Ultra vires

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Neha Singh (Querist)
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14 September 2013 Can Anyone tell me what will be the legal consequences when a company engages itself in business which is not mentioned in its main objects, incidental or other objects in MOA

Is it ultra vires? If yes..then what are the legal effects and penalties for the same?

CA Pallav Singhania

CA Pallav Singhania (Expert)
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14 September 2013 Ultra-Vires transaction means beyond the power of the company..

Following are the Consequences of an ultra vires transaction:-

The company cannot sue any person for enforcement of any of its rights.

No person can sue the company for enforcement of its rights.

The directors of the company may be held personally liable to outsiders for an ultra vires.

However, the doctrine of ultra-vires does not apply in the following cases :-

If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable.

If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error.

If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it.

Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity of the property is lost.

The lender of the money to a company under the ultra-vires contract has a right to make director personally liable.

Neha Singh

Neha Singh (Querist)
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14 September 2013 Thanks Aryan,

But here the Company is engaged in doing some other business as against its MOA, can you tell what may be the consequences in this case?

CA Pallav Singhania

CA Pallav Singhania (Expert)
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14 September 2013 In such case Directors will be held personally liable for any debt incurred during the course of such transaction and for the liability of such transaction...

Neha Singh

Neha Singh (Querist)
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14 September 2013 And Who can file case against the Company in this case?

CA Pallav Singhania

CA Pallav Singhania (Expert)
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14 September 2013 Lenders, creditors or any person whom right is affected by such transaction.

However, In Addition to this...

it is to be proved that:

(i) The tort was committed in the course of an activity which falls within the purview of the company’s memorandum, and

(ii) The tort was committed by the employee in the course of his employment.

Neha Singh

Neha Singh (Querist)
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14 September 2013 Thanks Aryan!!

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