Ultra Vires is derived from Latin words meaning “ultra” which means ‘beyond’ and “vires” meaning ‘power or authority’. So it can be said that anything which is beyond the authority or power is called ultra- vires. In the context of the company, it refers to anything which is done by the company or its directors which are beyond their legal authority or which was outside the scope of the object of the company is ultra-vires.
Significance of Ultra Vires
The doctrine of ultra vires applies to the Memorandum of Association (MOA) of a company. The MOA contains scope of activities to be done by company in its objects clause and a company cannot undertake any activity which is not defined MOA. Any activity done beyond scope of MOA is considered as an ultra vires activity. Such activities are null or void and all ultra vires transactions can never be subsequently ratified or validated, not even by the consent of the shareholders. This is meant to protect the interests of the shareholders and creditors of the company.
Effects of Ultra Vires
The directors entering into ultra vires contracts may be liable to the third party for breach of warranty of authority. The directors can be held personally liable by the company for acts done by them ultra vires to MOA.
If the directors of the company divert company’s capital, for purpose alien to the company’s MOA, they will be personally liable to replace it.
Similarly, if a director makes an ultra vires payment to an outside party, he can be compelled to make good the funds used. The director who refunded the money could also get indemnity as against the person who received the payment knowing fully well that the payment is given to him was ultra vires.
Similarly, ultra vires borrowing does not create the relation of creditor and debtor.
A contract which is ultra vires the company will have no legal effect. Such contract are void and are not biding upon the company and the company can neither sue nor be sued.