Advantages of the Doctrine of Ultra Vires The objects or reasons for the development of this doctrine is summed up as follows: 1. Protection of investors: The capital of the company is a contribution by the shareholders and the company is a trust for them. Thus the investors in a company may be assured by this rule that their investment will not be employed for the objects or activities which they did not have in mind at the time of investing their money in the company. Prof. Gower expressed his view that this doctrine enables the investors in the company to know the objects in which their money is to be employed. 2. Protection of creditors: This doctrine protects the creditors of a company, and the creditors trust the corporation for the repayment only out of its assets and business concern. The very idea is that the company’s capital cannot be spent on any project or business. Outside the orbit of the objects clause. This gives the creditors a feeling of security. 3. Protection to the Public: The statement of objects serves public interest by confirming the corporate activities within a defined field. It prevents diversification of a company’s activities in directions not closely connected with the business for which the company may have been initially established. Any change of objects would require approval of the CLB thus giving the board an opportunity to examine whether the proposed plan of diversification would not be against public interest. Effects of ultra vires transactions If a company gets involved in an ultra vires transaction the question arises as to what are the consequences and how to restrain such transactions. 1. Injunction: Any member of the company can get an order of injunction from the court to restrain the company from acting ultra vires. 2. Personal Liability of directors: It is the duty of the directors to see that the funds of the company are used only for legitimate business of the company. If the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore to the company the funds used for such purpose. 3. Breach of warranty of authority: The directors of a company are treated as agents of the company and therefore it is their duty not to go beyond the memorandum or powers of the company. Where the directors represent to the third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company has no such power under its memorandum, the directors will be personally liable to the third party for the loss on account of the breach of warranty of authority. 4. Property acquired under ultra vires transactions: If the funds of the company are applied in purchasing some property the company’s right over that property will be protected even though the expenditure on such purchasing has been ultra vires. “Property legally and by formal transfer or conveyance transferred to a corporation is in law duly vested in such corporation, even though the corporation was not empowered to acquire such property” In Ad Saint v. Bank of Mysore, the Madras High Court allowed a company to sue on a mortgage to recover the money lent in spite of the fact that the transaction was beyond the powers of the company. The court relied and quoted the observation of Brice. 5. Ultra vires contracts: A contract of a corporation which is ultra vires, that is outside the objects as defined in memorandum is wholly void and of no legal effect. The objection to an ultra vires contract is, not merely that the corporation ought not to have made it, but that it could not make it. The question is not as to the legality of the contract but the question is as to the competency and power of the company to make it. No performance on either side can give the unlawful contract any validity or be the foundation of any right of action upon it.

Advantages of the Doctrine of Ultra Vires

Advantages of the Doctrine of Ultra Vires

The objects or reasons for the development of this doctrine is summed up as follows:

  1. Protection of investors: The capital of the company is a contribution by the shareholders and the company is a trust for them. Thus the investors in a company may be assured by this rule that their investment will not be employed for the objects or activities which they did not have in mind at the time of investing their money in the company.  Gower expressed his view that this doctrine enables the investors in the company to know the objects in which their money is to be employed.
  2. Protection of creditors: This doctrine protects the creditors of a company, and the creditors trust the corporation for the repayment only out of its assets and business concern. The very idea is that the company’s capital cannot be spent on any project or business.  Outside the orbit of the objects clause.  This gives the creditors a feeling of security.
  3. Protection to the Public: The statement of objects serves public interest by confirming the corporate activities within a defined field. It prevents diversification of a company’s activities in directions not closely connected with the business for which the company may have been initially established.  Any change of objects would require approval of the CLB thus giving the board an opportunity to examine whether the proposed plan of diversification would not be against public interest.

Effects of ultra vires transactions

If a company gets involved in an ultra vires transaction the question arises as to what are the consequences and how to restrain such transactions.

  1. Injunction: Any member of the company can get an order of injunction from the court to restrain the company from acting ultra vires.
  2. Personal Liability of directors: It is the duty of the directors to see that the funds of the company are used only for legitimate business of the company.  If the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore to the company the funds used for such purpose.
  3. Breach of warranty of authority: The directors of a company are treated as agents of the company and therefore it is their duty not to go beyond the memorandum or powers of the company.  Where the directors represent to the third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company has no such power under its memorandum, the directors will be personally liable to the third party for the loss on account of the breach of warranty of authority.
  4. Property acquired under ultra vires transactions: If the funds of the company are applied in purchasing some property the company’s right over that property will be protected even though the expenditure on such purchasing has been ultra vires.  “Property legally and by formal transfer or conveyance transferred to a corporation is in law duly vested in such corporation, even though the corporation was not empowered to acquire such property”In Ad Saint v. Bank of Mysore,the Madras High Court allowed a company to sue on a mortgage to recover the money lent in spite of the fact that the transaction was beyond the powers of the company.  The court relied and quoted the observation of Brice.
  5. Ultra vires contracts: A contract of a corporation which is ultra vires, that is outside the objects as defined in memorandum is wholly void and of no legal effect.  The objection to an ultra vires contract is, not merely that the corporation ought not to have made it, but that it could not make it.  The question is not as to the legality of the contract but the question is as to the competency and power of the company to make it.  No performance on either side can give the unlawful contract any validity or be the foundation of any right of action upon it.