Doctrine of Ultra Vires

1. Meaning
   Ultra Vires is a Latin phrase which means “beyond the powers”.
2. Explanation
   The Memorandum of Association of the Company provides the objects of the company for which the company is established. The act of the Company should not be beyond the object clause, otherwise the said act will be treated as ultra vires, i.e., beyond the powers of the Company.
3. Nature
   The ultra vires act is completely different from an illegal act. However, both are void.
4. Legal Effect
   The ultra vires act is a void act and therefore it cannot be ratified even if all the directors of the company want to ratify the same.
5. Object of the Doctrine
   1. The motive behind the doctrine of ultra vires is to protect the investors and creditors of the company.
   2. This doctrine prohibits the Company from using the money of the investors for purposes other than those stated in the object clause of the Company enumerated in the Memorandum of Association.
6. Landmark Case
   In the case of Ashbury Railway Carriage and Iron Company V/s Riche, (1875) L.R. 7 H.L. 653, the doctrine of ultra vires was established.
   1. Facts of the Case
      1. Ashbury Railway Carriage and Iron Company Ltd. was incorporated under the Companies Act, 1862.
      2. As per the Memorandum Clause No. 3 of the said company, its objects were “to make and sell, or lend on hire, railway-carriage and wagon and also to carry on the business of mechanical engineers and general contractors”.
      3. Clause No. 4 of the Memorandum provided that activities beyond these objects required a Special Resolution.
      4. The Directors entered into a contract with Riche to finance the construction of a railway line in Belgium.
      5. However, after few days, the company repudiated the said contract with Riche on the contention that, the said contract was ultra vires.
      6. As a result, Riche filed a case for damages for breach of Contract.
      7. The main contention of Riche was that the said contract was within the ambit of the word “General Contractors” and therefore within the power of the company, and thus ratified by the majority of shareholders.
   2. Issue
      Whether the contract executed between the company and Riche was valid and if not, whether it could be ratified by the members of the company?
   3. Judgment
      1. The Court held that the contract was ultra vires and therefore void.
      2. The company had no capacity to ratify the said contract.
      3. The company has power to do only those things which are authorized by its object clause enumerated in the Memorandum of Association.
      4. The shareholders have no power to ratify the ultra vires contract.
      5. The business objectives of the company must be specified in the Memorandum.

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