Compliances

Doctrine of Ultra Vires: Let’s Understand the Concept

calendar17 Dec, 2022
timeReading Time: 3 Minutes
Doctrine of Ultra Vires

Ultra Vires is a Latin word that means “Beyond the Powers. Ultra Vires is typically used in legal sphere as a condition where an entity exceeds its authority or power (as cited under the charter document) while performing a particular business activity. The doctrine of ultra vires plays a pivotal role in the corporate law that regulates all contracts entered into by an organization. It is illegal for companies to act beyond the power or authority mentioned in the charter document.  Ultra vires is a legal antonym for Intra vires, which means within the powers.

Significance of Doctrine of Ultra Vires in a Corporate Law

A company’s officers and directors seldom act beyond the power cited in the vesting instrument, leading them to the violation zone. Such an act fits the doctrine of Ultra Vire and may incur legal proceedings against such officials.

To better understand the importance of ultra vires, let us know the consequences of not having it. The absence of the ultra vires can;

  • Encourage officials to take illegal actions to serve any business purpose.
  • Mitigate the legal fencing that binds the officials to stay compliant with corporate law
  • Create a legal nuisance for the firm
  • Put the shareholders’ money at stake.

Casting Light on the key elements of the Doctrine of Ultra Vires

The notion of ultra vires seems to lose its significance in modern corporate law, but it still has a prevalent presence in the case of government entities. The listed below are the key attributes of ultra vires:

  • The doctrine of ultra vires applies to all authorities underpinned by a contract or statute, regardless of whether they are implied or expressed.
  • Any entity or a third party cannot leverage the doctrine of ultra vires to support their action for invalidating a contract.
  • Any action of the company’s directors that lead to ultra vires often has harsh consequences for the shareholders.
  • In case of any dispute, shareholders typically file a lawsuit against the individual director since he is only accountable for his corporate actions.
  • Legally, the estoppel or ratification cannot act as grounds for transforming an ultra-vires contract into an intra-vires contract. The reason for this is that the ultra vires contract doesn’t possess legal significance by default.
  • Shareholders are not authorized to sanction an ultra vires transaction.
  • It is possible for any company’s member to put forth a demand against the company to preclude it from addressing any ultra vires activities.
  • A company cannot use ultra vires transactions as a ground to file a suit in a case of legal conflict. Entities that are indulged in the trading of products or services based on an ultra vires contract shall not able to either recover the loan or receive the payment.
  • It is not possible to bind an entity via an ultra vires contract.

What are the pros of the Doctrine of Ultra Vires?

The doctrine of Ultra Vires ensures the following benefits:

  • Protecting shareholders’ interest:  The ultra vires affirms shareholders that their hard-earned funds will remain safe and thus will be used for the purpose it was invested. Ultra vires prevent companies from misusing the shareholders’ funds.
  • Protection of creditors: The doctrine of ultra vires also safeguards the creditors’ interests by guaranteeing that the company’s capital is not spent on any business area or project falling outside the object clause.

What are the Cons of the Doctrine of Ultra Vires?

Unfortunately, the doctrine of ultra vires has its limitations. Let’s have a glance over some of its disadvantages:

  • The ultra vires restrains companies from devising activities that fit each member’s choice.
  • The Companies Act 2013[1] allows for the on-demand alteration of the object clause in the charter document via a special resolution. This is something that goes against the fundamental objective of the doctrine.

Conclusion

The doctrine of Ultra Vires still has a significant role in the corporate sphere despite its ever-declining significance. Although modern corporate law seems less inclined toward ultra vires, it is impossible to diminish its importance entirely. It’s because it plays a pivotal role in binding an organization’s actions, consequently preserving everyone’s interest.

Read our Article:What is Lifting of Corporate Veil under Companies Act, 2013

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