The objects of the company as per the memorandum of association were to supply and sell some material which is required in the construction of the railways. In the case of Ashbury Railway Carriage and Iron Co. The plaintiff claimed that fair value of the shares must be determined and directors must be ordered to purchase them at a fair value. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting. Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts may occur. Such acts cannot be ratified even by shareholders as they are void-ab-initio. These acts can be ratified by the company and can make it binding.
The plaintiff was a shareholder in a company. Guinness v Land Corporation of Ireland, 1883 L. . For example, a company which has been authorized by its memorandum to purchaseland had implied authority to let it and if necessary, to sell it. But, where it cannot be separated from the authority conferred on the company by the Memorandum, the whole of the transaction shall be void.
If the contract entered into is a ultra vires contract, then it becomes void and cannot ratified by shareholders also. This doctrine helps to prevent such kind of situation. Here the contract was for construction of railways which was not in the memorandum of the company and thus, was contrary to them. Thus, according to Riche, the company had all the powers and authority to enter and perform such kind of contracts. This is a similar concept that refers to the apparently authorized status of the action, as distinguished from the unauthorized status of their actions, which ultra vires refers to.
It has also an implied power to do all such things that are fairly incidental to its main objects. 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. Code of Virginia » » » » § 13. As the contract was ultra-vires the memorandum, it was held that it could not be ratified even by the assent of all the shareholders. An ultra vires act is one beyond the purposes or powers of a corporation. ShamjiLadhaand has been well established and explained by the Supreme Court in the case of A.
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. He was also in charge of collecting these newly implemented fees, and distributing them as he was directed by the ordinance. For example, under traditional ultra vires doctrine, a corporation that had as its purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles. State laws in almost every jurisdiction have also sharply reduced the importance of the ultra vires doctrine. 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 directors of the company will be personally liable to make good the funds used for the ultra vires acts. If any borrowing is made beyond the authority provided by these objective mentioned in the memorandum, it will be considered as ultra-vires. On one hand it has to be ensured that the authorities and bodies do not exceed their powers and thus abuse them and on the other hand they should have the powers which are reasonably required to make them effective in carrying out the purpose of the legislative. If the company has authority to do anything as per the memorandum of the company, then an act which is done by the directors beyond their powers can also be ratified by the shareholders, but not otherwise. Despite these principles the ultra vires doctrine was applied inconsistently and erratically. With a government entity, however, to prevent a contract from being voided as ultra vires, it is normally necessary to prove that the employee actually had authority to act.
Therefore, the courts adopted the view that such acts were voidable rather than void and that the facts should dictate whether a corporate act should have effect. The earliest legal view was that such acts were void. If a manager were to access the bank accounts of the company and use those assets for personal needs this would be classified as ultra vires acts. Origin of the doctrine The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage and Iron Co. Later on, directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company.
Several modern developments relating to corporate formation have limited the probability that ultra vires acts will occur. However, later on, the House of Lords held in other cases that the doctrine of ultra vires should be applied reasonably and unless it is expressly prohibited, a company may do an act, which is important for, or incidental to attainment of its objectives. If the company acquires any property from such funds, the company will have full right to such property. If it is found ultra vires, he can avoid such transaction and thereby safeguard his interest. Introduction Companies have to borrow funds from time to time for various projects in which they are engaged. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Article 11 is concerned with the relationship between the plaintiff as a member and the defendants, not as directors, but as members of the company.
An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form. Thus the expression ultra vires means an act beyond the powers. Members of the company have power and right to prevent the company from making such ultra-vires borrowings by bringing injunctions against the company. It will still remain ultra vires of the whole company. Failure to observe the statutory limits has been characterized as ultra vires. In the case of Clapp v. This known as Doctrine of Ultra Vires.