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The Companies Act, 1956
Section 633 in The Companies Act, 1956
Brij Mohan vs Mange Ram & Ors on 13 March, 1985

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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 4 expressly prohibited.: 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 oct.- 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 memorandum. (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 6 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 progressive society. 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 22 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 t. (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 circumstances :- (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 proper. 6 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 debenture.38 .• 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 transactions. 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.