Ultra Vires - Explained
What is Ultra Vires?
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What is Ultra Vires?
Ultra vires (Latin for Beyond the powers) is a condition where a company engages in activities that exceed its authority or power as established in organizational documents such as objects clause, articles of incorporation, bylaws, charters, operating agreements, and such like.
How is Ultra Vires Used?
The doctrine of ultra vires is a constituent of corporate law that governs all contracts entered into by a company. As such, any contract that is beyond the scope of the company's corporate powers is deemed illegal. Ultra vires is the opposite of intra vires (Latin for Within the powers).
Example of Ultra Vires
A company's officers and directors might sometimes lead the organization to engage in activities that are clear violations of their authority or power as outlined in the constituting or vesting instrument. Such a violation constitutes ultra vires and may lead to legal proceedings against the company or its directors.
Ultra Vires Applies to All Powers
The doctrine of ultra vires is applicable to all powers created by a contract or statute, irrespective of whether they are express or implied.
Are Ultra Vires Transactions Enforceable?
It is not possible to bind a company through an ultra vires contract. A company cannot sue or be sued based on an ultra vires transaction. In the event that the company sells products or services on an ultra vires contract, it will not be able to either receive payment or recover any loan involved.
Does Ultra Vires Affect Contracts?
Ultra vires may not be used by the company or any third party as justification for invalidating a contract.
It is not possible to turn an ultra vires contract into an intra vires contract by reason of estoppel or ratification. This is because ultra vires contracts are treated as invalid by default.
Can Ultra Vires Result in Liability for Company Directors?
Any action of the directors of a company that amounts to ultra vires often has severe repercussions for the shareholders of the company. As such, shareholders often initiate lawsuits against individual directors since the directors of a company are personally liable for its corporate actions.
Can Shareholders Ratify and Ultra Vires Act?
No. Shareholders cannot ratify an ultra vires transaction.
How Can Company Members Prevent Ultra Vires Acts?
It is possible for any member of the company to initiate an injunction against the company to prevent it from engaging in any ultra vires activities.
Advantages of the Doctrine of Ultra Vires
The doctrine of ultra vires presents certain advantages:
- Protection of shareholders: The doctrine of ultra vires assures shareholders that their investments will not be used for any activities other than the ones that were mutually agreed upon.
- Protection of creditors: The doctrine of ultra vires also protects the interests of creditors by ensuring that the company's capital is not spent on any project or business that is beyond the scope of the objects clause.
Disadvantages of the Doctrine of Ultra Vires
There are a few disadvantages of this doctrine as well:
- The doctrine of ultra vires makes it impossible for a company to alter its activities in a direction that is agreeable to all members.
- It is possible to alter the object clause of the Memorandum via a special resolution, thus defeating the main purpose of the doctrine.
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