Central India Law Quarterly
Doctrine Of Ultra Vires DOCTRINE OF ULTRA VIRES
Dr. A.AJim Khan
Any action taken by a company beyond the powers conferred
by its memorandum of Association is known as ultra vires transaction.
The legality of transactions has been judged by the Doctrine of ultra
vires which was developed in 1875. when during the course 01
judgement it was stated by learned judge that :.
'W hen an act is performed or a transaction is carried out which
though legal in itself is not authorised by the object clause in
the memorandum of association, is null and vod." t
2. In the words of Prof. Gower the purpose of this doctrine was to
ensure that :.
"An invester in a gokt mining company did not find himself
holding shares in a fried fish shop and to give those who
allowed credit 10 a limited company some assurance that its
assets would not be dissipated is an unauthorised enterprise:.2.
It was developed as a means of jlXticial control and by this doctrine the
courts can control the function of the coporanons P
3. In 1880. its scope was widened when lord Selborn had said in
a case that :.
" W h a t ever may fairly be regarded as incidental or
consequential upon those things specified in the memorandum
of association as object ought not to be held ultra vires unless
The judgements of 1875 and 1880 had been accepted as the basis of
the doctrine of ultra vires by Lord Halsbury in 1902. He had said during
the course of judgement in London County Council v. An Gen. 5 that ..
"I think it can not be doubted that these two cases do
constit ute the law upon the subject. II is Impossible to go
Reader in Law, Ravi Shanker Vishyavidyalaya , Raipur and tne Member. The central
India Law Institule , Jabalpur
Ashbury Railway Co v . Riche (1815) L.A.1 H,L. 653
2 Gower L.C.B,- Modern Company Law. 2nd Ed. 1951. p . 78
3 Palmer's Comany Law-2nd Ed. (Sweet and Maxwell) p . 77
4 An. Gen. Y. The Great Eastern Railway Co, (1880) 5 A,C, 431
5 (1902) A.C. 165. •
291 CENTRAL INDIA LAW QUARTERLY Vol. 5 :2
beyond those two cases . They are part of the law of the
country. One must acquiesce !here whether we like them or
4. The result of these two cases is that a registered company has
the follow ing powers :-
(i) Power to do whateve r (such things) is necessery 1 do 0
with a view to the attainment of the objects specified in the
(ii) Power to do whatever else (all such other things) which
may fairly be regarded as incidental to and consequen tial
upon to its objects.
(iii) Power to do such othe r things as are authorised to be
done by the companies act or by any othe r statute.
All other transactions which do not come under above categories are
termed as ultra vires transactio ns.
5. Now, the quest ion arises w hether this doctrine is harmful to the
corporations or is it beneficial to the corporations. In modern age when
the former co ncept of a co mpany was a mere profit making device,
whose ultimate object and aim was to maximise return and distribute the
profit or part of it among the shareholders, is no longer operative and
company is recog nised as an inst rument wield ing tremendous
socio-eco nomic power over the ultimate well being of the nation. The
ultra vires transaction of a company are now not only related 10 the
companies but , though indirectly, also related to the growing and
6. As stated above it was developed to safe guard the interest 01
the shareholders; it had been a means of judicial control since its origin
because shareholde r co uld not con trol the affairs of the company.
Though in theory the shareholders scattered over large geographical
area are the masters of the company but in actual practice they have
often been only in the position of sleeping partners who hardly ever stir
in their slumber and the business of the company is conducted by the
directo rs, who are in fact elected not selected by the shareholders.
6 Palmer', company Law. BySCtImith off C. & CJrry T.P.E. (Swee t and Maxwell2Qth
Ed. 1959_p. 78_
19921 DOCTRINE OF ULTRA VIRES 292
7. Besides shareholders there are some other persons including
company itself as a separate juristic entity which are concerned with the
activities of a corporation. How they have been affected by the ultra
vires transactions is a matter of discussion :-
(A) The Shareholders- The Shareholders' interest though fiscally limited
has been attached to the corpo rations. If it is involved in ultra vires
transaction, the shareholders are entitled to initiate an action. They can
bring an injunction from the co urt? Further a shareholde r can file a suit
tor setting aside a cont ract which had been unlawfully emereo."
(B)The Company- Gene rally a company can not create any
legal retattonsmp" or rig ht 0 by any ultra vires transaction. Neither it can
enfor ce the co ntract against the ou tside party involved in such
tra nsactions nor suc h tr an sact io n be ra tif ied later on by the
shareholde r even if it was advantageous to the compa ny.1I But the
company has a righ t to make the di rectors liable fo r the loss
sustained due to such transactio n.12 Where a company had received
some property upon an agreement and which turned out as ultra
vires. The company wo uld no longer be entitled to retain it.13 If the
memorandum gives no borrowing powers or limited power to borrow
or mortgage its property the company can not borrow or mortgage
beyond the limit set.14 If the com pany bo rrows beyond Its limit it
would be an ultra vires transaction and the security given to such
bo rrowing woul d not make the company liable.1 S But if a prope rty
is acqui red by ul tra v ires expe nd it ure of company's funds the
co mpa ny 's r ig ht o ver that prope rty is gene rally protec ted'"
because the assets tho ugh wrongly acqui red have form ed its
corporate capnar.! " Similarly If the company was vender It can
recover the property by pleading that the co ntract was ultra vires
7. QUin & Allten ltd v. saloman (1905) A,C. 442.
8. Jenki in v. Pharmaceutical Society of Great Britain (19 21) i Ch. 392.
Saligram Jhanjharia v. National Co. Ltd, (1969) CW.N. 369
9. Bishop v. Balkis Consolidated Co. (1890) 25 a,B.D. 572 ,
10. Port Canning v. Land lnvestmen t Co. (187 1) 7 B.LA. 583
11. Bell House Ltd . v. Citiwal Properties Ltd . (1966 )1 a,B, 207.
12. Gerrard v, James (1925) 1 Ch. 616 .
13. Mathura Mohan v. Ram Kumar (1915) 10 A.C. 354 .
14. Barness wenlock v. River Dee. Co. (1885) lOA.C. 354
15. Small v . Sm ith (1884) 10 A.C. 119 .
16. National Telephone Co. v. Constab le of St. Petersburg . (19OCl) A.C. 917.
17. Turner v. Bank of Bombay (1901) !.L.R. BCM. 52.
293 CENTRAL INDIA LAW QUARTERLY
transacnon'" An ult ra vires tr ansact ion has created no debt
obligation legal or equitable upon W1nding up and the contributories
have no liability to pay such debts. ' 9
(C)The Third Party- The person who enters into contract with the
compa:rJ obtains no justiciable rights due to doctrine of constructive
notice. It invariably operates against t he person dealing w ith the
company. 21 But t he third party may sue t he d irectors who had
negotiated the cont ract on behalf of the compa ny for damages.
(D) The Lender- When a person lends money to a company and the
co mpany has no borrowing powers or it has already exceeded the limit
mentioned in the memorandum of association then the contrac t would
be void and he can not recover the money leot 23 He however may
recover his money In w hole or in part by the following methods.
(i) By Injunction- He has a rigbt to follow his money. He can
interve ne at early stage and can obtain an injunction
restraining the company from parting with 1 24
(II) By Enforcing Guarantee- If the company's liability under
th e loan was guaranteed th e lender may enforce t he
guarantee against the guaranter.25
(III) By subrogatlon- Where a company has used or spent
t he loan to payoff lnt ravlres debts. The lend er is
subrogated to th e right s of th e creditors so paid and
may stand in the shoes of the credito rs so paid off. He
can sue the co mpany as t he creditors co uld have done
if th ey had not been paid.28 If the loan is secured then
t he lend er may realise th e security and take from the
p ro ceed s th e amount of t he debts t o w hic h he Is
subrogated but he must answer to the company for the
18. Birbank P.B. SOciety v, Cardiff & CO. (1912) Ch. 135.
19 Re. Madras N.P. Firnd Ltd. AlA 1931 Mad. 792.
20. Royal British Bank v, Tarquand (1856) Ex. B. 327.
22. Duck v, Tower Galvanizing Co. (1901) 2 KB. 314
22. Firbank Executors v. Humphrey (1886) 13 a.B,p. 54 .
23. Sinclairv. Brougham (1914) A,C. 398.
24. Be . John Beaforte (London)L1d. 19531 en. 131.
25, Supra note 12.
26. A.L Underwood ltd . v . Bank of Ijverpcct (1924) 1 KB. 775, Dec Narayan Prasad v .
Bank of Baroda (1928) Born. L.R. 1056.
199 2 J DOCTRINE OF ULTRA VIRES 294
batance." The ultra vires lender is subrogated merely as
an ordinary unsecured creditor of the company. The
sub rogation does not give lender any priority that the
original cred itors may have had over the othe r cred itors of
the company and such lender can not enforce that other
securities held by such creditors.28
(iv) By Tracing - The lender may also be able to trace (to
identify) his money into the assets which the company has
purchased with it or by the funds of the company and can
recover i1. 29 Th e t racing is possible in following
(i) The lender can claim l or an asset purchased with the
ultra vires loan it he has good evidence for that purchase .
This right is evailatse even lor more valuable assets than
his 100.0. 30
Ii) If his money is mixed in a fund . The lender may claim a
charge on the funds in proportion of his contribution to it.
Accordi ngly where an act of ultra vires issue 01shares has
been made and the com!f'ny is solvent, the subscribers
can recover their money 1
iii)1f the company is wound up the lender can claim to the
residual assets, He is entitled to share with the share
holders in proportion to his amount loaned,32
(E) The Director:- Directors of a company have two told liability
regarding ultra vires transaction:
(i)HiS liability towards the company-
Ge nerally the di rec to rs have be en liab le t o the
compan y fo r the ultra vires tr an saction . It is not
nees sary to Brave that a fraud had been co mmitt ed in
such case s. 3 The company can compel him to replace
27 Riversens Funds and Insurance CO, v. Maion COswayLtd . 1913 K,B, 364.
28 Re Waltham Mold & Connan's Rly Co. (1899) 1 ch. 440 CA
29 Diploc k v. Wentle (1946)1 ch. 465.
30 Supla note 24.
31. Margrate Unz v. Electric Wire Co. (Palastine) LId 1948. A.C, 371.
32. Howald v. Patenllvory Manufacturing Co. (1888) 38 Ch. 0 , 156.
33 Re Sharpe (1892) 1 en. 151.
295 CENTRAL INDIA LAW QUARTERLY Vol . 5:2
monel 4 even thoug h he had honestly misinter~reted his
powers und er an unambiguous merrcrardum." But sec.
448 of the Engl ish Companies Act 1948, which is
corresponding to Section 633 of the Indian Companies
Act 1956, gives a wide protection to the directors which is
extended to the cases of ultra vires acts if the court finds
that they have acted honestly and reasonably and ought
to be fairly excused and could relieve them either wholly
or partl~ from their liability on such terms as it might think
ii ) His liability towards the outsider:
The Directors will be liable on ultra vires contracts for the
breach of implied wa rranty of authority if their acts amount
to a misrepresentation of facts. 37 Similarly where the
money was borrowed beyond the power of the company,
The lender may sue the director for breach of warranty
Implied from the prospectus that had power to issue such
8. It appears from the above matters that: -
i) The company can not engage itse lf into all sorts of
activities , its sphere of activities is rest ricted due to
doctrine of ultra vires and company legislation.
ii) The shareholders should be vigilant about their interests.
T hey can bring injunction for company's ult ra vires
iii) The money lender should be serious and cautious about
the activities of the company and shou ld have read its
memorandum of association before lend ing the money.
iv) The Director should he careful in their dealings otherwise
they could be made personally responsible by the related
parties for their losses.
34. Cullerue v , london etc. SOciety lid. (1890) Q.B.P. 485.
35. London Financial Corporation ltd . v. Kelk (1884) 26 U.O. 107.
36. Re Gilt Edge Safety Glass lid. (1940) en. 495.
37. Heley v. Hitchin son v. 8raybead ltd. (1967) 2 All. E.A. 27
38. Weeks v. Prcpert (1873) L.A. 8 C.P. "27.