STUDY MATERIAL OF SPECIALIST OFFICER LAW ON The Doctrine Of Ultra Vires

Introduction

The doctrine of ultra vires derives itself from the mother theory of Corporate Law i.e. the Theory of Perpetual Succession. This theory envisages that the company is a distinct entity and therefore exists independent from the members that constitute it. Every company that is established is for a purpose and its existence is complimented by that purpose. When a member of the company in particular the director of boards, does an act or puts forth an object that is not within the purpose or object of that company then the company will not be bound by such a contract and that object of purpose shall be ultra-vires of the company. This theory was established only after the late 1800's in England by virtue of the decision of Ashbury Railway Carriage & Iron Co Ltd v. Riche and then was strengthened and applied to cases of Attorney General v. Great Eastern Railway Company, Cotman v. Broughametc.

By virtue of this project the researcher seeks to analyze the evolution of the doctrine and the final version after the process of modification through various cases. The position that is prevailing in England shall also be seen and thereafter the Indian Position shall be established. The general trend of criticizing the doctrine has been seen in the case of English law and therefore an amendment bill in 2006 was taken out. The doctrine has therefore gone through a radical process of change and stands now at a position where legal scholars from around the world criticize its working to “old ways”.

Evolution Of The Doctrine Of Ultra Vires

In the early 19th Century the companies that were formed came into existence as a result of the Charters or grants from the crown or the Parliament. The church and other companies herein were the first to exploit such a system and therefore gained corporate status. This grant of status was directly related and a consequence of the public function that they performed. The legal theory behind the doctrine of ultra vires finds its roots from this system. The parliament had conferred some powers upon these bodies and therefore the bodies were restricted by those powers. Any act done by these bodies which went beyond the power conferred to them stood as “ultra-vires”. The rationale behind this kind of a restriction was the democracy argument i.e. to say if a company acts in powers which are more than the powers conferred by elected representatives of the people. Then such acts have no legitimacy. Another argument was one wherein the interests of the share-holder and the creditors would be jeopardy. By limiting the powers and the scope of the acts that can be done by the directors, the position of the shareholder and the creditor became secure since the directors would thenceforth be restricted in their choice of business.

Enlarged partnerships were the only form of corporations which were present prior to 1855 after which statutory registered corporations came into existence. The functioning of these kind of partnerships was premised on the fact that the act of one partner cannot be binding on the others if it is outside the scope of the actual or apparent authority. Furthermore, changes could not be made in the nature of business without prior or post facto ratification or consent of all of the partners. The creditor or the investor therefore had adequate safeguards.

With the introduction of the 1855 Act the doctrine stood established with provisions such as the pre-requisite of a Memorandum of association and therein an object clause. The powers which a corporation is authorized to exercise are set forth in its charter, or in its articles of incorporation. Statutes too, may place express prohibitions upon the exercise of certain powers. If the corporation enters into a transaction which is beyond the powers expressly or impliedly contained in the charter or articles of incorporation or in violation of the statutory restriction, the transaction is said to be ultra vires, i.e., beyond the powers of the corporation.

This question first came up for consideration in the case of Ashbury Railway Carriages & Iron Co v. Riche. The Ashbury Railway Carriage and Iron Company was established with an object clause which stated that the business that was purported to be carried on was to be one of mechanical engineers and general contractors who dealt in the buying selling and hiring of railway-carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling-stock. Also to buy sell and hire as merchants, timber, coal, metals, or other materials; and to buy and sell any such materials on commission, or as agents. As a result of the repudiation of a contract to supply funds for the construction of a railway line in Belgium entered into on behalf of the company by its directors, a case was brought forth against it. The court herein dealt with the object clause in detail. The court rightly pointed out that objects of M/s Ashbury 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, using Messrs. Riche only as the persons to be employed in the construction which was contrary to the memorandum of association. Moreover, in constructing the scope of the words “general contractors” the court took a narrow view. The court herein concluded that according to the principles of construction, the term “general contractors” would be refer to that which precedes, and would indicate, in that theme of contracts, the making generally of contracts connected with the business of mechanical engineers in particular contracts as mechanical engineers are in the habit of making, and are in their business required, or find it convenient, to make for the purpose of carrying on their business.

The memorandum of association, the court concluded, defines the limitation of the powers of a company to be established under the Act and is the constituting document of a company. Therefore, if anything which goes beyond that memorandum, or is not warranted by it, the question will arise whether that which is so done is ultra vires , not only of the directors of the company, but of the company itself. While interpreting the scheme of the act the court scrutinized the act and its clauses and saw that the incorporation of the company found its foundation in the memorandum of association. The memorandum in return mandated the presence of an object clause which would prescribe the limits of the business, which according to the 11th clause has to be respected by every individual that makes the company and the company in itself. The court explicitly therein laid down that with respect to the contents of the memorandum of association.

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