CHAPTER - III

SCOPE APPLICATION AND

CONSEQUENCES OF THE
DOCTRINE OF ULTRA VIRES
 CHAPTER-III

SCOPE APPLICATION AND

CONSEQUENCES OF THE
DOCTRINE OF ULTRA VIRES
In order to appreciate the doctrine of Ultra Vires and understand its

scope and application it is necessary to examine the various decisions of

the various Courts, both English and the Indian Court in this regard.

In England the doctrine of ultra vires is usually traced to Suttons

Hospital case.1 In the beginning it was mainly applied to railway

companies, it was because of the fact that during those days railway

companies were the only large bodies of trading activities. In Ashbury

Railway Carriage compay V. Riche the house of lords held that the

contract to make a railway in foreign country was beyond the powers of

(Ultra Vires) the company and there fore altogether void and was in

capable of ratification even by unanimous consent of all the shareholders.

The Bombay High Court in India for the first time applied the doctrine in

1 Colomn. V. Estern Countries Rly Company, 10 Beav. 1 (14), Estern Anglian Rly. company V.
Eastern countries Rly. company, 11 C. B. 775 (803) Quoted by Alam M. Moshir in cochin University
Law Reniew 1979 Sept. 3 305-28 in his Article ‘Doctrine of Ultra Vires in Company Low’.

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Jahangir R. Modi V. Shamji Ladha.2 where the court held that the

purchase by the directors of a Joint Stock Company, on behalf of the

company and of shares in other Joint Stock companies, unless expressly

authorized by the memorandum, was ultra vires. The Court further held

that a joint stock company, even though it be empowered by its

memorandum to deal in the shares of other companies was not therefore

empowered to deal in its own shares, and a purchase by director of the

company of its own shares on behalf of the company was therefore ultra

vires.

The doctrine of ultra vires has been used to restrict the activities of

companies to the objects specially enumerated in their memorandum of

association or to such objects as are necessarily incidental there to. An

activity quite foreign to the sanctioned objects of the company would be

beyond its powers even though the same may be beneficial to the

company.

A. ASHBURY RAILWAY CARRIAGE AND IRON CO. Y

RICHE

The true position with respect to the ultra-vires doctrine was finally

settled by the House of Lords in the celebrated case of Ashbyry Railway

2 (1866-67) 4 Bam. H.C. Report 185, See alro : in Re-Part canning Co. Ltd. , (1871)7 Bangal L.R.
(O.C.) 583. waman Lai Chhatalal Parlkh V. Steam Navigation Co. Ltd. A.I.R. (1944) 31 BoM. 131.

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 carriage and Iron V. Riche3 decided in 1875. In that case the object of

the company were “to make and sell or lend on hire, railway carriages

and wagons and all kinds of railway plant, fittings, machinery and rolling

stock and to carry on the business of mechanical engineers & general

minerals, land & buildings; to purchase and sell as merchants, timber,

coals, metals or other material and to buy & sell any such material on

commission or as agents; to acquire, purchase hire construct or erect

works or building for the purpose of the company; and to do all such

other things as are necessary, contingent incidental or conductive to all or

any of such objects.“

The Company with the aforesaid objects in the memorandum, had

entered into a contract with the plaintiff for the financing of the

construction of a railway line in Belgium and the question raised in the

action was whether that contract was valid, The House of Lords held

that the contract was ultra-vires the company and therefore altogether

void. Lord Cairns L.C. after stating that the “subscriber are to state the

objects for which the proposed company is to be established, and the

existence, the coming into existence of the company is to be an existence

& to be a coming into existence, for those objects and for those objects

3 (1875) LR 7 HL 653.

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 alone” and after referring to the words at the end of section 12 to the

effect that “no alteration shall be made by any company in the conditions

contained in its memorandum of association” proceeded as follows:

“If that is the purpose for which the corporation is established it is

a mode of incorporation which contains in it both that which is

affirmative and that which is negative. It states affirmatively the ambit

and extent of vitality and power which bylaw are given to the corporation

and it states, if it is necessary so to state, negatively that nothing shall be

beyond that ambit and that no attempt shall be made to use the corporate

life for any other purpose than that which is so specified/44

He further observed4
5 “My Lords, this is the first section which

speaks of incorporation of the company but your Lordship will observe

that it does not speak of that incorporation as the creation of a corporation

with inherent common law rights, such rights as are by common law

possessed by every corporation & without any other limit than would by

common law be assigned to them, but it speaks of the company being

incorporated with reference to a memorandum of association and you are

referred thereby to the provisions which subsequently are to be found

upon the subject of the memorandum of association.44

4. Id at 669.
5. Id at 668

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 House of Lords further held as a corollary to the above that the

contract being ultra-vires and therefore void in its inception, was

incapable of ratification even by the unanimous consent of all the

shareholders.6

What was the purpose of ultra-vires doctrine? its purpose was two­

fold, first to protect investors in the company so that they might know the

objects for which their money was to be employed & secondly to protect

creditors of the company by ensuring that its funds, to which alone they

would look for payment in the case of a limited company, were not

dissipated in unauthorized activities.7

Doctrine of ultra-vires has one more purpose viz as a matter of

constitutional law, Parliament..................... does not grant more powers to

delegated bodies that it has authorized.

Subsequently in Att. Gen. V. Great Eastern Rly8 the principle laid

down in Asbury Railway carriage co. V. Riche was again affirmed by

the House of Lords, but it was in some degree qualified by the rule there

laid down that the principle was one to be reasonably and not

unreasonably understood and applied and that whatever may fairly be

6 . See also Rajendra Nath Dutta V. Shibendra Nath Mukherjee (1982) 52 Comp Cas 293 Cal.
7 Supra n.8 Per Caimas, L.C.
8 (1880) SAPP Cas 473.

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regarded as incidental or consequential upon those things which the

legislature had authorized (that is those things specified in the

memorandum as objects) ought not, unless expressly prohibited, to be

held by judicial construction be intra-vires. A company authorized by its

memorandum to buy land has implied authority to let it and where

necessary to sell it.9 However if the act is not incidental or consequential

to the object, it would be ultra-vires the company. In the case of London

County Council V. Att. Gen,10 it was held that the statutory power of

London County Council to purchase & work tramways do not empower it

to work omnibus in connection with the tramways business. In this case

Lord Halsbury L.C. referring to Ashbury Railway Carriage & Iron Co.

V. Riche*11 & Attorney General V. Great Eastern railway12 said “I think

now it can not be doubted that those two cases do constitute the law upon

the subject. “

Indian courts are applying the doctrine from the very beginning.

The law is basically based on English law. The first Indian case on ultra-

vires doctrine arose in connection with a company formed and registered

under Act. no. XIX of 1857. It was Jahangir Rastamji V Shamji Lodha.13

9 Gujrat Ginning and Mfg. Co. v. Motilal Hirabai Spg. & Wvg. Co. AIR 1930 AC Bomb. 84.
10 (1902) AC 165.
11 Supra n. S See also A Lakshmen swami Mudaliar V. LIC AIR 1963 SC 1185.
12 (1880) 5AC473
13 4 Bomb H.C.R. 185 (1866-67)

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In this case the plaintiff was the registered shareholder of SSI Shares in a

company of which the defendents were the directors. The plaintiff alleged

that the objects of the association, as defined in the memorandum of

association, did not include dealing in shares, nor the purchase of the

company’s own shares; yet the defendents, as directors, did deal in shares

and did purchase1,422 shares and thereby incurred lossed on behalf of the

company. The learned judge examined the memorandum and articles of

association of the company to find out if the transactions in question of

the company to find out if the transactions in question were authorized by

them. The learned judge came to the conclusion that transactions were not

authorized by the memorandum and articles and were accordingly ultra-

vires.14 Since then the doctrine has been applied and acted upon in a

number of cases.15

The doctrine has been affirmed by the Supreme Court in A.

Lakshmana-Swami Mudaliar v. L.I.C.16 The facts of the case were as

follows viz United India Life Assurance co. was authorized by its

memorandum of association to carry on business of life Insurance. At an

extra ordinary meeting of the shareholders, a resolution was passed in

which Rs. 2.00 lakhs were sanctioned to be given as donation to a

I4For Comments on this case see Sangal, P.S.: National and Multinational Companies; Some Legal
Issues 9 (1 ed. 1981)
15 See Inre Port Canning and Land Investment company (1871) 7 Bengal L.R. 583, Woman Lai V
Scindia steam Navigatior Co. AIR 1944 Bomb. 141
16 AIR 1963 SC 1185.

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Memorial Trust purposed to be formed with the object of promoting

technical or business knowledge, including knowledge of Insurance.

Subsequently the business of the company was, taken over by LIC. LIC

called upon the Appellant to refund the amount received by the trust on

the contention that resolution as well as the payment of donation was

ultra-vires the object of the company.

It was pertinent to mention that by the articles the directors were

empowered to make donation towards any charitable or benevolent object

or for any public, general or useful object.

The supreme Court held that company is competent to carry out its

objects specified in the memo of Association and cannot travel beyond

the objects. The company was authorized to carry on the business of

life insurance by one of clauses of objects. The company was also

authorized to do “all such other things as are incidental or conducive to

the attainment of the above objects or any of them.” The Court held that

power to carry out what is incidental or conducive to the attainment of

that object, for such extension merely permits something to be done

which is connected with the objects to be attained.” But some indirect or

remote benefit which the company may obtain by doing an act not

otherwise within the object clause is never permitted by the extension.

The court held that donations of the company’s funds for the benefit of a

trust for charitable purpose is not incidental to or naturally conducive to

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the business of life Insurance. There is in fact no discernible connection

between the donation & objects of company, The Court further held that

“power” to do a thing & “objects” of a company are .different things. By

conferring power, object clause cannot be extended. Directors can

exercise a power, even though empowered to do so by the Articles, only

if the company can exercise such power under its Memo of association.

Though under Articles directors were invested with the authority to

establish, subscribe to any institution which may be for the benefit of the

Co & to make payment towards any charitable or any benevolent object

or for general public or useful object, this is within the authority of

directors only if the company has power under the memorandum to

achieve the object specified or for doing anything incidental with the

competence of the company.

B. QBECTS OF THE ULTRA VIRES DOCTRINE

There are various reasons which have been suggested in

1*7
justification of the rale of ultra vires. According to palmer, the reasons

for the development of the rale are :

(i) As a matter of constitutional law, parliament has the sovereign

power in the country, does not grant more power to delegate

bodies that it has authorized, and

17 Palmer’s Company Law, 84 (1976).

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 (ii) As a practical consideration it was thought that the rule would

project investors in the company and creditors of it against the

' unauthorised use of funds.

Thus, the rule was justified as being in the interests of all the

members. By it, members could in theory be assured that their investment

would not be frittered away on activities which they did not have in

contemplation when they invested their monies in company. It could also

be justified as a safeguard for creditors who would be protected form

seeing the property of the company diverted to uncontemplated objects.

Gower picturesquely puts the same as :

An investor in a goldmining Company did not find himself holding

shares in a fried-fish shop, and to give those who allowed credit to a

limited company some assurance that its assets would not be dissipated in
1Q
unauthorized enterprises.

C. ULTRA VIRES TRANSACTIONS

The objects clause in a Company’s memorandum sets out those

acts which a company has capacity to under take. Acts which fall outside
the scope of powers defined in the objects clause are void. This is a
simple formulation of the ‘ultra vires’ doctrine.

18 See L.C. B. Gower

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 The doctrine of ultra vires is the principal instrument of judicial

control of corporate action and has traditionally performed the role of a

watch dog confining the management complex within a defined'frame­

work. Simultaneously, this doctrine has created many problems. If an

object is neither mentioned expressly nor flows impliedly from what is

expressed, then it is outside the scope of the company; and a transaction

to effect such an object is ultra vires, therefore, this doctrine can create

serious practical difficulties for the corporation and for the persons with

whom it transacts business, transaction involving huge sums may become

void.

The doctrine has received severe criticism from all sections of the

society especially in Great Britain. But before dealing with the criticism

of the doctrine and its remedies, it is necessary to understand how the

doctrine evolved and what changes were brought to it in its operation by

the judiciaries, legislature and businessmen.

The ultra vires rule has a long and some what tangled history.19 In

England the doctrine of ultra vires is usually traced to Sutton’s Hospital

case. This case has generally been taken to establish that a chartered

corporation has all the power of a natural person in so far as an artificial

19 Moshir Alam, M., “ The Doctrine of Ultra Vires in Compan Law, “ 1979 (s) C.U.L.R. 305.

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 entity is physically capable of exercising them; if it misuses its powers by

exceeding the objects in the charter, it may be that proceedings in the

nature of quo warranto could be taken to restrain it or in the nature of'

scire facias to forget the charter, but in the meantime its actions will be

fully effective.

In the beginning this doctrine was mainly applied to railway

Companies. It was because of the fact that during those days railway

companies were the only large bodies of trading activities.20

The House of Lords for the first time applied the doctrine, in

Ashbury Rly. Carriage & Iron co. Ltd. V. Riche.21 This decision is the

locus classieus on the doctrine as applied to registered Companies. This

case placed registered Companies in the same position as the statutory

corporations such as those created under the Railway Acts. This decision

made it clear that the registered companies did not belong to the

family of common - Low corporations or chartered companies and did

not possess their general capacity to bind themselves to do anything

which a natural person could.

20 See East. Anglian Rly. Co. v. The Eastern counties Rly. Co. (1851) 11 C.B. 775.
21 (1875) 44LJ. Exch 185.

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 In this case a Company was formed (1) to make and sell, or lend on

hire railway carriages and wagons (2) to carry on the business of

mechanical engineers and general contractors, (3) to purchase, lease work

and mines, minerals land and buildings. The Company entered in to a

contract with Riche, a firm of railway contractors, to finance the

construction of a railway line in Belguim. The general meeting of the

Company ratified the contract by passing a special resolution to that

effect. The company subsequently repudiated the contract and the

concessionaries such for breach.

The House of Lords held that the contract was beyond the powers

of the Company and, therefore, altogether void. The terms “general

contractors” must be taken to indicate the making generally of such

contracts as are connected with the business of mechanical engineers. If

the term “general contractors” is not so interpreted, it would authorize the

making of contracts of any and every description, such as for instance, of

fire and marine insurance and the memorandum in place of specifying the

particular kind of business, would virtually point to the carrying on of the

business, would virtually point t the carrying on of the business of any

kind whatsoever and would, therefore, be altogether void. The House of

Lords further held that it was incapable of ratification even by the

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 unanimous consent of all the shareholders. Incapacity to ratify the act

followed logically from the initial incapacity to do it. In the words of

Lord Cairns, L.C.:

If every Share holder of the Company had been in room and had

said. ‘That is a contract which we desire to make, which we authorize the

directors to make’. The case would not have stood in any different

position from that in which it stands now. The shareholders would

thereby, by unanimous consent, have been attempting to do the very thing

which by Act of Parliament they were prohibited from doing.

In the next leading case of Attorney General v. The Great Eastern

Railway company, however, the House of Lords observed that the

doctrine of ultra vires as laid down in the Ashbury case should be

retained but it “ought to be reasonably, and not unreasonably understood

and applied, and whatever may fairly be regarded as incidental to or

consequential upon those things which the legislature has authorized,

ought not to be held, by judicial construction, to be ultra vires.23 Statute to

acquire the undertaking of two existing railway companies and to

construct and run certain other railways. The question before the Court

was whether it was within its power, as defined by the incorporating

22 (1880) 5 A.C. 473.

23 (1880) 5A.C. 478

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statute,24 to hire locomotives and railing stock to another railway

company operating in the same area. The Court, held that activities in

question were within the Company’s powers.

The Principle of incidental object as laid down in the Great Eastern

Railway Company case was followed in Deuchar V. Gas light and coke

Company.25 In this case a gas company was empowered to make and sell

gas. In the course of making gas from coal the Company produced a

number of residual products. The memorandum authorised the respondent

to convert those residual in to a marketable estate. Among those residual

products was a substance called naphthalene, and naphthalene could

profitably be converted in to beta- napthal, a substance which is used in

making dyes. That conversion was best effected by the use of caustic

soda. For a time, they provided the necessary caustic soda by purchase

but after sometime they manufactured it themselves.

The question was whether the respondents were justified in

manufacturing caustic soda themselves.

The Court held that as no particular method of “providing” the

“Material” required for converting their residuals was prescribed or

24 The statute may be taken as equivalent to a memorandum of association.

25 (1925) A.C. 691.

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prohibited, the Company was impliedly authorized to manufacture the

necessary amount of caustic soda for themselves, and were not bound to

purchase it from the chemical manufacturers.

The Indian Companies Act.26 as well as the English Companies

Act.27 now requires incidental objects also to be stated in the

memorandum. But even if they are not so stated they would be allowed

by the principle of reasonable construction. Thus a railway company,

having authority to keep steam vessels for the purpose of a ferry, may use

them for excursion trips to the sea when they are otherwise

unemployed. Again a Railway company whose rail road is carried over

arches may convert the arches into shape,29 otherwise “it might as

reasonably be contended that a railway company are not entitled to sell

the hay which grows on their banks so as to make something out of it.”30

Similarly, a chemical manufacturer was allowed to distribute

1,00,000 to universities and scientific institutions for the furtherance of

scientific education and research as it was conducive to the continued

progress of the company as chemical manufacturers.31

26 Section 13(1) (d)

27 Section 13 (1) (C)
28 Forest v. Manchester etc. Rly. Co. (1861) 54 E.R. 803.
29 Foster V. London Catham & Dover Rly. Co., (1895)1.
30 ID. at 716.
31 Evans V. Brunner, Mond. & Co. Ltd. ()1921 1 Ch. 359.

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 But no company can devote any part of its funds to an object which

is neither essential nor incidental to the fulfillment of its objects,

however, beneficial that object might seem likely to prove.32 Accordingly

in London County Council V. Attorney General,33 the council having

statutory power to work tramways was restrained from running

omnibuses in connection with the tramways. The Court found that the

omnibus business was in no way incidental to the business of working

tramways, and therefore, could not be undertaken although it might have

materially contributed to the success of the council’s tramways. In this

case Lord Halsbury L.C., referring to Ashbury and Great Catem Railway

Cases, said,” ...............I think now it can be doubted that those two

cases do constitute the law upon the subject.”34

-Jr

Recently in simmonds V. Heffer and others also it has been

reiterated that payments unconnected with Company’s objects are ultra

vires. In this case the defendant company has been active for many years

in seeking to oppose and prevent cruelty to animals. The business of the

company is managed by its executive Committee. In the general election

of 1979, the Company through its executive committee paid the sum of

32 Eastern Counties RIy. Co. V. Hawkes (1855) 10 E.R. 928 at 934.

33 (1902) A.C. 165.
34 Id. at 167.
35 (1986) 2 Comp. L.J. 20. (Ch.D.)

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 80,000 as contribution to the Labour Party for its compaign fund in the

hope that it will legislate to end cruelty to animals. The sum was in two

parts. 50,000 was paid over without any restrictions on its use. a further

sum not exceeding 30,000 was also allotted to help the Labour Party meet

the substantial cost of the work and campaigning in the Manifesto of the

party to the cause of animal welfare generally, and in particular that part

of it within the object and purposes of the company. These payments

were challenged as ultra vires the objects of the company.

The Court held that as to 50,000, the payment is not a carrying out

of the company’s main aims or objects. The 30,000 is, however, a

horse of another colour. The company, in deciding to entrust its funds to

the Labour party committee in the way that it did, i.e. specifying the

purposes for which the money could be used, seems to have acted

insistently with its aims or objects. The Court distinguished this case from

Evans V. Brunner Mond & Co. Ltd.36 on the ground that in that case, “the

payment was compatible with and not antagonistic to the company’s main

objects." The Court observed that in the present case there was implicit

a prohibition on the spending of money for purposes alien to the main

objects. In the words of Mervyn Davies ji:

36 (1921) 1 Ch. 359

37 Simmonds V. Heffer, Supra note 46 at 24.

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 The ‘ incidental’ or ‘conducive’ power

Can only be used in the pursuant of,

or to extend, an express authorized

object. It was used in that way in the

Brunner Mond. case. Such a power may

not be used to negative an implied prohibition

• 38
in an express power.

The net result of these cases was that : (a) a company has the

power to do such things as are essential to the attainment of its objects

specified in the memorandum; (b) a Company also has the power to do all

such other things as are reasonably and fairly incidental to its objects; and

(c) a company has the power to do such things as are authorized to be

done by the Companies Act. Everything else is ultra vires.

This development of the doctrine has been approved by the

decision of the Court of Appeal in Bell Houses Ltd. v. City wall

on
properties Ltd. In this case a Company’s objects clause authorized it to

carry on such trade or business which in the opinion of the board of

directors could be carried on advantageously with the existing business of

the Company. The Court held that since the directors honestly believed

38 ibid.
39 (1967) 1 All E.R. 427.

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 that the transaction could be advantageously carried on as ancillary to the

Company’s main objects, it was not ultra vires.

This decision was welcomed by some as a progressive

development in the direction of the doctrine commenting on this case,

P.V.B. says40 “It would tend to reduce the prolixity of modem

memorandum of association, and to cure the injustice to third parties who

enter into contract, which are afterward to be ultra vires, both these

objectives were favoured by the Jenkins Committee.”

But this approach is not very sound. The formula in the Bell House

Case allows the directors to carry on any business which according to

them can be carried on with the main business. The directors have been

given too much discretionary powers and it is not necessary that their

good faith will keep in view the wishes of the share holders. But the

doctrine of ultra vires has great power of resilience and it seems

that those who hailed the Bell Houses case as the death of the doctrine

may have been premature.41 In Re Introduction Ltd.42, a bank lent money

to a Company on the security of debentures, knowing that money was for

its main business, pig breeding, and that its stated objects did not include

40 (1966) 82 L.O.R. 465.

41 Atiyah, P.S., Annual Survey of Common wealth Law 532 (1968).
42 (1969) 1 All E.R. 887.

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that business or anything remotely similar. The objects did, however,

include a sub-clause empowering the company “to borrow or raise money

in such manner as the company shall think fit.” A final paragraph in

common form also stated that each sub-clause should be construed

independently and the objects there set out were each “independent

objects” of the company. The Company borrowed money from its bank,

and the question was whether the contract was ultra vires. Buckley J.

refused to accept the sub-clause as a separate object, and thus the Bank’s

loan was held ultra vires and the debentures were considered void. He

held, that it was impossible to treat the power to borrow money as an

independent, object, despite the provision to this effect in the

memorandum , since this power could not in its natures be treated as

independent of the Company’s objects. Borrowing per se could not be an

object and could therefore only be incidental to other objects, and since

the only object for which the money was borrowed was the pig. breeding

business, the contract was held to be ultra vires, thus it is clear that in this

case despite the presence of an independent clause some of the express

objects may fall to be treated as no more than powers ancillary to the

dominant objects.

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 In American Home Assurance co. v. Timond Properties Ltd.43 The

facts were almost reversed as in the above case but the result was same.

Here, one of the Company’s objects were expressed in Very wide terms. It

was obviously designed to expand, the permitted scope of the Company’s

activities beyond what was provided else where in the memorandum and

to mitigate the restrictive effects of the interpretations which some courts

had placed on objects clause. There was no clause declaring that each of

the objects is an independent object. Company entered in to a joint

venture agreement with appellant. A deed of indemnity was also obtained

from the respondents pursuant to the agreement. Later on, deed of

indemnity was sought to be enforced by appellant. The respondent

company set up the defence of ultra vires with regard to its entering in to

joint venture agreement. Appellant relied on company’s objects clause

which empowered Company to conduct large number of specific

business, and also business which directors believed could conveniently

or profitably be carried on in conjunction with company’s other business,

or any of them.

The Court of Appeal of New Zealand observed, that it is

undesirable that the then directors of the respondent Company honestly

43 (1987) 2 Comp. LJ. 114 (CA- New Zealand).

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believed that game processing and exporting was capable of being

conveniently and profitably carried on in conjunction with the

manufacture of more basic foodstuffs. Accordingly, the joint venture

agreement was held properly and validly authorized. So also, the deed of

indemnity.

Thus, it can be concluded that the memorandum of association is a

public document and one intending to deal with a Company must

ascertain the business of the Company and further he should ascertain

that his own or other dealings relate to the objects specified in the

memorandum.

In India, the Bombay High Court for the first time applied the

doctrine in Jahangir R. Modi. V. Shamji Ladha.44 The facts were that the

plaintiff was the registered shareholder of 601 shares in a Company, of

which the defendants were the directors. The plaintiff alleged that the

objects of the association, as defined in the memorandum of association,

did not include dealing in shares, nor the purchase of the Company’s own

shares, yet the defendants as directors did deal in shares and thereby

incurred losses on behalf of the Company, and did purchase 1,422 shares

of the Company. Therefore, the plaintiff contended that the defendants

44 (1866-67) 4 Bom H.C.C.R. 185.

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 should account for such unauthorized dealings and should pay all losses

thereby incurred to the Company. At the outset, Sargent, J. observed:

A long series of decisions of the Courts

of law and equity in England has decided

that an incorporated joint stock Company

can do no act which is not expressly or

impliedly authorized by..................... the deed

of settlement of the Company.............it

is therefore to the memorandum and articles of

association that we must turn to determine whether

those transactions are expressly or impliedly authorized,

or as it has been sometime expressed, or impliedly

authorized, or as it has been sometimes expressed,

whether they fall within the scope of the objects

for which the Company was established.45

After having thus described the rule of ultra vires, the learned

judge proceeded to examine the memorandum and the articles of

association of the Company to find out if the transactions in question

were authorized by them and come to the conclusion that they were not

45 Id. at 190

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 authorized and were accordingly ultra-vires. It is clearly noticeable in this

case, in the words of S.R.Das,46 that, “His Lordship was inclined to place

the same value of the articles' of associations on the memorandum of

association.”

It is also rather surprising that the Learned Judge in arriving at the

rale of ultra vires did not make any reference to the relevant provision of

the Indian Law. It would have been in the fitness of things, if the learned

Judge, instead of borrowing the rale, should have based it on the

provisions of the Indian Companies Act. 1866.47

But we can not say that the learned Judge based his decision in

total disregard to Indian conditions. He was aware that the decision

would cause hardship and brought to bear on his decision the peculiar

Indian conditions also. In adhering to the rale of ultra vires, the learned

Judge saw the utility that the public would be assured that the funds of the

Company would not be applied to things other than the legitimate

purposes and objects of the Company and that this was necessary for the

Joint Stock Companies to flourish.

46 Das, S.R., “The Law of ultra vires in British India,” in Tagore Law Lectures, 38 (1903)
47 Sangal, P.S., “Ultra Vires and Companies: The Indian Experience”, (1963) 12 Int. & Comp. L.Q.
967 at 972.

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 The next case of importance on the question was In Re Port

Canning Co. Ltd.48 where, Phear, J., saw the utility of ultra vires rule

being in the interest of the public on the one hand and of the shareholders

on the other.

It may be noted that Phear, J., saw this utility of the ultra vires rule

in connection with a short “objects clause”, consisting of only four

paragraphs. Whether this usefulness of the rule is still available, when the

“object clauses” are exceedingly long, consisting of a large number of

paragraphs and when each of these paragraphs is considered an

independent paragraph, is extremely doubtful.49

After this, the rule of ultra vires has been applied and acted upon in

a number of cases50 in India.

The supreme Court of India appled the doctrine in A.L. Mudaliar

V. Life Insurance Corporation of India.51 In this case “the Company”

incorporated under the Indian Companies Act, 1882, with the principal

object of carrying on life insurance business in all its branches, was

registered as an Insurer under the Life Insurance Act, for carrying on life

48 (1871) 7 Beng. L.R. 583.

49 Sangal, P.S. National and Multinational Companies: Some Legal Issues, 9 (1981).
50 See e.g., Ahmed sait V. Bank of Mysore (1930) 59 M.L.J.28; Imperial Bank of India V. Bengal
National Bank, A.I.R. 1930 Cal. 536; Madras Native Permanent Fund Ltd. (1931) 60 M.L.J. 270;
Waman lal V. Scindia Steam Navigation Co., A.I.R. 1944 Bom. 131 Iron Jraders V. Hiralai Mittal,
A.I.R. 1962 Punj. 2
51 (1963) 33 Comp. Cas. 420

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 insurance business. The Directors were also authorized “to make

payments towards any charitable objects as would be useful for the

attainments of the company’s own objects. The company’s business

having been taken over by the Life Insurance Corporation, it had no

business left to promote.

Thus the doctrine of ultra vires has been used to restrict the

activities of companies to the objects specially enumerated in their

memorandum of association or to such objects as are necessarily

incidental thereto. An activity quite foreign to the sanctioned objects of

the Company would be beyond its powers even though the same may be

beneficial to the Company. However, it appears that the Courts are

prepared to adopt a liberal attitude when the memorandum itself vests a

discretion in the directors.

D. EROSION OF THE ULTRA-VIRES DOCTRINE

The ultra-vires rule was salutary in its intention. It prevented

traffic-king in company registration. “It ensured that an investor in a

gold-mining company did not find himself holding shares in a fried fish

shop & it gave those who allowed credit to a limited company some

assurance that its assets would not be dissipated in authorized

enterprises.52

52 See Supra n. 3 at 165.

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 However the doctrine was capable of causing hardship as great as

those which it prevented. The result of cases was that the only method by

which a company could extend its objects was by altering them in

accordance with the company Acts which invariably required

confirmation of court (now Company Law Board).53 Further in fact since

Attorney General V. Great Eastern Railway 54 courts have interpreted the

rule in liberal spirit and agreed that everything reasonably incidental to

the specified object will be intra-vires. As a result there is now a

considerable body of case law deciding what power will be implied in the

case of particular type of enterprise & what activities can be regarded as

reasonably incidental to others.

But the business-men were reluctant to leave matters to

implication; they preferred to set out in the memorandum the ancillary

power which they thought they would need. Besides, they incorporated in

the object clause all the other business which they might conceivably

want to do in future. Therefore the memorandum, far from containing the

simplicity of Table B of the Companies Act, have come to contain

statements of thirty or forty objects and ancillary power covering every

conceivable business and all the incidental powers which might be

53 In England Confirmation of court is not required. For English position, See chapter II Supra.
54 (1880) 5 AC 473

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needed to accomplish them. This made the application of the

doctrine of ultra-vires very remote and therefore there remained less

control over the activities of directors and afforded little assurance of the

preservation of the company’s assets.

1. Main Object Rule

In a bid to control this tendency the courts adopted the main object

rule of construction. The Main object rule of construction is that “where a

memorandum of association expresses the object of the company in a

series of paragraphs and one paragraph or the first two or three

paragraphs appear to embody the ’’Main object” of the company and all

other paragraphs are treated as merely ancillary to the main object and is

limited or controlled thereby.”55 In other words courts applied the ejudem

generis rule to the construction of object clause i.e. when the main objects

specified in the first few paragraphs, were followed by wide powers

expressed in general words, the latter would be constructed as covering

their exercise only for the purpose of the main objects.

In re German Date Coffee Co.56 is good illustration. The facts of

the case were as follows viz. the objects of the company included the

55 PerSalmon J. in Anglo overseas Agencies Ltd. V. Green (1961) 1 Q. B.I. at 8.

56 (1882) 20 Ch. 169.

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 following: (1) to acquire and use German patent for manufacturing coffee

from dates: (2) to acquire & use any other inventions for that or similar

purposes and (3) to import & export all description of produce for

the purpose of food; the German patent was never granted, but the

company acquired a Swedish patent for the same purpose & made coffee

from date without a patent in Hamburg. The company was solvent & the

majority of the shareholders wished to continue the company. Two

shareholders petitioned for a winding up on the grounds that its objects

had entirely failed. Held that the main objects for which the company was

formed had become impossible and therefore it was just and equitable

that the company should be wound up. Lindley L.J. observed “ In

construing a memorandum in which there are general words they must be

taken in connection with what are shown by the context to be the

dominant or main objects. It will not do under general words to turn a

company for manufacturing one thing into a company for importing

something else. Taking that as the governing principle, it seems to be

plain that the real object of this company which is called German Date

Coffee co. was to manufacture a substitute for coffee in Germany under a

patent. It is what the company was formed and for and all the rest is
c*7

subordinate to that.

57 Id. at 188.

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 CQ

It was also held in Re Haven Gold Mining co. that were the court

was satisfied that the subject matter of the business for which a company

was formed has substantially ceased to exist, it would make an order for

winding up the company although the large majority of the

shareholders desire to continue to carry on the company. All

other in object clause were treated as merely ancillary to the main object

and as limited and controlled thereby.

However the “main objects” rule of construction was excluded by

the practice of inserting an express declaration by the practice of inserting

an express declaration in the object clause to the effect that each of the

objects specified in clause regarded as independent objects and should not

be limited or restricted by reference to any other paragraphs of the object

clause. This clause is called “independent object clause.”

In Contman V. Broughman59 the House of Lords excluded the

“Main object” rule of construction by holding that the memorandum must

be construed according to the literal meaning and effect must be given to

such a clause which makes all the object clauses of the company as set

out in the memorandum, independent of the main object. The facts of the

case were as follows viz. the company’s object clause contained 30 sub-

58 (1882) 20 Ch. - 151; See also re Amalgamated Syndicate (1897) 2 Ch. 600.
59 (1918) AC 514.

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clauses enabling the company to carry on almost every kind of business

importers and exporters of merchandise (E) to acquire any concession and

contracts and to carry the same into effect. The objects clause concluded

with “independent objects clause.” The company claimed damages

against an architect and a firm of estate-agents for breach of an agreement

to assist the company to obtain a building lease of a site in a shipping

centre for a large store, shops and business development. The defense

was that the acquisition of a building leaser and the making of such an

agreement was ultra-vires the Company. Held “main object” rule was

excluded and the acquisition of the building lease and the agreement were

intra-vires.

In India also courts excluded main object rule of construction.

When the objects of the company are mentioned in a series of paragraph

in the memorandum of association and it also states that each object

should be treated as an independent object, foil effect has to be given for

each object.60

60 V.M. Rao and others V. Rajeshwari Raama Kishan and others (1986) 1 Comp LJ. Mad 3. ; See also
Seth Mohan lal V. Grain Chambers Ltd. (1968) 38 Comp Case 543, Mohan Lai Dhanjibal Mehts V.
Chunilal B.Mehta (1962) 32 Comp. Cas 970.

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 Thus we see that “independent object clause” was intended to

exclude the application of the “Main object” rule of construction and the

court gave effect to intention thus indicated.61

This development was carried forward by Bell House Ltd. V. City

wall Properties Ltd.62 The facts of the case were as follows viz. After

stating the principal business of the plaintiff company, which was that

of developing housing estates, the objects clause provided that the

company was formed “to carry on any other business whatsoever which

can, in the opinion of the Board of Directors, be advantageously carried

on by the company in connection with or as ancillary to any or the above

business or the general business of the company. The chairman of the

Board of Directors to when the Board had delegated the management of

the company acquired knowledge of and skill in securing finance for the

company’s operations. A contract was made between the plaintiff and

defendant companies for the payment of fee for arranging finance for one

of the defendents company’s schemes of development. When the plaintiff

company brought action for its fee, the defendant alleged that the making

61 In Stephen V. Mysore Reeis (1902) 1 Ch. 745, general words in later paragraph were held to be cut
down by reference to the “Main object” notwithstanding the presence of words intended to exclude any
such rule. This decision, though not expressly overruled in Cotman V. Broughmen appears to be quite
inconsistent with the principle there laid down and has now been stated it no longer to represent the
law.
62 (196) 2Q B 656; See also American House Assurance Co. V. Tjwond Properties Ltd. (1987) 2 Comp.
LJ. 114 CA- New-Zealand (Pertains to facts prior to New-Zealand Company Amendment Act. 1983)

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of the agreement was ultra-vires the plaintiff company. Mortgage broking

was not a stated object in the plaintiff company’s memorandum. Clause 3

(c) thereof however authorized the company to carry on any trade or

business whatever which could in the opinion of the directors be

advantageously carried on by the company in connection with or ancillary

to any of the business specified in the object clause. The Court of Appeal

held that the memorandum once registred is deemed to have complied

with the provisions of the companies Act that the question was one of

construction, and that the bonafide opinion of the board expressed

through the chairman to whom management had been delegated

determined whether the activity was intra-vires. The plaintiff company

thus succeeded in its claim.

2. Object and Powers

The objects (purposes) for which a company is created should be

distinguished from the powers which it can exercise. In addition to the

objects, the company, has the capacity to exercise any power which are

incidental to those objects.

The object clause of a company should only set out object &

should not contain the powers which it can exercise. The subtantive

objects of a company may be the carriage of passengers and goods by air,

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 sea and land, but its powers may include the power to hold land, to

acquire shares in other companies; to borrow money and so forth. 63

Even if the power of the company are not expressed in the object

clause, the company has implied powers as are reasonably incidental to

the attainment or pursuit of its substantive objects. “A company has no

capacity to pursue objects outside those stated. It does not follow,

however that any act which is not expressly authorized by the

memorandum is ultra-vires the company. Anything reasonably incidental

to the attainment or pursuit of any of the express objects of the company

will, unless expressly prohibited, be within the implied power of the

company.”64 Difference between the pursuit of a substantive object and

the exercise of a power (whether expressed in the memorandum or

implied) is that power can only be exercised for the benefit of the

company or the promotion of its prosperity but that no such limitation

exists with respect to an act done within the terms of an express

substantive object, unless such limitation is expressly or impliedly

contained in the memorandum.65 The distinction was approved by Slade

LJ. in Rolled Steel Product (Holdings) Ltd. V. British Steel

63 Supra n. 5 at 121.
64 Per Bucklay LJ. in Re Horsely & Weight Ltd. (1982) ch. 442,448.
65 Ibid.

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Corporation.66 The learned Judge held that, if the objects clause provided

that the company may part with its funds gratuitously or for a non­

commercial purpose, it could not be said that such a transaction was ultra-

vires.

3. Relevance of Company’s Benefit

The distinction between the objects and the powers of the company

is of particular relevance if the question arises whether it is necessary for

a transaction, into which the company enters to be for the benefit of the

company.

Eve J in the case of Re Lee, Behrens & Company Ltd.67 decided

that whether a transaction is binding or not is dependent upon whether it

satisfies a three limb test as follows :

(i) Is the transaction reasonably incidental to the carrying on the

company’s business?

(ii) Is it a bonafide transaction?

(iii) Is it done for the benefit and to promote the prosperity of the

company ?

66 (1986) Ch 246, 288.

67 (1932) 2 Ch 46.

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 Re Halt Garage (1964) Ltd.68

Husband and wife were the only shareholders and the directors of

the company, In terms of the Articles, directors were not entitled to

remuneration unless it voted by the general meeting. (The remunerations

were sanctioned by the company). Once prosperous garage business had

fallen on hard times when the industrious wife became bed-ridden and

had to move from the area. The husband continued to work full time,

apart from two periods when he was away from the business because of

his wife’s illness and an accident he had sustained. Both husband and

wife continued to draw remuneration, the former, on a higher level and

the latter, who was entirely inactive, at a reduced level. Throughout the

period in question, the company was suffering trading loses and was in

fact insolvent. The liquidator in the compulsory winding up took out a

misfeasance summons against the husband and wife to recover from them

the whole of the remuneration drawn by the wife and such part of the

husband’s remuneration as exceeded the market value of his service to

the company during the period in question and that 3rd of Eve J’s tests had

not been satisfied.

68 (1982) 3A1 ER 1016.

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 Oliver J. found it difficult to understand the logical basis of Eve J’s

and doubted whether they were a fact of the ultra-vires doctrine. He

observed that not only bonafide tests but also the test of the benefit to the

company were appropriate and really appropriate to the question of

the propriety of an exercise of a power rather than the capacity to

exercise it. He preferred in this connection to speak of an “abuse of

power.” He held that the payments to the husband were genuine

remuneration and to that extent rejected the claim of the liquidator. But

the liquidator succeeded in recovering part of the payments made to the

wife, because her drawings were not genuine exercise of power to

remunerate the director and were a gratuitous distribution of the capital

and unlawful. In Rolled Steel Products (Holdings) Ltd. v. British Steel

Corporation.69

The facts of the were that there were four companies involved in a

chain of indebtedness. One SSS Ltd. owned 860,000 to C Ltd. On the

other hand, SSS Ltd. was a creditor of rolled Steel Products (Holdings)

Ltd. (RSP) and had lent to RSP a sum of 400,000. However both SSS

Ltd. & RSP were owned and controlled by the Shenkman family.

Subsequently C Ltd. was taken over by British Steel Corporation (BSC)

69 (1986) Ch. 246 : (1984) BCLC 446 : (1985) 3 All ERCA 52. For case comment see Gregory “Rolled
Steel (Holdings) Ltd. V. British Steel Corporation (1985) 48 Mod LR 109-110.

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which continued to press SSS Ltd. for the repayment of its debt. To

ensure that SSS Ltd. would finally repay its debt BSC pressed for a

personal guarantee by Sh. Shenkaman well as a company guarantee by

RSP which owned sufficient assets to meet the debt. Although Sh.

Shenkman acceded to the demand, RSP could not readily do so as the

Payment under the guarantee by RSP to BSC, which was in excess of

RSP debt of 400,000 to SSS Ltd. might subsequently have been attacked

as a fraudulent preference over RSP’s creditors and perhaps even as an

act of misfeasance on the part of the directors.

The solution to this problem was that C Ltd. would lend a further

401, 448 to RSP before RSP issued the guarantee to BSC. This money

would then be used to extinguish RSP’s debt to SSS Ltd. and SSP Ltd.

would in turn, use the same partially to reduce its debt of 860,000 to C

Ltd. Having transferred, in effect, a portion of SSS Ltd,s debt to RSP ;

RSP would then agree to guarantee the balance of SSS Ltd’s debt to C

Ltd. and failings that RSP was to issue a debenture in favour of C Ltd.

The disquieting feature of the scheme was that Sh. Shenkman had

earlier personally guaranteed SSS Ltd.’s indebtedness to c Ltd. The

transfer of portion of SSS Ltd. debt to RSP served to benefit him as it

would reduce his liability under his guarantee. In contravention of Article

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17 of RSP’s Articles, Mr. Shenkman subsequently Approved the scheme,

without any declaration of his self interest in this series of transations.

Cause of ActionOn 25th March 1975, RSP brought an action

against BSC, the receiver & trustees in bankrutcy of Mr. Shenkman & his

father on the following grounds

(i) neither the guarantee nor the debenture was the deed of RSP as it

was not duly executed by RSP. The reason was that Mr. Shenkman

was personally interested in the arrangement & because he had not

declared his interest in accordance with Article 17 & 18 (a) of

Articles of Articles of Association of RSP, he was not entitled to

guarantee the debenture.

(ii) If contrary to the plaintiff submission, the guarantee & the

debenture were the deeds of RSP, each of them was ultra-vires and

void because arrangements were made not for the purpose or

benefit of RSP, but for the personal benefit of Mr. Shenkman.

(iii) If contrary to plaintiff submission the guarantee and the debenture

were the deeds of RSP and were intra-vires RSP, the directore were

acting in breach of their fiduciary duties because, these transaction

were entered into in bad faith & not for the purposes of RSP. It

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 follows that BSC & the receiver having received the moneys with

actual or constructive trustee.

Defences In defence, the defendents sought to rely on the rule in

tarquand’s case.70 Although the resolution was defective, the

defendents were entitled to rely on it as a formally valid resolution.

They also argued that the shareholders by having unanimously

consented to the execution of the guarantee and the debenture ratified

and made binding the transaction in question.

Vinelott J.71 considered the following paragraph.

3 (k) in the objects clause of .the plaintiff company:

“To lend & Advance money or give credit to such persons firms or

companies & on such terms as may seem expedient & in particular to

customers of & other having dealings with the company, & to give

guarantee or become security for any such persons firms or companies.

The learned judge, after detailed review of the relevant cases, held

that this clause provided a power and not an object & it therefore had to

be exercised for the benefit of the plaintiff company. As this was not the

70 Royal British Bank v. Turquend (1856) 6 E & B 327.

71 (1982) Ch. 478.

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case Vinelott J. held that the transactions in question were ultra-vires or

more correctly an abuse of power.

The Court of Appeal affirmed the decision of Vinelott J. on this

point, though on somewhat different reasons. One of the reasons, which is

relevant here, was that the plaintiff company did not enter the guarantee

for its own benefit pursuant to its memorandum & consequently the

directors lacked authority; this was known to the recipient of the

guarantee and therefore the corporation and the receiver had received the

payment from the plaintiff company as constructive trustees and must

repay it with interest. Another reason on which the court of Appeal found

its judgment, was that there was no valid resolution of the board of

directors authorizing the guarantee because one of the directors was

barred from voting as he had not disclosed his interest in the transaction

and therefore there was no quorum.

E. THE NEW MODEL DOCTRINE OF ULTRA-VIRES

Whether the transactions were ultra-vires. Slade L.J’s efforts to

answer this question in effect amounted to a restructuring of the ultra-

vires doctrine.,72 resulting in a modified new model ultra-vires doctrine

72 See Choong T.C. “From Ultra-vires to Agency: A Comment on the Recent Modifications to the
Ultra-vires Doctrine” Malava Law Review 17 (1986).

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being introduced. Described below are the steps taken by Slade L.J to

arrive at his new model ultra-vires doctrine.

(i) First, Slade LJ decided that a sharp distinction must be maintained

between object and powers. Only objects which are in their nature

an activity which a company could pursue in isolation could

delineate a company’s capacity. The powers on the other hand are

mere abilities and may be exercised only within the scope or

confines of the true objects. It follows that power ought not be

inserted in a company’s memorandum and the exercise on any

implied or express powers should also be controlled so that a

company is treated as having implied powers only to do acts for

purposes which are reasonably incidental to the attainment or

pursuit of any of its express objects.

(ii) following from the above, Slade L.J. stated the proposition that

once a clause is capable of subsisting as an independent object of

the company, it cannot be ultra-vires for it is by definition

something which the company is formed to do and so must be

intra-vires. This same principle should apply even if a company has

adopted as its objects the giving away of corporate property

gratuitously. In this context, Slade L.J. declared that the Lee.

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 Behrens principle developed to provide a test as to whether a

company’s gratuitous disposition of property comes within a

company’s capacity, ought to be recognized as being misleading

and of no assistance. And in his opinion, this is so specially in the

light of the observations of Buckley L.J. Re Horsely and Weight

Ltd.73 of Pennycuick J. in Chaterbridge Corporatoin Ltd. V. Lioyds

Bank Ltd.74 and of Oliver J. in Re Halt Garoge (1964) Ltd.75

(iii) Having disposed of the Lee, Behrens principle as being misleading

& irrelevant, the distinction between the objects & powers become

all important. Slade L.J. now had to decide whether the sub-clause

in RSP’s memorandum which authorized it to give guarantee for

any persons firms or companies, was is the nature of a power or

object. Slade L.J. did not employ Buckley L.J.’s test of whether the

sub-clause in question could be pursued in isolation as the sole

activity of the company to decide the matter although he conceded

that a sub-clause could not be treated as an object if it was by

nature incapable of being so. He took the view that even if a sub­

clause might exist as a substantive object, a construction of the

memorandum as a whole might show it was intended to constitute

73 (1982) Ch. 442,452.

74 (1970) Ch. 62, 69-71.
75 Supra n. 33 at 1028-30.

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 an ancillary power only. The presence of Cotman V. Brougham

clause should not elevate what was essentially powers into object.

In construing this sub-clause Shade L.J. come to the conclusion

that this was meant to be ancillary power not because it was in

nature incapable of constituting an independent substantive object

but because the sub-clause imposed the condition that the company

might lend or advance money as might “see expedient.”

This condition necessarily implied that there was some

criterion by which expediency was to be tested and the only

possible criterion could be “ as may seem expedient for the

furtherance of the other objects of the company.” In this regard the

sub-clause could only be regarded as an ancillary power.

(iv) Since the sub-clause was in the nature of a power, Slade L.J.

expressed the view the that strict logic might require that any

exercise of such a power whether implied or implied or expressed

would be beyond the company’s capacity if the resultant

transactions were in fact, performed for purposes other than those

of its incorporation. But, Slade L.J., modified this rule on the

ground that the practical difficulties resulting from such a

conclusion for persons dealing with a company carrying on a

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 business authorized by the memorandum, would be intolerable. To

solve the problem, Slade L.J. relied on Buckley J’s Judgment in Re

David Pavne & Co. Ltd.76 as stating as stating the proper

alternative approach. Under this approach, an act that is ultra-vires

would not be so regarded and it follows that the act would become

voidable but not void. Such an act would instead be treated as an

act of impropriety on the part of the directors who have exercised

the power in question. Since this only raises questions of equity

between the directors and the shareholders, it does not affect the

legal quality of the act vis-a-vis the outside without notice of the

impropriety. In Slade L.J’s view, directors authority as agent is

limited by an implied condition that they must exercise then-

powers only for the purposes of the company and therefore any

such express restrictions found in the sub-clauses in the

memorandum merely reinforced such a condition. Slade L.J. was,

therefore, suggesting that every general power contained in a

company’s memorandum was subject to express or limited

restriction that it must be exercised for the purposes of the

company.

76 (1904) 2 Ch. 608.

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 Thus every exercise of power outside the condition ought not be

treated as ultra-vires but as an instance of directors exceeding their

authority. Slade L.J. then put forward the proposition that an outsider

acting without notice of the impropriety of the transaction in questions

may invoke the independent “indoor management rule “& the agency

doctrine of apparent authority. Slade L.J. was able to cite Harman L.J.

Judgement in Re Introduction Ltd.77 as a supporting decision because

Harman L.J. had up-held the rule that the validity of an exercise of power

for purpose other then the company’s corporate purposes depended upon

whether the outsider knew that the directors had exceeded their authority.

Also in support was Penny-anick J’s statement in Chaterbridge

Corporatoin Ltd V. Lloyds Bank Ltd.78 where he declared that “where

director misapplied the assets of the company that may give rise to a

claim based on breach of duty.” Again a claim may arise against the other

party to the transaction if he has notice that the transaction was effected

in breach of duty. Further, in a proper case, the company concerned may

be entitled to have the transaction set aside. But all that results from the

ordinary law of agency & has not of itself anthing to do with the

corporate powers of the company. Slade L.J. further observed that Re

77 (1970) Ch. 199.

78 (1969) 2 AUER 1185

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David Payne & Re Introductions decisions were not authorities on ultra-

vires but were merey authorities on director’s agency powers.

In sum, the gist of Slade LJ’s Judgement is that any act that falls

within the scope of a company’s power is intra-vire. From now on the

strict logic of the ultra-vires doctrine will continue to have impact only in

cases where the act in question does not even to begin with falls within

the scope of the company’s powers.'

Slade L.J.’s Judgment is development in right direction. With the

standard multifarious list of objects, powers, independent object clause of

Cotman V. Brougham80 and Bell Houses81 sub-clause and with the

interpretation given to objects and powers in Rolled Steel Case82 few

activities will fall outside the corporate capacity of the modem limited

company & contractual capacity will be close to that of a natural person.83

In order to strike down a unreasonable depletion of corporate

assets, such as in Rolled Steel, Re Introduction & Re David Payne, other

means including breach of duty and the law of agency will be used.

79 Supra n. 37 at 44.
80 1918 AC 514
81 (1966) 2 WLR 1323
82 Supra n. 34.
83 But See Clark “Ultra-vires after Rolled Steel Products” (1985) 6 Co. Law 155-158.

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 Still the ultra-vires doctrine has not dead & continuously being

applied.84

F. CONSEQUENCES OF ULRA-VIRES TRANSACTIONS

Where a Company does an act which is beyond the objects

mentioned in the memorandum and is ultra-vires, no legal relationship

or effect ensues there from. Such an act is absolutely void and can not be

ratified even if all the Shareholders agree. It any money has been

dispersed then the officers responsible far such unlawful disbursement

and not the company will be responsible. The following are what are its

effects :

l.(a) Injunction

The members of the company are entitled to hold a company to the

objects given in the memorandum. Company’s funds should not be spent

on ultra-vires transactions. “Whenever an Ultra-vires act has been or is

about to be undertaken, any member of the company can get an

nr

injunction to restrain it form proceedings with it.

84 See Rosemary Simmons Memorial Housing Associateion V. United Dominions Trust Bates &
Partners (1986) IWLR 1440; (1987) 11 Current Law 16; Brady V. Bardy (1987)3 BCC 575 C.A., See
also Shapira, Giora, “Ultra-vires Redux” 100 LQR468 (1984)
85 (1880) 5 AC 473.

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(b) Personal Liability Of Directors

Directors of a company are under statutory duty to see that the

corporate capital is used only for the legitimate business of the company.

If a director enters into a transaction which is ultra-vires the company, he

is guilty of grave dereliction of duty and if the company suffers a loss, he

is personally liable to the company.86

(c) Breach of Warrant ofAuthority

It is the duty of an agent to act within the scope of his authority. If

he goes beyond his authority, he will be personally liable to the third

party for breach of warranty of authority; the directors of a company are

its agent. As such it is their duty to keep within the limits of the

company’s powers. If they induce an outsider to contract with the

company in a matter in which the company does not have power to act,

they will be personally liable to him for loss. 87

The action lies as a result of the erroneous assertion that the agent

has been empowered by his principal, the company to enter into a

contractual relations with third party.

86 See Jehangir R. Modi V. Shamji Lodha (1866-67) 4 Bombay HCR 185; See also Kathiawad Trading
Co. V. Virchand (1893) ILR 18 Bombay 119; A Lakshman- Swamy- Mudaliar v. LIC AIR 1963 SC
1185.
87 Weeks V. Propert (1873) LR 8 CP 427; see also Chapleo V. Brumswiek Permanent Building
Society (1881) 6 Q.B.D. 696.

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 1

(d) Ultra-Vires Acquired Property

If a company’s money been spent ultra-vires in purchasing some

property, the company’s right over that property must be held secure. The

reason being that asset thought wrongly acquired, represents the corporate

capital. In the case of Ahmad Sait & other V. The Bank of Mysore Ltd,88

the Madras High Court held that the Bank had the right to sue on the

basis of the mortgage & thus to enforce the mortgage. The Court justified

this on the ground that according to Brice on the Doctrine of ultra-vires,

property legally & by formal transfer or conveyance transferred to a

company in law duly vested in such company even though the company

was not empowered to acquire such property & because under the Indian

law a mortgage was a transfer of interest in immoveable property.

Indian courts are inclined to treat the companies at par with minors

so far as protection of their interest goes. To give minors certain one

sided privileges because of his infancy is understandable but to give a

company also similar one sided protection does not stand to reason to day

when companies because of their resources can utilize & do utilize the

services of the best legal brains of the country.89

88 (1930) 59 MUR 28.

89 Supra n. 168 at 57.

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(e) Ultra-Vires Contract

A contract of company which is ultra vires the objects as difined by

its memorandum is void- ab-initio and of no legal effect.90 Such an act is

absolutely void and con not be ratified even if all the shareholders

agree.91 Neither the company nor the other contracting party can enforce

it.

Whether it is possible to recover money paid or property

transferred under such a void transaction?

2. Recovery Under Ultra-Vires Lending

(a) Recovery by The Company

If the Company has made ultra-vires loan, it can not sue in debt

because contract is void. However an action in guasi contract for money

had & received is admissible it can be established that the other party is

unjustifiably enriched at the expense of the company because in this

action the company need not rely on the void contract.92 If the

requirements of an action in guasi contract are satisfied, the company

need not fell back on secondary remedies such as tracing in law.

90 Central Transportation Co. Vs. Pullmen’s Car co. (1890) 139 US 24

91 In Re Birkbeck Building Society (1912) 2 Ch. 183.
92 Brougham V. Dwyer (1913) 108 L.T. 504.

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 (b) Recovery by The Contracting Party

Matter has not been full resolved by the courts.93 Although in the

case of unjustifiable enrichment on the part of the company to the

detriment of the ultra-vires lender, an action in quasi-contract appears to

be a perfectly good remedy. The House of Lords in Sinclair v.

Brougham94 has expressly ruled out the admission of such remedy as this

would be an indirect means of enforcing the ultra-vires loans. The Lender

is thus compelled have recourse to the secondary remedies of subrogation

to satisfy intra-vires creditors of the company, he is subrogated to their

right against the company but he does not appear to be subrogated to the

securities held by them.95 The ultra-vires lender may also trace his loan

in to the assets of the company.96

3. Who Can Plead That a Contract is Ultra-Vires?

The opinions on this question in England are divided. Street

thought that the other party could not plead ultra-vires.97 Prof. Gower is

of view that as ultra-vires was designed to protect the company against

itself (or rather its organs) so as to safeguard its members and creditors;

93 Supra n. 5 at 138.
94 (1914) AC 398.440.
95 Re Wrexham Mold and Connas’s Quay Rly Co. (1899) 1 Ch. 440.
96 Supra n. 57 as considered in Re Diplock (1948) Ch. 456,526.
97 Street HA A Treatise on Doctrine of Ultra-vires 30.

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and therefore it could not be invoked by other party.98 On the other hand,

Furmoton says that either party to a contract may set up the defence that

the contract is ultra-vires; the reason being contract is void and not

voidable.99

Defence of ultra-vires was set up in Anglo overseas Agencies Ltd.

V. Green.100 But the Point was not decided as the court found that the

contract in question was not ultra-vires. Similarly same question arose in

Bell Houses Ltd. V. City Wall Properties Ltd.101 The Court of Appeal did

not have to decide the question as to whether the defence was open to the

other party as it held that contract was ultra-vires. Therefore in England

the question whether the defence of ultra-vires can be set up against a

company remains open.

In India, in Two case viz Ahmad Sait & others V. The Bank of

Mysore Ltd.102 and Imperial Bank of India Ltd.V. Bengal National Bank
im
Ltd. plea of ultra-vires was raised by other party defendents &

respective courts did not object to the raising of this plea.

98 Supra n. 3 at 171.
99 See Furmston MP “ Who can plead that a contract is Ultra-vires?” 24 Mod LR 715.
100 (1960) 3 A11ER 244.
101 (1966) 2 WLR 1323
102 (1930) 59 ML JR 28.
103 AIR 1930 Cal 536.

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4. Ultra Vires Torts and Criminal Liability

The question whether a company ought, on grounds of public

policy, to be criminaly liable, has been much debated but has been

answered in the affirmative by courts.104

In general, the wide doctrine of agency and vicarious liability

developed by law enable a company to be held liable whenever justice so

requires irrespective of the fact that it is an artificial person that can act

only through its human agents and servants. But in the case of criminal

liability, a person is not held liable unless he himself is personally

at fault. If this principle is applied strictly to corporate bodies, they

would never be held liable. 105 To avoid this consequence courts have

developed a doctrine that the acts & thoughts of certain agencies of a

company may be regarded as those of the company itself. In effect those

agencies are treated as organic parts of the company by applying organic

theory.

The theory developed from the speech of Lord Haldane in

Lennard’s Carry Company V. Asiatic Petroleum Co.Ltd.106 In this case

the Merchants Shipping Act, 1894 provided that shipowner would not be

104 Supra n. 3 at 207.

105 Tarts by corporation in Ultra-vires undertakings (1925) comp. LJ. 180.
106 (1915) AC 705 HL.

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liable to make good a loss of, or damage to the goods if such loss or

damage happens without owner “actual fault or privity”. The Shipowner

in this case was an incorporated company and the loss had taken place

due to the negligence of Lennard, the Managing Director of the company.

The company was sued for the loss. Its chief defence was that the

company being artificial person was incapable of commiting actual fault.

Rejecting this contention, Viscount L.C. delivering the Judgment of the

House said “My Lords, a corporation is an abstraction. It has no mind of

its own any more than it has a body of it own; its acting and directing will

must consequently be sought in the person of somebody who for some

purpose may be called an agent, but who is really the directing mind &

will of the corporation, the very ego and centre of the personality of the

corporation. If Mr. Lenard was the directing mind of the company, then

his action must, unless a corporation is not be liable at all, have been an

action which was the action of the company itself within the meaning of

section. 502...........It must be upon the true construction of that section in

such a case as the present one that the fault or privity is the fault or privity

of somebody who is not merely a servent or agent for whom the company

is liable upon the footing of respondent superior, but somebody for whom

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the company is liable because his action is the very action of the company

itself.107

This case was followed in The Lady Gwendolen etc.108

It is in the realm of criminal law that Haldance’s principle has

exercised especially powerful influence. The organic concept has

overcome the difficulty that there is no rule of vicarious liability in

criminal law, mensrea on the part of he accused being an essential

element. At common law the only exception to the need for mensrea were

in cases of public nuisance109 and criminal liability.110 In both the cases,

civil law principle of vicarious liability were applied and the company

was made liable. When the legislatures began to create a vast number of

statutory offences, courts recognized that the legislatures could if wished,

dispense with the requirement of mensrea and make a master vicariously

liable for the crime of its servants.

In 1944 three cases introduced a general principle of criminal

liability based on the principle that certain official were the agent of the

corporation for which it was personally liable and not on the principle of

respondent Superior. First of these was Director of Public Prosecutions V.

107 Id at 713-714.
108 (1965) P 294 CA
109 R V. Stephens (1866) LRIQ B 702.
110 R V. Holbrook (1878) 4 QBD. 42.

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Kent & Sussex Contractors.111 In this case a company was prosecuted

under Defence Regulations on two charges; firstly for making use of a

document with intent to deceive and secondly for making a statement

which it knows to be false. These offences were admittedly statutory

ones, but it was clear that mensrea was essential & that normally a

master would not have been liable for an offence committed by his

servant. Viscount Caldecote, Chief Justice, held that the abstract principle

that a company can have knowledge and can form an intention to do an

act is not disputed. A company connot be found criminally liable for

some offences like treason, murder etc. The directors of the company are

not merely agents, but something more than that and without them the

company is neither able to think nor act. Then directors and officers are

the company for this purpose and the question of mensrea is irrelevant.

Me. Nanghten J. held that a corporation can be have knowledge or form

intention only through its agent and the circumstances may be such that

the knowledge and intention of the agent may be imputed to the body

corporate. Finally it was held that a state of mind can be attributed to the

body corporate so as to render it liable to conviction of an offence in

which certain state of mind is an essential ingredient.

111 (1944) KB 146.

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 TJiis decision was approved by the Court of Criminal Appeal in R.

V. I.C.R. Haulage Ltd.112 In the third case Viz. Moore V. Bresleer Ltd.113

a company was convicted of making use of a document with intent to

deceive despite the fact that the acts were not those of the directors but

merely of its secretary and a branch manager.

However, a limitations has been put on the ambit of the doctrine by

making it clear that it is not the act or knowledge of every agent or

servant of the company which will be attributed to the company but only

of those whom the company has made its “responsible officers” for the

action in question. 114 Further there are certain offences for which a

limited company can not be indicted which arises from the limitation

which must inevitably attach to an artificial entity e.g. bigamy. Further

exception comprises offences for which the only punishment the court

can impose is imprisonment.115

Further developments have taken place in the United States.

Corporations have been held liable for offences such as keeping a

disorderly House, usury, criminal contempt by publishing a newspaper

story regarding a pending case, criminal conspiracy. Interesting

112 (1944) KB 246.

113 (1944) KB 551 CCA.
114 (1944) 2 AI1ER 515.
115 See Tesco Supermarkets Ltd. V. Nattrass (1971) 2 All ER 127.

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controversies have arisen in the United State regarding corporate liability

for murder and manslaughter. New Yark Court of Appeals have held that

corporations to be not liable for manslaughter. However New Jersey

Court held a corporation accountable for manslaughter.116

INTRA-VIRES TORTS

(i) Torts

If the tort committed by a servant or other agent of the corporation,

acting in the course of his employment, then the corporation is liable on

exactly the same principle that any employer is vicariously responsible in

the like circumstances. Companies have been held for the pass, libel

malicious prosecution etc. Corporation in responsible for tort because it is

responsible (like any other employer) for the torts of its servants

committed in the course of their employment.117

(ii) Ultra-Vires Torts

Initially company was not liable for ultra-vires torts. In Polution V.

L.& S.W. Ry.118 the defendents’ station master wrongfully detained the

plaintiff because he refused to pay the fare of his horse. The power to

110 Supra n. 5 at 209.

117 See Bakshi, PM “Corporations & the Criminal Law” 3 Comp LJ. 67 (1985).
118 See Winfield and Jolowicz on Tort 692 (12th Edition by Rogers, W.V.H. 1984)

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detain in such circumstances was quite out side the defendant power. It

was held that they were not liable, for the station master could not be said

to have been impliedly authorized to do such an act. But editor of

Winfield & Jolowcz on Tort is of the opinion that so long as, at least as

the view is accepted that master’s liability for his servant’s torts is truly

vicarious, the corporation should be liable. It will no doubt, be

comparatively rare for an ultra-vires Tort to be committed by a servant of

a corporation in the course of his employment, but if such a case arises,

there is no valid reason why the corporation should not be liable.

Corporation should be liable for the tort which is expressly authorized by

the corporation whether ultra-vires or not. The Editor further observes.119

that “If a corporation acts in the only way in which a corporation being an

artificial person, can act that is if the central governing body of the

corporation orders or ratifies an act than the act must be attributed to the

corporation itself. The commonsense solution was regarded as obvious in

Campbell V. Poddington Corporation 118 and it is submitted that there is

no valid reason why it should not be accepted.120 Indeed if it is not

accepted, it is difficult to see how any unlawful act can ever be regarded

as corporation’s act and yet we know that a corporation can not only be

119 (1867) L.R.Q.B. 534.

120 Ibid.

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primarily liable in tort, but can even be guilty of actual fault within the

meaning of the Merchant Shipping Acts.121

Palmer is also of the view that the company is liable for the torts of

its servants, even though these torts are ultra-vires the objects.122 obiter

dicta in American decisions123 and eminent writers124 can be quoted in

support of the view.125

From the above discussion, it is obvious that company is liable for

ultra-vires crimes and torts. Strictly speaking a company can pursue only

those objects which are expressly authorized and possesses only those

powers which are expressly or implicitly conferred upon it. Consequently

company can never be liable for ultra-vires torts and crimes inasmuch as

commission of torts or crimes can never be within the authorized objects

or power, of the company.

Prof. Gower is of the opinion that doctrine of ultra-vires has no

application to ultra-vires torts & crimes except in relation to contract and

property transactions. He has given no reason for it.

121 (1911) 1 KG 869, 875.

122 But See Good hart Corporate Liability in Tort and the Doctrine of Ultra-vires” 2 Camb L.J. 350
(1926).
123 Supra n. 5 at 208.
124 The National Bank V. Graham (1879) 100 US 207, Salt Lake city V. Hollister (1885) US 260.
125 Clark and Lind-sell on Torts, para 245 (15111 Edition 1982)
126 Supra, n. 87.

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 There is need for reform in the doctrine of ultra-vires so that it may

be universally applicable in all the situation covering contract and

property transactions and torts and crimes. Company may be liable for *

ultra-vires torts & crime if powers of natural persons are conferred upon

it.

G. SOCIAL RESPONSIBILITY OF COMPANY AND

ULTRA - VIRES

The orthodox conception of company is that company is an

association of business people with the objects of trading for profit.

In Hutton V. W. Cork Rly.127 Lord Powel had expressed the

orthodox view as follows viz ‘Charity’ has no business to sit at board of

directors qua charity.

But in the development of corporate ethics; we have reached a

stage where the question of Social Responsibility of business to the

community can no longer be scoffed at or taken lightly. Companies have

very important place in the economy of a country. Lot of public money is

invested in the companies by nationalized banks/public financial

institutions in the nature of term loan/direct subscription etc. In these

127 Supra n. 3 at 170.

companies lakhs of people are employed who are putting their labour &

lives in the business of companies. There are crores of shareholders who

have invested their hard earned money in the companies. The Companies

are producing products of mass consumption. Modem companies are

touching everybody’s life in one way or other. Therefore, the companies

can no longer be accepted as a private domain, the working of which

would be of no concern to the society. On the contrary, the very impact of

the corporate sector in terms of finance & employment shows that the

well being of the corporate sector is of considerable significance to the

society.

Corporate sector no longer functions in isolation. In view of the

fact that it has enormous power resources and affecting life of people, it

must behave and function as a responsible member of the society. Profit

is still a necessary part of the total picture, but it is not the primary

purpose. It implies that the claims of various interests are required to be

balanced not on the narrow ground of what is best for the shareholders

alone but from the point of view of what is best for the community at

large. The company must accept its obligation to be socially responsible

and to work for the larger benefit of the community.128

128 (1833) 23 ch. at. 673.

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 A Company has responsibility customers, workers, shareholders

and the community. Company has responsibility towards shareholders

‘that capital which is put into is safe, honestly and wisely used and paid a

fair return. In regard to workers, it must ensure fair wages to workers,

continuity of employment and a recognition of their right to their jobs

where they have educated themselves to highly skilled and specialized

work. The company Should also ensure that customers get a product at

reasonable price. It has a very important social responsibility to the

society that by its activities it does not pollute the environment. The

concept of social responsibility of companies is very near to the Gandhian

Concept of trusteeship.

It is in the United States where the idea that a company has social

responsibilities is most widely held and it is there that the “legitimacy of

the business Corporation has been much debated.”129 In India High

Powered Expert Committee (Sacher Committee) examined the matter of

social responsibility of company & observed that some enlightened

business houses in our country were showing recognition of the social

responsibility owned by the corporate sector. Committee further observed

that no enlightened management can really remain aloof to the national

129 See report of the High Powered Expert Committee on companies & MRTP Acts, 95 (1978).

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problems such as unemployment, overpopulation, rural development

environment protection including conservation of resources, control of

pollution & provision for drinking water.

Thus the question of social responsibility of the company is no

longer in dispute. The only relevant, consideration is how for and in what

manner can the company discharge its undoubted social responsibility. So

far as ultra-vires is concerned, it comes in the way of discharging

the social responsibility of company. A company has only those

capacities & power which are expressly or implied conferred upon it

through object clause of the memorandum of association. Any activity

which is not covered by the object clause is ultra-vires and therefore void.

Therefore if a company in pursuance of its social responsibility

undertakes an activity which has not been specifically authorized, court

may declare it as ultra-vires and company may be restrained from going

ahead with the undertaking/activities.

Sachar Committee considered this point and observed “It is

possible that a company may be required to alter its memorandum with

respect to the objects of the company so as to carry out its activities as

obligation to the concept of social responsibility. We do not envisage any

difficulty in such a course because we have no doubt that shareholders

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themselves are conscious of the responsibility of the company to

discharge its social obligation and it will be very co-operative to assist the

management iit permitting alteration to be made so that this obligation is

discharged by the company without the risk of this action being declared

to be ultra-vires as being beyond the objects of the company. It is not

free from doubt that even if memorandum is amended, the court may take

a different view on that ground that new activities are not the main

objects of the company and is only power which can be exercised for

achieving the main object of the company and may declare the activity as

ultra-vires the objects. The concept of social responsibility of company is

bound to stay. Therefore solution of the problem is reform of the ultra-

vires doctrine. As mentioned above, if the power of natural person is

conferred on companies, activity undertaken in pursuance social

responsibility cannot be ultra-vires. Alternatively the Companies Act

should be amended conferring general power on companies to undertake

activities in pursuance of social responsibilities of the company.

The ulta-vires doctrine is based on the judgment in the case of

17D
Ashbury Railway Carriage and Iron Company V. Riche. The judgment

is century old. Since than, many changes have taken place. Concepts have

130 (1875) 44 U Exch. 185

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also changed. There is no logic in sticking to the said doctrine.

Legislatures all over the world have attempted to abolish/modify the

ultra-vires doctrine. In the next chapter we will discuss what amendments

the other countries have brought about about for abolition/reformation of

the doctrine.

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