The doctrine of ultra vires is a fundamental principle of company law that states that a company can only do things that are authorized by its Memorandum of Association (MoA). Any act that is beyond the powers of the company is said to be ultra vires and is void and unenforceable.
The purpose of the doctrine of ultra vires is to protect the interests of the company’s creditors and shareholders. By limiting the powers of the company, the doctrine ensures that the company’s assets are used for the purposes for which they were intended.
Examples of ultra vires acts
Some examples of ultra vires acts include:
- A company entering into a contract that is not related to its objects
- A company borrowing money for a purpose that is not authorized by its MoA
- A company paying dividends to its shareholders when it is insolvent
Consequences of ultra vires acts
The consequences of an ultra vires act vary depending on the circumstances. In general, an ultra vires act is void and unenforceable. This means that the company cannot enforce the contract or recover any money that it has paid out.
However, there are some exceptions to this rule. For example, if a third party knows that the act is ultra vires, then they cannot enforce the contract against the company.
Ratification of ultra vires acts
In some cases, an ultra vires act can be ratified by the company’s shareholders. Ratification is the act of approving an act that was previously done without authority.
To ratify an ultra vires act, the shareholders must pass a special resolution at a general meeting of the company. A special resolution is a resolution that is passed by a majority of at least 75% of the votes cast.
MCQs
- Which of the following is an example of an ultra vires act?
- A company entering into a contract to sell goods
- A company borrowing money to finance its operations
- A company paying dividends to its shareholders
- All of the above
Answer: The correct answer is All of the above. All of the acts mentioned are ultra vires acts if they are not authorized by the company’s MoA.
- Can a third party enforce an ultra vires contract against the company?
- Yes
- No
- Only if the third party knew that the act was ultra vires
Answer: The correct answer is No. A third party cannot enforce an ultra vires contract against the company. However, the third party may be able to recover damages from the directors of the company if they knew that the act was ultra vires.
- Can an ultra vires act be ratified by the company’s shareholders?
- Yes
- No
- Only if the ultra vires act was beneficial to the company
Answer: The correct answer is Yes. An ultra vires act can be ratified by the company’s shareholders if they pass a special resolution at a general meeting of the company.