money and can sue the company

to the extent the money advanced by him has been so applied but

this subrogation does not give the lender the same priority that

the original creditor may have or had over the other creditors of

the company.  

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES:   There are, however, certain

exceptions to this doctrine, which are as follows:

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 intra vires the company but done in an

irregular manner, may be validated by the consent of the

shareholders. The law, however, does not require that the consent

of all the shareholders should be obtained at the same place and

in the same meeting. 8

CORPORATE LAW 3. If the company has acquired any property through an

investment, which is ultra vires, the company’s right over such a

property shall still be secured.

4. While applying doctrine of ultra vires, the effects which are

incidental or consequential to the act shall not be invalid

unless they are expressly prohibited by the Company’s Act.

5. There are certain acts under the company law, which though not

expressly stated in the memorandum, are deemed impliedly within

the authority of the company and therefore they are not deemed

ultra vires. For example, a business company can raise its

capital by borrowing.

6. If an act of the company is ultra vires the articles of

association, the company can alter its articles in order to

validate the act.  

 

Eley v The Positive Government Security Life

Assurance Company Limited6, It was held that the articles of

association were a matter between the shareholders inter se, or

the shareholders and the directors, and did not create any

contract between the plaintiff and the company and article is

either a stipulation which would bind the members, or else a

mandate to the directors. In either case it is a matter between

the directors and shareholders, and not between them and the

plaintiff.   

6 (1875-76) L.R. 1 Ex. D. 88

9

CORPORATE LAW

The Directors, &Co., of the Ashbury Railway Carriage and

Iron Company (Limited) v Hector Riche7, he objects of this

company, as stated in the Memorandum of Association, were to

supply and sell the materials required to construct railways, but

not to undertake their construction. The contract here was to

construct a railway. That was contrary to the memorandum of

association; what was done by the directors in entering into that

contract was therefore in direct contravention of the provisions

of the Company Act, 1862 It was held that this contract, being of

a nature not included in the Memorandum of Association, was ultra

vires not only of the directors but of the whole company, so that

even the subsequent assent of the whole body of shareholders

would have no power to ratify it. The shareholders might have

passed a resolution sanctioning the release, or altering the

terms in the articles of association upon which releases might be

granted. If they had sanctioned what had been done without the

formality of a resolution, that would have been perfectly

sufficient. Thus, the contract entered into by the company was

not a voidable contract merely, but being in violation of the

prohibition contained in the Companies Act, was absolutely

void. It is exactly in the same condition as if no contract at

all had been made, and therefore a ratification of it is not

possible. If there had been an actual ratification, it could not

have given life to a contract which had no existence in itself;

but at the utmost it would have amounted to a sanction by the

7 [1874-75] L.R. 7 H.L. 653

10

CORPORATE LAW shareholders to the act of the directors, which, if given before

the contract was entered into, would not have made it valid, as

it does not relate to an object within the scope of the

memorandum of association.

  Shuttleworth v Cox Brothers and Company (Maidenhead),

Limited, and Others8, It was held that the contract, if any,

between the plaintiff and the company contained in the articles

in their original form was subject to the statutory power of

alteration and if the alteration was bona fide for the benefit of

the company it was valid and there was no breach of that

contract; there was no ground for saying that the alteration

could not reasonably be considered for the benefit of the

company; there being no evidence of bad faith, there was no

ground for questioning the decision of the shareholders that the

alteration was for the benefit of the company; and, the plaintiff

was not entitled to the relief claimed.

  In Re New British Iron Company9, It was held that the

article is not in itself a contract between the company and the

directors; it is only part of the contract constituted by the

articles of association between the members of the company inter

se. But where on the footing of that article the directors are

employed by the company and accept office the terms of art. 62

are embodied in and form part of the contract between the company

and the directors. Under the article as thus embodied the

directors obtain a contractual right to an annual sum of 1000l as8 [1972] 2 K.B. 99 [1898] 1 Ch. 324

11

CORPORATE LAW remuneration. It was held also that although these provisions in

the articles were only part of the contract between the

shareholders inter se, the provisions wer e, on the directors

being employed and accepting office on the footing of them,

embodied in the contract between the company and the directors;

that the remuneration was not due to the directors in their

character of members, but under the contract so embodying the

provisions; and that, in the winding-up of the company, the

directors were entitled to rank as ordinary creditors in respect

of the remuneration due to them at the commencement of the

winding-up.

  Rayfield v Hands and Others10, Field-Davis Ltd was a

private company carrying on business as builders and contractors,

incorporated in 1941 under the Companies Act, 1929 , as a company

limited by shares, having a share capital of £4,000, divided into

4,000 ordinary shares of £1 each, of which 2,900 fully-paid

shares had been issued. The plaintiff, Frank Leslie Rayfield, was

the registered holder of 725 of those shares, and the defendants,

Gordon Wyndham Hands, Alfred William Scales and Donald Davies

were at all material times the sole directors of the company. The

plaintiff was a shareholder in a company.

Article 11 of the articles of association of the company

required to inform the directors of his intention to transfer

shares in the company, and which provided that the directors

10 [1957] R. no. 603

12

CORPORATE LAW “will take the said shares equally between them at a fair value.”

In accordance with this the plaintiff so notified the directors,

who contended that they need not take and pay for the plaintiff’s

shares, on the ground that the articles imposed no such liability

upon them. The plaintiff’s claimed for the determination of the

fair value of his shares, and for an order that the directors

should purchase such shares at a fair value. It was found that

the true construction of the articles required the directors to

purchase the plaintiff’s shares at a fair price. Article 11 is

concerned with the relationship between the plaintiff as a member

and the defendants, not as directors, but as members of the

company.

Guinness v Land Corporation of Ireland11, The Land

Corporation of Ireland, Limited , was incorporated under the

Companies Act on the 12th of July, 1882, as a company limited by

shares. By the memorandum of association of a company limited by

shares it was stated that the objects of the company were, the

cultivation of lands in Ireland , and other similar purposes

there specified, and to do all such other things as the company

might deem incidental or conducive to the attainment of any of

those objects. The 8th clause of the articles of association,

provided that the capital produced by the issue of B shares

shall, so far as is necessary, be applied in making good to the

holders of A shares the preferential dividend of £5 per cent.,

11 (1883) L.R. 22 Ch. D. 349

13

CORPORATE LAW which they are to receive on the amounts paid up on their shares.

This action was brought by one of the B shareholders on behalf of

himself and the others, to restrain the directors from issuing

any A shares on the footing of their being entitled to the

benefit of that article, and to restrain the directors from

applying in accordance with it the capital arising from the B

shares. It was held that the application of the B capital

provided for by the articles is not an application of capital to

carrying on the business of the company, but is providing an

inducement to people to take shares and subscribe capital to

carry on the business and that article 8 was invalid, as it

purported to make the B capital applicable to purposes not within

the objects of the company as defined by the memorandum of

association, and in a way not incidental or conducive to the

attainment of those objects, and that the directors must be

restrained from acting upon it. The articles of association of a

company cannot, except in the cases provided for by sect. 12 of

the Companies Act, 1862 , modify the memorandum of association in

any of the particulars required by the Act to be stated in the

memorandum. 

Ultra vires is a Latin phrase meaning literally "beyond

the powers", although its standard legal translation and

substitute is "beyond power". If an act requires legal authority

and it is done with such authority, it is characterised in law

14

CORPORATE LAW as intra vires (literally "within the powers"; standard legal

translation and substitute, "within power"). If it is done

without such authority, it is ultra vires. Acts that are intra

vires may equivalently be termed "valid" and those that are ultra

vires "invalid".

In corporate law, ultra vires describes acts attempted by a

corporation that are beyond the scope of powers granted by the

corporation's objects clause, articles of incorporation or in a

clause in its Bylaws, in the laws authorizing a corporation's

formation, or similar founding documents. Acts attempted by a

corporation that are beyond the scope of its charter

are void or voidable.

1.An ultra vires transaction cannot be ratified by

shareholders, even if they wish it to be ratified.

2.The doctrine of estoppel usually precluded reliance on the

defense of ultra vires where the transaction was fully

performed by one party

3.A fortiori, a transaction which was fully performed by both

parties could not be attacked.

4.If the contract was fully executory, the defense of ultra

vires might be raised by either party.

5.If the contract was partially performed, and the performance

was held to be insufficient to bring the doctrine of

estoppel into play, a suit forquasi contract for recovery

of benefits conferred was available.

15

CORPORATE LAW

6.If an agent of the corporation committed a tort within the

scope of his or her employment, the corporation could not

defend on the ground the act was ultra vires.

Several modern developments relating to corporate formation

have limited the probability that ultra vires acts will occur.

Except in the case of non-profit

corporations (including municipal corporations), this legal

doctrine is obsolescent; within recent years, almost all business

corporations are chartered to allow them to transact any lawful

business. The Model Business Corporation Act of the United States

states that: "The validity of corporate action may not be

challenged on the ground that the corporation lacks or lacked

power to act." The doctrine still has some life among non-profit

corporations or state-created corporate bodies established for a

specific public purpose, like universities or charities.

According to American laws, the concept of ultra vires can

still arise in the following kinds of activities in some states:

1.Charitable or political contributions

2.Guaranty of indebtedness of another

3.Loans to officers or directors

4.Pensions, bonuses, stock option plans, job severance

payments, and other fringe benefits

5.The power to acquire shares of other corporations

6.The power to enter into a partnership

16

CORPORATE LAW

In the United Kingdom, the Companies Act 2006 sections 31 and

39 greatly reduced the applicability of ultra vires in corporate

law, although it can still apply in relation to charities and a

shareholder may apply for an injunction, in advance only, to

prevent an act which is claimed to be ultra vires.

In many jurisdictions, such as Australia, legislation providesthat a corporation has all the powers of a natural person12 plus others; also, the validity of acts which are made ultra vires is preserved.13

Present position in U.K : In England, the doctrine

of ultra vires has been restricted by the European communitiesact, 1972. According to section 9(1) of the European communitiesact in favor of a person dealing with a company any transactiondecided by its directors shall be deemed to be within thecapacity of the company to enter into validity and the otherparty to the transaction is not required to enquire about thecapacity of the company and thus such transaction may be enforcedby the other party acting in good faith against the company andthe company cannot plead that the transaction was ultra vires,but it cannot be enforced by the company against the other partyfor the other party still can plead that the act was ultra vires.

12 CORPORATIONS ACT 2001 - SECT 124

13 CORPORATIONS ACT 2001 - SECT 125

17

CORPORATE LAW It is to be noted that in England the European Communities Act,1972 merely restricts the application of the doctrine of ultravires but it does not abolish it. The company can still pleadagainst the third party that the act was ultra vires if it isproved that the third part has not acted in good faith. It can bepleaded by the company against the third party if the transactionor act has not been approved by the director. Along with it, ashas already been stated, the third party can still plead againstthe company that it has acted ultra vires, that means the ultravires transaction cannot be enforced by the company against thethird party. Thus, the doctrine of ultra vires applies in Englandwith certain restriction and modifications and certain provisionshave been inserted in the European Communities Act, 1972 in orderto protect innocent third party from the hardship created by thisdoctrine for him.14

Present position in India: In India, there is no legislation like the European

Communities Act. Consequently, the principals laid down in theAshbury Railway Carriage & Iron Co. v. Riche and Attorney Generalv. Great Eastern Railway Co. are applied without restrictions andmodifications. Thus, in India, the ultra vires act is stillregarded void and it cannot be validated by ratification even ifall the shareholders consent to such ratification. Thus, inIndia, the ultra vires transaction nether can be enforced by thecompany against the third party nor by the third party againstthe company and thus, both the company and third party can pleadeach other that the act or transaction was ultra vires.

However, the provisions similarto those inserted in the European Communities Act should also beinserted in the Indian Companies Act to protect the innocentthird party15.

14 Pg :97 ,Pari-3, Company Law by Kailash Rai 15 Pg: 98, Pari-1, Company Law by Kailash Rai

18

CORPORATE LAW

CONCLUSION:

An ultra vires act is void and cannot be ratified even ifall the directors wish to ratify it. The provisions similar tothose inserted in the European Communities Act, 1972should alsobe inserted in the Indian Companies Act, 1956 to protect theinnocent third party.

The tendency of inserting “independent objects clause” toexclude the main objects rule of construction is dangerous alsobecause it makes the distinction between the object and powerobscure.

The doctrine of ultra vires also prevents directors fromdeparting the object for which the company has been formed and,thus, puts a check over the activities of the directions. Itenables the directors to know within what lines of business theyare authorized to act

In India, there is no specific legislation like EuropeanCommunities Act and therefore, there is no specific statutoryprovision under which an innocent third party making contractwith the company may be protected. Thus, in India, ifthe doctrine of ultra vires is strictly applied, where thecontract entered into by a third party with a company is foundultra vires the company, it will be held void and cannot beratified by the company and neither the company can enforce thecontract against the third party nor the third party can enforceit against the company.

19

CORPORATE LAW The powers exercisable by the company are to be confined to the objects specified in the MO A. So it is better to define and include the provisions regarding the acquiring of business, sharing of profits, promoting company and other financial, gifts, political party funds etc. If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered to be of ultra vires. Even if it is ratified by the all the members, the action is considered to be ineffective. 

REFERENCES

Websites:

1. www.scribd.com/doc/31676572/Q-7-Ultra-Vires

2. en.wikipedia.org/wiki/Ultra vires

3. www.caclubindia.com › Discussion › Students › IPCC

Books:

20

CORPORATE LAW 1. Company Law By Kailash Rai, Reprinted in 2011, Allahabad Law

Agency 2. Company Law By Avtar Singh, Fifteenth Edition, Reprinted in

2009, Eastern Book Company3. Company Law By S.C Tripathi

TABLE OF

CASES

21

CORPORATE LAW

1.Ashtray Railway Carriage and Iron Company Ltd v.

Riche (1875) LR 7 HL 653 

2.Jahangir R. Mod v. Shamji Ladha(1866-67) 4 Bom HCR

185

3.Lakshmanaswami Mudaliar v. Life Insurance

Corporation Of India 1963 AIR 1185, 1963 SCR Supl.

(2) 887

4.Re, Jon Beaufore (London) Ltd [2001] 105 Comp Mad

763

5.S. Sivashanmugham And Others v. Butterfly Marketing

Private Ltd (2005) 5 CompLJ 117 Mad

6.Eley v The Positive Government Security Life

Assurance Company Limited (1875-76) L.R. 1 Ex. D.

88

7.Shuttleworth v Cox Brothers and Company

(Maidenhead), Limited, and Others [1972] 2 K.B. 9

8.Re New British Iron Company[1898] 1 Ch. 324

9.Rayfield v Hands and Others [1957] R. no. 603

22

CORPORATE LAW

10. Guinness v Land Corporation of Ireland (1883)

L.R. 22 Ch. D.

23