The doctrine of ultra vires holds that a company has only the capacity conferred by its memorandum and the Act. An act beyond the objects clause is ultra vires and void, not merely voidable. The doctrine is a consequence of the company’s separate legal personality: the company is a creation of law, and its capacity is limited by the terms of its creation.
The Objects Clause as the Boundary
The objects clause in the memorandum defines what the company is formed to do. The 2013 Act requires the memorandum to state the objects for which the company is proposed to be incorporated. An act that falls outside the objects clause is beyond the company’s capacity. The consequence is not that the act is merely irregular; it is that the act cannot be ratified by the shareholders, because ratification cannot confer a capacity the company does not have.
The Categories of Ultra Vires Acts
An ultra vires borrowing is not binding on the company, although the lender may have a remedy in restitution. An ultra vires guarantee is not enforceable against the company. An ultra vires donation or investment is similarly vulnerable. The doctrine applies to contracts, borrowings, guarantees, investments, donations and litigation. An act that is incidental to the objects—reasonably necessary for carrying out the objects—is intra vires even if not expressly listed.
The Exceptions and Limits
The doctrine has been narrowed by the “incidental powers” approach: a company has the powers reasonably incidental to its objects, even if the memorandum does not expressly list them. The doctrine also interacts with the indoor-management rule: a third party dealing with the company in good faith is not ordinarily affected by an internal irregularity, but the third party is affected by an act that is beyond the company’s capacity. The distinction is between an irregular exercise of an existing power (indoor management) and an exercise of a power the company does not have (ultra vires).
The Object-Alteration Route
The remedy for an ultra vires problem is an alteration of the objects clause under Section 13, subject to the special resolution and, where applicable, the Section 13(8) requirements for companies that have raised public money. An object alteration widens the boundary prospectively; it does not retrospectively validate an act that was ultra vires when done.
Call to Action: We advise companies on objects-clause drafting, ultra vires risk and object alterations. For a corporate-capacity review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.