THE ULTRA VIRUS DOCTRINE Once a company is incorporated, it becomes a legal person and it is treated differently from its

members.1 Unless otherwise provided in any particular case, a company contracts in the same way as an individual. An incorporated company has the power of a natural person of full capacity to enter into contracts except otherwise provided by the memorandum of the company or an enactment. Since a company is a creature of statue, it enjoys only such powers and privileges conferred on it by the statute. The contractual capacity of a company is therefore conditioned by the powers expressly conferred on it at the time of its creation; these are powers specifically conferred on it to enable it exercise the functions for which it is incorporated. It is however generally accepted that it has implied powers to enter into contracts which are reasonably incidental to the fulfilment of the objects for which it is created. But where a company purports to enter into contracts whose nature and purpose are outside the realm of express or implied authority conferred on the company, the contracts are said to be ultra vires the company for it lacks the capacity to enter into such contracts. Ultra vires consists of two words ultra and vires. Ultra means beyond and vires means powers. Therefore, ultra vires means an act of a company which is beyond the powers conferred on the company by the objects clause of its memorandum. Ultra vires is the Latin word for "beyond powers," in the law of corporations, referring to acts of a corporation and/or its officers outside the powers and/or authority allowed a corporation by law. Example: Directors of Highfliers, Inc. operate a small bank for its employees and friends, which corporate law do not permit without a bank charter, or sells shares of stock to the public before a permit is issued.2

1 2

Salomon V. Salomon & Co. (1897) A.C. 22. http://dictionary.law.com/Default.aspx?selected=2181

The development of the ultra vires doctrine was for the protection of the creditors and investor of the company. The doctrine of ultra vires could not be established firmly until 1875 when the Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A company called The Ashbury Railway Carriage and Iron Company, was incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were to make, and sell, or lend on hire, The ultra vires doctrine was developed for the protection of the creditors and investors of the railway carriages and waggons, and all kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents. The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Socit Anonyme formed in that country, which socit was to supply the materials for the construction of the railway, and to receive periodical payments from the English company.

The objects of this 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. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862

It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even

the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association.

Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine was made clearer. In this case the House of Lords affirmed the principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche but held that the doctrine of ultra vires ought to be reasonable, and not unreasonably understood and applied and whatever may fairly be regarded as incidental to, or consequential upon, those things which the legislature has authorized, ought not to be held, by judicial construction, to be ultra vires.

To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found:

(a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. How this doctrine protect the creditors and investors This doctrine being developed to protect the creditors and investors of the company, it prevents the company from using the money of the investors for a purpose different from the one stated clearly in the objects clause of its memorandum. This rule puts the investors and the company at a settled state of mind that their investment will not be used for the activities which they did not have in mind at the time of investing their money in the company. This doctrine protects the creditors of the company by ensuring them that the funds of the company to which they must look for payment are not dissipated in unauthorized activities. The wrongful application of the companys assets may result in the insolvency of the company, a situation when the creditors of the company cannot be paid. More so, this doctrine ensures that directors do not depart from the object for which the company was formed and also puts a check over the activities of the directors in order to enable the directors know what lines of business they are authorized to act.

Effect of Ultra Vires Doctrine

Ultra Vires Contracts: The doctrine of ultra vires enjoins a corporation created by a statue to exercise only those powers which are expressly conferred on it or those power which may be reasonably implied to be incidental to the accomplishment of the objects of its corporation. The memorandum of association of a corporation usually enumerates the statutory powers conferred on it under the law and its sphere of operation is accordingly confined to these powers. Any activity of the corporation outside the powers so enumerated or to be reasonably presumed as implied is void being regarded as ultra vires. The effect is that the contract has no validity. The case which neatly illustrates the effect of the doctrine of ultra vires on contracts is Ashbury Railway Carriage & Iron Co. v. Richie.3 The main advantage of the doctrine is to protect the pecuniary interest of the shareholders bu ensuring that activities of the corporation are restricted to its objects as listed in its memorandum of association. Since the memorandum of association is regarded as a public document open to the public for inspection and persuasion, persons dealing with incorporated associations are presumed to know the powers of the corporation. This where mining corporation purports to establish a banking business, its customers have no remedy of recovery of money deposited with it. The present situation of the law which renders every contract ultra vires the corporation void is not wholly satisfactory. Surely, a great hardship will be suffered where a party contracts with a company on a subject outside its objects of association in which either the corporation or the other contracting party has received benefits under it. So long as the contract is not illegal except for the fact that it is ultra vires, it appears that a more sensible approach is to discriminate between situations where the contract is executed by one of the

(1875)L. R: 7 H. L. 653.

parties and where it is still executory. In the former, the party who has performed his part of the contract should be disentitled from recovering the value of the benefits conferred on the other party, the doctrine of ultra vires notwithstanding. In this connection, the position will remain the same where both parties have performed their own parts of the contract. In the latter situation where the contract is wholly executory to the extent that neither party has incurred any detrimental nor received any benefits, the doctrine of ultra vires can be successfully pleaded to invalidate the contract and render it void. see Re , Jon Beaufore (London) Ltd., (1953) Ch. 131., In S. Sivashanmugham And Others v. Butterfly

Marketing PrivateLtd., (2001) 105 Comp. Cas. Mad 763,

In England, S. 9(1) of the European Communities Act, 1972 has lessened the effect of the judgment given by the court in this case. In England a third person dealing with the company in good faith is protected and he can enforce the ultra vires contract against the company if: (1) The third person has acted in good faith and (2) The ultra vires contract has been decided on by the directors of the company. In other words, third person can enforce the ultra vires contract against the company if he had no knowledge of the fact that it was ultra vires and the contract was decided on by the directors of the company. The third party is presumed to have acted in good faith unless the contrary is proved by the company. However, the provisions operate in favour of a person dealing with the company in good faith. Consequently, the company cannot enforce the ultra vires contract against the third party but the third party can plead ultra vires.

Ultra Vires Borrowings:

This can be defined as borrowings beyond the power of the company; that is beyond the objects clause of the memorandum of the company. In UK, S. 9(11) of the European Communities Act, 1972 provides, even such a borrowing can be enforced by a third party against the company if he has acted in good faith and the borrowing has been decided on by the directors of the company. It should be noted that the courts formed certain principles in the interest of justice in order to protect such lenders. Therefore, in the case of ultra vires borrowing, a lender may be allowerd by the courts the following reliefs: (a) Injunction: if the money lent to the company has not been spent the lender can get the injunction to prevent the company from parting with it. (b) Tracing: The lender can get his or her money back so long as it is found in the hands of the company in its original form. Where his or her money is used in purchasing certain property, he or she can claim the property so long as it remains in the actual possession of the company. But in a situation where the money of the lender got mixed up with that of the companys in such a way that both of them cannot be separated, the lender can claim pari-passu distribution of assets of the company with the shareholder in the event of the winding up of the company.4 (c) Subrogation: if the money borrowed is used in paying off lawful debts of the company, the lender can claim the right of subrogation and this will make him stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied but this subrogation does not give the lender the same priority that the original creditor may have or had over the other creditors of the company.

Sinclair v. Brougham, (1914) A.C. 398.

Exceptions to the doctrine of Ultra Vires Activities of the company that shall be valid shall include: (a) Activities that are essential for the fulfilment of the objects stated in the main objects clause of the memorandum; (b) Activities that are incidental or consequential or reasonably within its permissible limits of business; and (c) Activities that the company is authorized to do by the Companys Act, in course of its business. It should be noted that any other activities of the company excepting those stated above shall be ultra vires and therefore invalid. There are some exceptions to this doctrine and they include: (a) An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form.5 (b) An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of the entire shareholders be obtained at the same place and in the same meeting. (c) If the company has acquired any property through an investment, which is ultra vires, the companys right over such a property shall still be secured. (d) While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Companys Act.

Rajendra Math Dutta V. Shailendra Nath Mukherjee, (1982) 52 Comp. Cas. 293 (Cal.).

REFERENCES
Raghvendra Singh Raghuvanshi. (). Doctrine of Ultra Vires in Company Law. Available: http://www.slideshare.net/IndrajithKr/doctrine-of-ultra-vires. Last accessed 23rd Nov 2011.

The

free

dictionary.

(). Ultra

vires. Available:

http://legal-

dictionary.thefreedictionary.com/ultra+vires. Last accessed 23rd Nov