The Doctrine of Ultra Vires: A Detailed Report

Introduction:

The term ‘Ultra Vires’ originates from Latin, which means ‘beyond the powers’. It is the fundamental rule of the Company Law and the Administrative Law.

In the Company Law, if a company does an act that is beyond its powers under its Memorandum of Association, it becomes ultra vires or falls on the farther side of its ‘Object Clause’. Under the Companies Act, 2013, the Memorandum of Association provides the constitution, objectives, and scope of powers of that company. Therefore, any transaction or contract beyond the scope of the Memorandum of Association is treated as ultra vires and is censured thereupon as under Section 245(1) (a) of the Act.

The doctrine of ultra vires here acts as a tool for keeping check and balance over the policies of the company, reassuring its stakeholders (shareholders, debenture-holders, and creditors) that the company would not exploit the assets and funds invested by them; and if it does so, that contract or transaction would be void. However, if the shareholders and the board of directors agree to amend the ‘Object Clause’ of the company through a ‘Special Resolution’ at the ‘Annual General Meeting’, then such a contract or transaction would not be ultra vires since it would fall within its scope of powers under the amended Memorandum of Association (MoA).

In Administrative Law, the doctrine of ultra vires implies that an executive body or delegated legislation can only exercise those powers conferred by the law. The judiciary reviews the actions of the delegated legislation on the test of the doctrine of ultra vires. The judicial control is exercised on the grounds of Constitutional provisions, substantive provisions of any statute, or on procedural errors committed by the delegated legislation. The additional test for judicial control is the test of non-arbitrariness of the actions of the authority. The doctrine of ultra vires is used to control and limit the actions of the delegated legislation within its legal limits.

The courts have the power to check whether delegated legislation is acting within the scope of their parent legislation. If the subordinate legislative authority is not empowered by any parent statute, the court deems it ultra vires. The doctrine of ultra vires is divided into the Substantive doctrine of ultra vires and the Procedural doctrine of ultra vires. The former is when the delegated legislation has committed a substantial error to the law; the latter is when the delegated legislation has committed any procedural error in the discharge of their duty. The doctrine of ultra vires is equally applicable when the delegated legislation has made an error in the exercise of their jurisdiction.

Applicability of the Doctrine of Ultra Vires in Company Law

The concept was adopted in India in the year 1866 by the Bombay High Court. Since the concept of ‘Limited Liability’ emerged during this period, it became essential to provide some relief to the creditors and shareholders of a company for the ultra vires contracts or transactions of the companies. It meant that the shareholders are liable for only those company debts equal to the nominal value of their shares, and gives a guarantee to the creditors to recover those debts without being exploited by the limited liability of that company. If the company indulges in borrowings that are ultra vires to its MoA for loan repayment, the stakeholders are entitled to recover their part of the lending from the company.

Jahangir R. Modi vs Shamji Ladha [4 Bom. HCR (1855)]

The object clause of the directors of the defendant company prohibited them from purchasing and selling the shares of their own company. The plaintiff approached the Court seeking action against the company directors who had sold those shares beyond their powers. The Court applied the doctrine of ultra vires holding the defendants liable for acting beyond the scope of their Memorandum of Association. The court also relied on the precedents set by the English Courts for the doctrine of ultra vires. The following English case laws were relied upon:

Ashbury Railway Carriage & Iron Company vs Riche [(1875) LR 7 HL 653]

The MoA of the company did not cover the construction of railway lines within its Object Clause, but the company entered into a contract to do so. The company later renounced its contract causing severe losses to the other party. The Court held that the Memorandum of the company can never be merely overridden for the sake of a previous contract if it is ultra vires, and would be wholly void. Therefore, no compensation was awarded to the other party.

Attorney General vs Great Eastern Railway Company [(1880) 5 App Cas 473 HL]

The Court devised an exception to the doctrine of ultra vires and held that if any action, transaction, or contract made by the company is for the benefit of their business, then it would not be deemed ultra vires even if it was not mentioned it the Object Clause of their  Memorandum of Association. This judgment imposed a limitation on the application of the doctrine of ultra vires for the limited liability companies.

Lakshmanaswami Mudaliar vs Life Insurance Corporation of India [AIR (1963) SC 1185]

LIC had taken over the plaintiff’s company and questioned the previous charitable donations made by them before its acquisition. The Object Clause of the Memorandum included donations to charitable causes and not to any charitable organizations. The Court held the transaction as ultra vires of their MoA, however, excluded those donations made to the research facilities benefitting the company.

National Provincial Bank vs Introductions Limited [(1969) 1 All ER 887]

The Court widened the application of the doctrine of ultra vires in India through this judgment. It held that the loans proceeded by any bank or lending institution ultra vires to their Memorandum of Association would be wholly void and cannot be recovered through remedies given by any Court.

Radhabari Tea Company Pvt. Ltd. vs Mridul Kumar Bhattacharjee [2009 Guwahati High Court]

The Court gave a strict interpretation to Section 245(1) (a) of the Companies Act, 2013 for the application of the doctrine of ultra vires. It held that decisions taken by the directors beyond their powers under the Memorandum of Association would be ultra vires, no matter the reason for such a decision.

Presently, the doctrine of ultra vires applies to all the companies incorporated under the Companies Act, 2013. It does not extend to the sole proprietorship and partnership firms that are governed by different legislation, therefore, it would be only applicable to the companies or corporate bodies governed by Section 245(1) (a) of the Companies Act, 2013. Every transaction or contract resulting in the abuse of power by the company’s directors or employees would fall within the scope of the doctrine of ultra vires.

As previously stated, the Object Clause of the Memorandum of Association of the company provides the scope of powers and the purpose of the company. Therefore, any transaction or contract that exceeds the Object Clause is ultra vires. Through various precedents, the limitations to the application of the doctrine of ultra vires have also been construed. These exceptions are as follows:

1. Ratifications made by the shareholders of the company for those transactions or contracts made by the directors beyond their powers.
2. Validation by shareholders for those actions taken by the company in an irregular manner, which is in contradiction of its Memorandum.
3. Security of rights over the company property purchased through an ultra vires investment.
4. Unless prohibited by any statute, consequential outcomes of the actions taken by the company are not ultra vires of its MoA[1].

Applicability of the Doctrine of Ultra Vires in Administrative Law

When there is any abuse of powers by the delegated legislation, the courts have the power to deem it as ultra vires after identifying any mala fide intention or extraneous consideration of such action. The delegated legislation is put on the test for any corruption or dishonesty, either direct or indirect while exercising the powers conferred upon them by the law. Therefore, even if the purpose was foreign to the parent legislation, if it was deemed improper by the court it becomes ultra vires and is quashed. However, when the parent legislation itself has been declared void, the delegated legislation also becomes void even though there is neither mala fide intention nor improper consideration.

The parent legislation does not have the power to delegate the essential functions to the executive authority. When there is any inconsistency between the parent and the delegated legislation, their actions are deemed as ultra vires immediately. It also means that a delegated executive authority does not have the power to further delegate its essential functions or give a retrospective effect to the rules made under the parent legislation. Therefore, it simply implies that the powers delegated must originate from valid parent legislation and should be exercised well within the authority. Moreover, the delegated legislation may be exercising the power within the substantive authority, but it also needs to comply with the procedural requirement of the law.

The following judicial precedents have evolved the scope of the doctrine of ultra vires within the administrative law in India:

Harishnkar Bagla vs State of Madhya Pradesh [(1954) 4 AIR 465 SC]

The court held that where the delegated legislation fails at the procedural requirements, the courts have the discretion to either quash their action as ultra vires on whether that procedure was mandatory or directory under the parent legislation. The court also clarified that the delegated legislation can further delegate their functions once they have performed their essential functions.

Sitapur Municipality vs Prayag Narayan [AIR 1990 SC 58]

There was a procedural defect while publishing tax regulations by the executive authority. The court declared it as a mere irregularity that needed correction, instead of declaring it ultra vires completely. The court further elaborated that the error by the delegated legislation in directory procedural requirement would be deemed as an irregularity if the substantive law has been complied with.

State of Madhya Pradesh vs Mahalaxmi Fabric Mills [AIR 1995 SC 2213]

The court held that the actions of the delegated legislation can always be challenged on the grounds of being arbitrary, irrational, and in violation of Articles 14 and 19(1) (g) of the Constitution.

A.K. Roy vs Union of India [AIR 1982 SC 710]

The court held that any rule made by the delegated legislation can be challenged on the ground of being inconsistent with the purpose of the parent legislation. The rules must fulfill the purpose of the statute, either directly or indirectly. If there is no nexus between the two, such a rule is deemed ultra vires and void.

Tahir Hussain vs District Board, Muzzaffarnagar [AIR 1954 SC 630]

The district board made bye-laws restricting cattle markets for public health and safety under the parent legislation. The court could not find any reasonable nexus between the two and deemed it ultra vires.

Indian Council of Legal Aid and Advice vs Bar Council of India [AIR 1995 SC 1761]

The court held that for the application of the doctrine of ultra vires, an accurate interpretation of the parent legislation is made to know the scope of powers of the delegated legislation and to ascertain whether the actions of the executive authority were within those statutory powers or not.

Lal Kamal Das vs State of West Bengal [AIR 1975 SC 753]

The order for preventive detention of persons for railway theft was deemed as improper for the parent legislation and declared as ultra vires by the court. It was held that there needs to be a proper purpose for prosecuting any person under the parent law.

Ashoka Lanka vs Rishi Dikshit [AIR 2006 SC 2382]

The court held that the implied restriction exists on the retrospective effect of the rule-making powers of the delegated legislation. While making rules to fulfill the purpose of the parent legislation, the executive authority does not have the powers to make retrospective rules except any government notifications under the said statute. Such rules are deemed as ultra vires at the first glance.

State of Madhya Pradesh vs Tikam Das [AIR 1975 SC 1429]

The court emphasized that unless prescribed by the state, any delegated legislation cannot give retrospective effect to rules and regulations where the parent legislation is sovereign.

C.S. Rowjee vs Andhra Pradesh State Road Transport Corporation [AIR 1964 SC 962]

The Chief Minister of the state excluded certain routes from being nationalized under the nationalization scheme of the corporation. This was done with mala fide intentions against opposition political leaders within the state. The court demanded an affidavit from the Chief Minister for such an action and deemed it as ultra vires for being dishonest intentions.

State of Kerala vs Abdulla and Co. [1965 AIR 1585 SC]

The court held that the doctrine of ultra vires would apply to all the rules and regulations made effective as enacted by the parent legislation. The scope of powers exercised by the delegated legislation can always be checked for being void ab initio by applying the doctrine of ultra vires. The rules and regulations must conform with all the tests of the doctrine before being enforced.

Banwaru Lal vs State of Bihar [AIR 1961 SC 58]

The court held that the failure to comply with the procedural requirements under section 59 of the Mines Act, 1952 makes the actions of the executive authority ultra vires and void. The procedure under the Act was that the union executive was to frame regulations after referring it to the reports submitted by the state Mining Boards for the reforms required. It was the procedural requirement for the Mining Boards to be given fair and reasonable opportunity to make their demands under section 59.

Chintaman Rao vs State of Madhya Pradesh [AIR 1951 SC 118]

The court the parent legislation was declared as unconstitutional for violating Article 19(1) (g). Therefore, the order made under the law prohibiting the manufacturing of mini-cigars was deemed as ultra vires and struck down even though it had fulfilled the substantive and procedural requirements.

Conclusion

In the Company Law, the doctrine of ultra vires plays a vital role in the decision-making and extent of powers of the companies in India. It has been codified under Section 245(1) (a) of the Companies Act, 2013, and has evolved through various judgments to where it stands today. It safeguards the interests of the stakeholders of a company and results in the proper functioning of the company.

However, there remains uncertainty to the application of the doctrine of ultra vires when it comes to certain actions taken by the company that is not covered within the statute and left on the interpretation of the Court. Because of the wide scope of its interpretation, there is a requirement of amendment of the statute governing the doctrine of ultra vires to suit the present needs. There is also a need to provide safeguard to those third-party victims of the company transactions or contracts other than its stakeholders, especially in the banking and money-lending sector.

In Administrative Law the doctrine of ultra vires is a tool to exercise judicial control over the functions of the delegated legislation. An act of executive authority is ultra vires when[2],

• there is a prima facie substantive or procedural error
• there is an error in the jurisdiction
• there is a male fide intention or an improper consideration
• there is an arbitrariness or a violation of the Constitutional provisions

The validity of functions of delegated legislation can be challenged before the court of law on either of the grounds mentioned above. The doctrine of ultra vires is a mechanism that controls the delegated legislation from exercising powers beyond their scope. It reduces the inconsistency of rules with the parent legislation. But it requires more dynamic developments since laws can be amended to give more powers to the delegated legislation as long as the parent legislation remains constitutional. The concept was adopted from the common law system, and therefore has a restricted application while determining the legislative intent of the parent legislation. It depends on the test of reasonableness in determining the nexus between the parent law and the functions of the delegated legislation which requires legitimization.

---

[1] Simran Chandok, Critical analysis of the doctrine of ultra vires, Vol. 2 JCIL (2016)

[2] Pratiksha Gautam & Sakshi Nathani, Judicial control: Doctrine of ultra vires in administrative law, JLSR (2020), https://www.jlsrjournal.in/judicial-control-doctrine-of-ultra-vires-in-administrative-law-by-pratiksha-gautam-sakshi-nathani/#_ftn42