This article is written by Gitika Jain pursuing BBA.LLB (Hons) from Amity University, Kolkata. This article deals with the doctrine of ultra vires with reference to the case of Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India.
Table of Contents
Introduction
The doctrine of ultra virus appreciation can only be done if its scope and application are understood properly and various decisions of courts both English and Indian are examined carefully in this regard.
An English case for the same reference can be traced to Sutton Hospitals case. Doctrine of ultra vires was mainly applied to railway companies; the only large bodies of trading activity were railway companies those days. In the case of Ashbury Railway Carriage Company v Riche, it was held by the house of lords that to make a contract for making railway companies in foreign countries was an ultra vires act and therefore it would be regarded as void altogether.
In India, the first time that this doctrine was applied in the case of Jahangir R Modi v.Shyam Ji Laddha where the Bombay High Court held that purchasing joint-stock company by the directors on behalf of the company for purchasing shares in another joint-stock company was ultra vires unless it had expressly been authorised by the memorandum of association. It was further held that even though a joint-stock company is empowered by the memorandum to engage in the activities of shares of other companies which do not cause power to deal in its own share and if any purchase has been made by the director of the company of its own shares on behalf of the company it will be held ultra vires.
This doctrine came into force for restriction of activities of the company to the objects that are mentioned in the memorandum of association or any related objects. An activity will be considered ultra vires if it is not incidental to the objects of the company and is not beneficial for the company.
Objects of doctrine of ultra vires
- According to constitutional law, the parliament has sovereign power in the country but the Constitution has not granted more power to delegate bodies that have been authorised.
- This doctrine was brought into force to stop unauthorised use of the funds for the purposes other than that are mentioned in the memorandum or articles of association. This doctrine was justified to be in favour of the interest of all the members of the company.
Ultra vires transaction
Since the memorandum of the company has an object clause in it which sets out the activities that the company can carry under its capacity and the activities which fall outside the purview of such mentioned in the memorandum will be considered to be void and it will attract the doctrine of ultra vires. Thus, this doctrine is the principal instrument of judicial control on the actions of the corporate world and performs the role of a watchdog for big associations. But this doctrine has also created many problems. For example, if something has not been mentioned expressly or impliedly then it will be considered to be outside the scope of the company and any transaction will be considered ultra vires, therefore, in respect of practicality this doctrine may create confusion.
This doctrine has even attracted severe criticisms from all sections of society. But before we deal with the criticisms and its remedies it is necessary for us to know how this doctrine took place and what changes have been brought by all the levels of the Constitution.
Background
The ultra vires doctrine has a long and complicated history. In the Sutton hospital case of England, this doctrine was established. In the beginning of this doctrine, it was mainly applied to the railway companies because of the fact that they were the only large body of trading activities and for the first time, it was applied in an Ashbery Case. The decision, in the same way, was to apply this doctrine to the registered companies. From that time onwards, this case placed the position of registered company in the same level as that of statutory companies created under the Railways Act.
In this case, the company was mainly formed to carry on the business of general contractors or to purchase land buildings, etc. or to make or sell railway carriages and wagons. The company was formed and entered into a contract with Riche which was the firm of railway contractors. but in the general meeting of the company the contract was ratified by special resolution and was thus repudiated for breach. It was held that the contract was beyond the powers of the company and was declared to be void.
Another case after the previous one was Attorney General v. The great Eastern railway Company where it was observed by the house of lords that as this doctrine was laid in Ashbury case this doctrine needs to be applied reasonably and fairly and the application of this doctrine, in this case, was held within the company’s power.
In the case of Mudaliar v. Life insurance corporation of India, the Supreme Court repealed this doctrine. The company which was incorporated under Indian Companies Act, 1882 and had a principal objective to carry life insurance business in all its branches. It was registered under Life Insurance Act. Authorisation to make any e-payments to charitable organisations or for any charitable motives that would be useful to achieve the object of the company was in hand of the directors of that company. Since the company’s business was taken over by life insurance corporations they had nothing left to promote. In this case the doctrine of ultra vires was used to limit the activities of the company only to the objects that were specifically written in the memorandum of association of the companies or any objects that are similar to the objects mentioned thereon. It was also held that any activity carried on which was not mentioned in the objects of the company and was beyond its power was considered to be an ultra vires activity. From this case it appeared that the courts were prepared to practice easy attitude when the very discretion of the directors is mentioned in the memorandum itself.
The new model of the doctrine of ultra vires
In order to determine a transaction to be of ultra vires nature or not, there was a need to restructure this doctrine. Slade L.J. provided:
- Firstly, it was decided by him that there must exist a distinction between objects and powers. two objects that are already present and according to the nature and activity of the company are acceptable. The powers are only abilities that must be exercised within the scope of the object. The powers must not be included in the company’s memorandum and exercise of the same should be controlled to avoid any activity.
- Slade L.J. also stated that once the object of the company is applied independently it cannot be held to be ultra vires.
Facts of Mudaliar v. Life Insurance Corporation of India
- The United India Life Insurance Company limited had an extraordinary general meeting where a resolution was passed, among other matters, to sanction a donation of rupees 2,00,000 from out of the share.
- Life insurance Corporation Act came into force on 1st July, 1956 where one of the provisions was related to appointing all the assets and liabilities related to the control of business of insurance vested in the Life insurance corporation.
- The Life Insurance Corporation Act gives power to the corporation by Section 51(a) to apply to the tribunal to sort relief in respect of payments made by the insurers, not necessary for the purpose of controlled business which was done during the five years preceding the date of vesting the powers.
- Their food corporation applied to the tribunal for relief with regard to the matters of payment of rupees 2,00,000 by the company to the appellant on the basis that the payment was ultra vires the power which was given to the company and it was not reasonable enough for the purpose of controlled business. The tribunal therefore ordered the appellants to get back the sum of rupees 2,00,000 to the corporation.
- As a result a special leave application was filed to the Supreme Court to appeal this matter decided in the tribunal.
Issues
- The issue of the case was whether the plaintiff agreed or consented to letting off the parts of demolished premises. If it did then when and to what effect?
Judgement
It was therefore held that an act of the company is supposed to be ultra vires if it is not:
- Necessary to fulfill the object stated in the memorandum.
- Consequential to attend the objects of the company.
- Something the company is authorised to do by the Companies Act in the course of its business.
- Where the act of the company is ultravires, no legal relationship can be given to that effect and that act will absolutely be void and cannot be ratified even if all the members or shareholders of the company agree.
- The bearers of the company responsible for ultra wires resolution are themselves responsible to make the liability good and make good the amount belonging to the company which was unlawfully dispersed.
- The main object of the company which is required to be specified according to Section 13 of the Company Act 1956 and also specify objects ancillary to the attainment of the main object.
- It was also held that the memorandum of association of the company must be read fairly and the interpretation of its language must be done just effectively. Where it has not been provided under an act in the memorandum of association the director cannot seem to depend upon the articles of association and claim that such activity falls within its object.
- The memorandum of association has to be read with an article of association whenever there lies any ambiguity in the terms of the contract. This may explain the provisions of the memorandum but it cannot extend its scope.
Conclusion: consequences of ultra vires transaction
- Injunction
It is the responsibility of the members of the company to restrict the company to the objects given in the memorandum and to check whether the funds of the company are not spent on ultra vires transactions. If any member finds that any ultra virus app has been or is about to be undertaken, the member can himself get an injunction to restrain from it.
- Personal liability of the directors
The directors have a statutory duty to check whether the capital of the company is being used legitimately. If a director himself is involved in any ultra vires transaction, he shall be held guilty of his grave duty and will be personally liable for any loss or carrying out of that.
- Breach of warranty of authority
Any agent of the company is under the duty to be active within the ambit and scope of this and if he is found to be going beyond his authority, he will personally be held liable to the third party for the breach of warranty of his authority. Although it is a duty of the directors themselves to check upon the working of the company, yet if they appoint an outsider to this matter they will personally be held liable to him for any loss which happens because of the director.
- Ultra vires acquired property
If for the purchase of any property the company has been spending in an ultra vires manner, the company’s right over the property can be held void.
References
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