Distinction between ultra-vires and unlawful conduct
An ultra-vires act should not be confused with an illicit act. Frequently misconstrued as synonymous terms, they are in fact distinct phrases. Ultra-vires refers to anything that surpasses the objectives outlined in the company’s memorandum. Anything that violates the law, is prohibited by law, or entails civil liability is considered illegal. Although something that is ultra-vires may or may not be prohibited, it is void-ab-initio regardless.
- Doctrine of Ultra Vires
The Ultra Vires Doctrine is an essential principle of corporate law. It specifies that a deviation from the objectives of a company, as delineated in its Memorandum of Association, is only permissible to the degree allowed by the Act. Therefore, should the company perform an action or enter into a contract that exceeds the authority of the directors and/or the company, said action/contract shall be void and shall not bind the company legally.
“Ultra Vires” translates to “Beyond Powers.” From a legal standpoint, its applicability is limited to actions carried out beyond the doer’s authorized powers. This operates under the supposition that the powers possess inherent limitations. Due to the fact that the Doctrine of Ultra Vires restricts the organization to the purposes outlined in the memorandum, the organization may:
- Prohibited from employing its funds for objectives not explicitly outlined in the Memorandum.
- Prohibited from engaging in any commerce other than that which is authorized.
A lawsuit against the company regarding an ultra vires transaction is futile. Moreover, it is immune to legal action. A company that enters into an ultra vires contract by providing commodities, services, or lending money is precluded from collecting payment or recovering the loan.
In contrast, if a lender extends a loan to a company that has not yet repaid it, the lender may obtain an injunction to prevent the company from disbursing the funds. As the transaction is ultra vires for the company, the lender retains ownership of the funds and the company does not acquire ownership. As such, the lender retains this right.
Moreover, should the organization procure funds through an ultra vires transaction in order to repay a lawful loan, the lender retains the right to retrieve his loan from the organization.
Occasionally, a shareholder of the company may regularize an action that is ultra vires. For instance,
- When an action exceeds the authority of directors, it can be ratified by the shareholders.
- In the event that an action violates the Articles of the company, the company may amend the Articles.
Keep in mind that an ultra vires contract cannot legally obligate a firm. It is not ‘Intravires’ by estoppel, acquiescence, passage of time, delay, or ratification.
Summing up
The idea of ultra vires prohibits the use of business objects or powers that are not explicitly mentioned in the memorandum.
As a result, an act that is ultra vires is void and will not bind the firm.
Neither the corporation nor the contract’s parties can sue over it.
Furthermore, the company cannot make it valid even if all members agree to it.
The act that violates the company’s rights will never be ratified, as is the normal practice.
If the act only affects the directors, the shareholders can ratify it.
If it violates the articles of association, the firm can amend its articles in the correct manner, and such activities can be ratified.
Doctrine of indoor management
The “Doctrine of Indoor Management” and the “doctrine of constructive notice” are fundamentally dissimilar in character. The first safeguards an external party against the illicit activities of the company, while the second safeguards the corporation itself against the unlawful activities of the outsider. The Doctrine of Indoor Management, alternatively referred to as “Turquand’s Rule,” is a long-standing concept that originated within the framework of the Doctrine of Constructive Notice more than five hundred years ago.
Indoor Management constitutes an exemption to the Indoor Management Doctrine of Constructive Notice. This doctrine emphasizes the fundamental principle that an external party entering into a contract with a company in good faith can presume that there are no internal irregularities and that the organization has adhered to all procedural requirements.
As precedented in Pacific Coast Coal Mines Ltd. v. Arbuthnot, an interloper is presumed to be knowledgeable of the Corporation’s Charter, but not of what may or may not have transpired behind closed doors. In the case of Dey v. Pullinger Engg Co., Justice Bray astutely noted that requiring individuals conducting business with companies to examine their internal processes and machinery for signs of error would disrupt the normal flow of commerce.
Lord Simonds stated in Morris v. Kanssen that individuals in the industrial age would have been hesitant to enter into contracts with corporations if they had been able to examine the organization’s inner workings.
Exception: Extending the scope of this doctrine is of utmost importance; failing to do so would render it limited in scope and favor external parties, thereby presenting a substantial liability for the company.
- Knowledge of irregularity: Under the doctrine of interior management, an outsider entering into a contract with a corporation is precluded from seeking relief when he or she has constructive or actual notice of a problem with the internal corporate management.
- Forgery: It is critical to underscore that the Doctrine of Indoor Management is not applicable in situations where an external party relies on a forged document endorsed by the organization.
- Negligence: In the event that the contract-related facts and circumstances are sufficiently dubious to warrant investigation, and an external party to the corporation fails to conduct an effective investigation, the remedy under this concept is also unavailable.
- Actions that exceed the apparent authority’s scope: This remedy is not applicable to actions that exceed the apparent authority’s scope, and the company cannot be held liable for such actions.
