Doctrine of Ultra Vires in Company Borrowing
Explore the significance of the doctrine of ultra vires in company borrowing, including its origins, implications, and effects on creditors, shareholders, and directors. Learn about the types of ultra vires acts and exceptions to the doctrine to ensure financial compliance and prevent insolvency.
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Presentation Transcript
Introduction Borrowing is an indispensable part of day to day transactions of a company, and no company can be imagined to run without borrowing from time to time. However, there are certain restrictions while making such borrowings. If companies go beyond their powers to borrow then such borrowings may be deemed as ultra-vires. ULTRA VIRES
Lakshamanaswami Muddalair Vs Life Insurance Corporation of india AIR 1963 SC 1185) Jahangir R. Vs Shaamji Ladha (1866) Ashbury Railway Carriage and Iron Company (Limited)V S Riche, (1874-75) L.R. 7 H.L. 653 Origin of Doctrine of Ultra vires
MEANING OF THE DOCTRINE LATIN WORDS; ULTRA VIRES (BEYOND AUTHORITY) THE OBJECTS OF MEMORA NDUM OF COMPANY
WHY IS THE DOCTRINE NEEDED? ASSURENCE TO CREDITORS AND SHAREHOLDERS ASSURENCE TO CREDITORS AND SHAREHOLDERS RIGHTEOUS UTILIZATION OF FUNDS OF THE COMPANY RIGHTEOUS UTILIZATION OF FUNDS OF THE COMPANY TO PREVENT INSOLVENCY OF THE COMPANY TO PREVENT INSOLVENCY OF THE COMPANY TO KEEP A CHECK ON THE DIRECTORS OF THE COMPANY TO KEEP A CHECK ON THE DIRECTORS OF THE COMPANY
Basic principles of the Doctrine; transaction cannot be ratified by all the shareholders Performance of the contract cannot be attacked on the basis of this doctrine. parties can raise the defense of ultra-vires. suit can be brought for recovery of the benefits conferred. any default or tort of an agent , no defence from ultra-vires.
Types of ultra-vires acts 2.Acts which are ultra-vires to the Memorandum of the company. 1..Acts which are ultra-vires to the Companies Act. 4.Acts which are ultra-vires to the directors of the company but intra- vires the company. 3. Acts which are ultra-vires to the Articles of the company but intra- vires the company.
Effects of ultra vires Transactions Void ab initio Personal liability of Directors (Jehangir R. Modi v. Shamji Ladha, [1866 ] Injunction (Attorney General v. Gr. Eastern Rly. Co. (1880) Estoppel or ratification
EXCEPTIONS OF THE DOCTRINE . While applying doctrine of ultra vires, the effects which are consequential to the act shall not be invalid unless they are expressly prohibited by the Company s Act. There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholder s . . If the company has acquired any property through an investment, which is ultra vires, the company s right over such a property shall still be secured. An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders.
. . CONCLUSION Directors of the company can act only within the purview of the authority provided to them under these objectives. If any borrowing is made beyond the authority provided by these objective mentioned in the memorandum, it will be considered as ultra-vires.
