Ultra Vires – what does it mean ?
Despite the somewhat strange latin name, ultra vires is a legal concept and not in fact a disease. It prevents companies carrying out actions which are beyond their scope of power.
Origin & Development
The doctrine of ultra vires has been developed in the interest of the investors and creditors of a company. The concept dates back over 140 years to case in which a railway company was incorporated as a company under the Companies Act 1862. The object clause in the Memorandum of Association stated that the company was to make, sell, lend, or hire railway carriages and wagons and all kind of railway machinery, plant, fittings and rolling stock; to carry on the business of general contractors and mechanical engineers; to purchase, sell, and lease minerals, mines, buildings.
The directors of the company agreed to purchase a concession for making a railway in a foreign country. The object clause in the Memorandum of Association was to supply and sell materials required to construct railways and not to undertake the construction. This was contrary to the company’s Memorandum of Association and the court held that the construction contract entered by Ashbury Ltd was ultra vires not only to the directors but to the whole company.
Meaning & Definition
Ultra vires means “beyond the powers”. It is a concept relating mainly to corporate law. In corporate law, the act is ultra vires, when the company perform acts which are beyond it’s powers. Such actions may include acts which are specifically prohibited by the company’s articles or memorandum or excessive use of the corporate power that has not been granted to the company.
Important points to note
- Acts performed by the company that are beyond the scope of its charter are void or voidable.
- The shareholders can ratify an ultra vires act if they wish it to be ratified.
- If the company’s agent commits a tort within the course of its employment then the company cannot exclude liability on the basis that the act is ultra vires.
Exceptions to the doctrine of Ultra vires
- An act that is within the ambit of the company but beyond the authority of the directors can be ratified by the shareholders in proper form.
- If the company has purchased a property by an ultra vires act, the company’s right over such property shall still be secured.
- The company can alter its articles in order to validate an otherwise ultra vires act.
Ultra vires is a complicated subject but has less significance since the Companies Act 2006 has simplified many issues including the need for a memorandum of association.
This post provided courtesy of Darlingtons Solicitors. If you have any additional questions about company law or the concept of ultra vires, please contact darlingtons.