The doctrine of ultra vires 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 effects of an ultra vires transaction can vary depending on the circumstances. In general, the following effects apply:
- The company cannot enforce the contract against the other party.
- The other party cannot enforce the contract against the company.
- The company cannot recover any money that it has paid out under the contract.
- The other party may be able to recover damages from the company if they have suffered a loss as a result of the ultra vires transaction.
Exceptions to the Effects of Ultra Vires Transactions
There are a few exceptions to the general rule that ultra vires transactions are void and unenforceable. These exceptions include:
- If the other party knew that the transaction was ultra vires, they cannot enforce the contract.
- If the transaction is ratified by the company’s shareholders, it becomes valid and enforceable.
- If the transaction is beneficial to the company, the court may order it to be enforced.
MCQs
- Which of the following is an effect of an ultra vires transaction?
- The company can enforce the contract against the other party.
- The other party can enforce the contract against the company.
- The company can recover any money that it has paid out under the contract.
- The other party may be able to recover damages from the company.
Answer: The correct answer is The other party may be able to recover damages from the company. The company cannot enforce the contract against the other party, but the other party may be able to recover damages if they have suffered a loss as a result of the ultra vires transaction.
- 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. The third party can only enforce the contract if they are a party to it.
- Can an ultra vires transaction 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 transaction can be ratified by the company’s shareholders if they pass a special resolution at a general meeting of the company.