DOCTRINE OF ULTRA VIRES IN COMPANY LAW

Prepared by:
RABIA SHABEEB
Advocate

As the Company Law has been originated to protect the rights of its members, shareholders, directors, promoters, creditors etc., so it is clear that whenever and who-so-ever tries to commit any illegal act, which is beyond the powers of the company and is against the company, then the shareholders then and there have the right to file a suit against the wrong-doers because otherwise the company can be at full stake and even minority shareholders can take an action of those illegal and ultra vires act of company because those illegal and ultra vires act can never be rectified; although done by the majority shareholders. It is preliminary right of minority shareholders that they can appear in action against majority shareholders’ themselves or by their representatives.

Company law has made it clear that everything should be done in a legal way and the same is to be followed by a legal person or any legal entity. This legal entity being an artificial person can never act or perform any act which is against the company’s memorandum or articles; rather we can say that if anything shall be happened then the same shall be categorized as “Ultra Vires”. The word “ultra” means beyond and “vires” means Object or Legal Powers. The term ultra vires is not confined to companies’ sector only but also used worldwide even by the “civil servants” or “lawyers”. Ultra vires act is such a term in which it is clear that an action can be brought against the person who has done something which is beyond its persons and such act is always “Void ab initio”, which means it is void from the very beginning and it can never be rectified even the majority gave their consent thereto.

In the perspective of Company Law, the application of ultra vires can be perceived in three different aspects:

i) In a first sense it can understood in such a way that the body which is doing ultra vires act, either has the capacity to do so? and even the same falls within the legal personality?, if so, then an action can be brought. Similar is the case with partnership that its agents can raise an objection, if the powers in such a partnership are exercised in an ultra vires manner.

ii) In a second sense, this rule’s application can be understood by asking a question that the act performed or done by the authorities was within their authority or not?

iii) In the last perspective, the same can be understood in such a way that if the company’s capital is being used contrary to its memorandum by any act, then such an act shall be termed as ultra vires.

For checking the vires of any act within the ambit of companies sector, the prime document which requires to be consulted in any of the company’s i.e. called memorandum of association. Memorandum of association usually contained many clauses and one of its main clauses is known as “Object Clause”. Object clause in any company is made so, that all the individuals which are working with the company or even the strangers or outsiders come to know that what is actually the purpose of the company and for what is this company for, and must know that what kinds of business the company is going to run.

The importance of ultra vires principle was first time observed in a well renowned case titled as “Ashbury Railway Carriage and Iron Co. Ltd. Vs. Riche (1875) LR 7 HL 653”, wherein two well reasons were described there for its application and those were:

a. That the doctrine of ultra vires is of so much importance because the same gave shelter to the “shareholders” and “creditors” of the company.

And that this doctrine creates bar and put a system of check and balance upon the company having its fundamental principle, that a company cannot move or act away from the proposed object finalized in the “Memorandum of association”.

Further, doctrine of ultra vires can be understood easily, while keeping in view the relation of principal and its agent, which in this context was very well explained in PLD 1984 Kar. 481; whereby it was held that it is well established and founded principle that the principal should be aware of the acts of the agents.

Having a vast study and different researches made upon this doctrine has culminated with only one effect of it that those contracts or dealings which are accorded or done in ultra vires can never be enforced because those are done beyond the object from the very starting.

Effects of ultra vires in relation to mechanism provided under Companies Ordinance, 1984 can be construed in such ways that:-

a) Contracts which are done in an ultra vires manner are always void and can never be enforced even they cannot be converted to intra vires at any stage because of lapse of time or due to the silence of parties or by their ignorance.

b) The second effect of ultra vires contract is seen in a situation that if the capital of company is utilized ultra vires in purchasing the assets or property then and there the company should be secured to recover its money.

c) Another effect of the ultra vires contract is that if the contract is ultra vires then its performance can never be done or be the foundation of any right of action upon it. Both law and precedent have pointed out the conclusion that either party to a contract may set up the defense that the contract is ultra vires in such a situation.

REMEDIES IN CASE OF ULTRA VIRES ACT:

The first and foremost priority of law is always to protect its individuals, so wherever the rights of its members, shareholders are affected even if those are too small, then they are protected against such ultra vires act in the form of following remedies:-

> Directors can be held responsible directly for their unlawful acts and liable to pay back to the company or shareholders if doing any personal act in earning personal profit.

> Injunction in form of remedy can be granted to the shareholders which prevents the company for entering into any unlawful transaction.

> Minority members are given right of remedy to raise object where the directors are trying to do something by just passing the ordinary resolution which was only allowed by passing of the special resolution.

> Director’s of the company can be directly held liable if they effecting the rights of the company.

> Minority members can raise object against the directors for committing fraud against company or shareholders.

> Minority members can start raising objection, if the special meeting was required to redress the individuals but it was not done so by the unlawful activity of directors.

> Directors if try to earn the profits from the company by illegal means then they can be held liable and relief has to be given to shareholders.

> Action can be raised if justice is not provided to the shareholder’s.

Finally, the doctrine of ultra vires has justification for its existence as it would operate as a shield for the shareholder’s as well as for the creditor’s with an adjoining effect of the principle of constructive notice. By virtue of which it would be deemed that the person’s dealing with or forming any negotiations with the company having awareness with the object as envisaged under its memorandum of association cannot be punished for the act beyond its ambit as the same shall amount to ultra vires because the shareholder’s and creditor’s have put their stake in the incorporated entity.