The Latin phrase ‘ultra vires’ is a combination of Latin words which refers to “beyond the powers”. Any act which requires legal authority, and if done with such an authority, it is characterized in law as ‘intra vires’ literally meaning “within the powers,” and if done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed “valid” and those that are ultra vires “invalid”. The term ultra vires signifies a concept distinct from illegality. The application of the term ultra vires is quite broad, as it includes not acts prohibited under any Act, but the acts which are in excess of powers granted. The doctrine of ultra vires is one of the basic doctrines of both Administrative and Company Law. In administrative law, this doctrine envisages that an authority can exercise only so much power as is conferred on it by law. And in company law, the object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it.
Ultra vires may either be substantive or procedural in nature. Where the object clause does not provide an act, the company is not bound by the act because ‘there is a lack of legal capacity to incur responsibility for the action’. This is a substantive ultra vires. A procedural ultra vires is one where there is no lack of power or capacity of the company, but the organ of the company which has done the act does not have the power or has exceeded the power. A procedural ultra vires may or may not bind the company but Substantive ultra vires however is decisive and a company is not bound by such an act.
Doctrine of ultra vires has been developed to protect the investors and creditors of the company. After the advent of joint stock companies, this rule was laid down in the case of Ashbury Rly. Carriage & Iron Co. Ltd. Vs. Riche[(1875)L.R. 7 HL 653. The British courts strictly interpreted the object clause as it stipulates the character of personality and strictly delimits the corporate existence. There have been Indian cases also where the concept of ultra vires has been upheld. The Supreme Court of India in Dr. Lakshmanaswami Mudaliar vs LIC [(1963)33 Comp.Cases 420(S.C)] held that acts incidental must have reasonable proximity with the main object specified. An object is required to be differentiated from power. Powers are necessary ingredient to attain objects. The effects of ultra vires transactions are null and void ab initio. If there is prior information of an ultra vires act, any member can get an injunction from the court. The directors and other officers are personally accountable to third parties in case of ultra vires transaction. But if company’s money has been used ultra vires to acquire some property, the company’s right over such property is held secured. The shareholders can ratify an act which is ultra vires the powers of the directors. The company can recover money advanced on the basis of ultra vires lending.
During the middle of the 20th century many authors as well as judges of England and America started questioning the validity of the principle of ultra vires. Many disadvantages of the principle of ultra vires and its impracticability were noticed. In recent times the principle of ultra vires has become toothless due to circumventing commercial practice. Cohen Committee in its report rightly suggested Doctrine of Ultra Vires as an illusory protection to the shareholders which shareholders themselves have discarded long time back. It also creates difficulties for the management for interpreting the objects at every stage. In addition, objects clauses can now be easily amended if the corporation seeks to do business in new areas, to carry on business more economically or more efficiently, to enlarge or change the area of its operations, to restrict or abandon any of the objects specified in memorandum or to amalgamate with any other company or body of persons. Though the doctrine of ultra vires has played an important role in the development of corporate powers, but is largely obsolete in modern private corporation law, the doctrine remains in full force for government entities. With passage of time the ambit of Doctrine of ultra vires seems to be diminishing and more regressive in nature.