LECTURE # 7-A

Explain fully the doctrine of 'Ultra vires' in relation to companies. What are the liabilities of a company and its agents for ultra vires acts?

Ans. Doctrine of ultra vires : When an act if performed and a transaction is carried out which, though legal in itself, is not authorised by the object clause in the Mmemorandum of Association or by statute it is said to be ultra vires, i.e., beyond the powers of a company. This principle is based on the facts That a company is formed only for certain specified purposes, which are defined in its Memorandum of Association or charter, and any act beyond the powers conferred is null and void and has no legal effect.In the application of this doctrine to limited companies there are three classes of ultra vires acts, namely:

(1) Ultra vires the Memorandum: The acts which are ultra vires the memorandum are entirely void, e.g., engaging in any business not covered by the object clause of the memorandum.

(2) Ultra vires the Articles: The acts which are ultra vires the memorandum but intra vires the articles are also void, e.g., paying interest on calls in advance at a rate higher than that allowed by the articles.

The company in general meeting may, however, alter the articles by special resolution and ratify any such unauthorised acts whenever any such unauthorised act is to be ratified, the provisions of the Contract Act relating to the principle of ratification must be observed.(3) Ultra vires Directors: In Company Law the term ultra vires is sometimes used to describe acts which are not beyond the capacity of the company but simply beyond the capacity of the Board of Directors. Such acts may be breach of the articles but they are not beyond the powers of the company, e.g., payment of gratuity to an employee by directors who are not authorised to do so. The company in general meeting may ratify such an unauthorised act of directors by passing an ordinary resolution.

A company has power to do whatever is legally authorised by its memorandum and has also implied power to do whatever may properly be incidental or conducive to the attainment of the stated objects, unless expressly prohibited by the memorandum. Thus, a trading company may borrow with or without security, without any express power to do so. A company has also power to do such other things as it is authorised to do by the Ordinance, e.g., it may change its name.

The company cannot do anything outside the powers given in the memorandum or powers given to it by the Ordinance or anything prohibited by the Ordinance. Anything so done becomes ultra vires the company; it is void, and cannot be validated by the assent of the general meeting of the members or of every individual member or by obtaining a consent decree against the company or by estoppel. A company can neither enforce nor be held liable on an ultra vires contract. A company can be restrained by injunction obtained at the suit of one of its shareholders from doing an ultra vires act.

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LECTURE # 7-A

Ultra vires Company: A company is not bound by an ultra vires contract. An ultra vires agreement cannot become intra vires by reason of estoppel, lapse of time, ratification, acquiescence, or delay. Persons dealing with the company, even if they do not have actual notice of the company's powers because they have not inspected the memorandum, have constructive notice of the powers. Accordingly, if they make a contract which is to their knowledge actual or constructive ultra vires the company they cannot enforce it. If they have supplied goods and services under such a contract they cannot obtain payment, and if they have lent money the general rule is they cannot recover it.

An act which is ultra vires a company but ultra vires the directors may be ratified by an ordinary resolution of the shareholders in a general meeting, or even without a meeting, although to authorise such acts in the future an alteration of the articles by special resolution is required.

Liabilities of company for ultra vires acts: All persons dealing with the company are bound to know its constitution, so that it will not be liable for any act which is ultra vires of the directors; but any act of the directors which is not ultra vires of the company may be ratified by the company as indicated above. And apart from ratification, the company will be answerable for any property which has come into its possession through the unauthorised acts of the directors.

Liabilities of agents for ultra vires acts: A company can act only through its agents. Directors and officials to the company are its agents. A company is liable in respect of contracts made by its agents only when acting within the scope of their authority provided that the contract is within the powers of the company, but not for acts and representations not within that scope. The agents of the company cannot bind the company in respect of acts and transactions which go beyond their powers or which are not incidental to the legitimate exercise of the same. They may make themselves liable, but not the company; and those who deal with them should look to them only, and not to the company.

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LECTURE # 7-A

Write a note on Doctrine of Indoor Management.

Ans. Doctrine of Indoor Management: Every person dealing with the company is deemed to have a constructive notice of the memorandum as it is a document which has to be registered and is open to public inspection. Therefore, the members and outsiders are

deemed to be acquainted with all the provisions of the memorandum. But though the persons dealing with the company are bound to have constructive notice of memorandum and articles and the limits within which the company must act, they are not deemed to have notice of Internal affairs of the company. An outsider can assume the regularity of the internal affairs of the company. This is a doctrine of indoor management. If there be any irregularity in the indoor management of the company, a person dealing with the company is not affected by such internal irregularity unless someone has actually come to know of such irregularity. The doctrine of indoor management does not apply to the case of a forgery, a transaction which is void ab initio, or, where an outsider actually knows of the irregularity.

The rule of indoor management was first laid down in the case of Royal British Bank v. Turquand. The purpose of the rule is to provide some measure of protection for those who enter into._ contracts with the company from the consequences of the complex j internal organisation of companies. The essence of the rule is that, while those dealing with companies are affected with constructive notice of its publicly registered documents, they are not affected by what is called the indoor management of companies. They are entitled to assume that the internal procedures of company, both at directors' and shareholders’ meetings’ have been regularly conducted in the absence of actual notice to the contrary. Section 173 (3) of the Companies Ordinance gives direct support to this principle. It provides that where the minutes of shareholders' or directors' meetings are kept-as the section requires there is a presumption, until the contrary is proved, that all meetings have been regularly convened and conducted. However, where it applies, the Turquand rule is conclusive and does not simply raise a rebuttable presumption.

Exceptions: This rule is subject to exceptions. It does not apply:

(1) When it is known that the rules of internal regulations have not been complied with.

(2) When a document is forgery.(3) What, ah agent of the company has done something beyond any authority which

was given to him or which he was held put as having.(4) When the person dealing with the company has been put on inquiry, as where a

director or officer does something outside his normal powers.(5) When the person dealing with the company has not relied on the articles at all.(6) When a scheme of amalgamation is proposed the matter is not one of indoor

management.

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