Top 7 Effects of Ultra-Vires Transactions (Indian Companies Act, 1956)

Any contract which is ultra-vires the company, will be void and of no effect whatsoever. “An ultra vires contract being void ab initio cannot become intra vires by reason of estoppel, lapse of time, ratification, acquiescence or delay”.

However, if the contract is only ultra-vires the powers of the directors but not ultra-vires the company, it may ratify such a contract in the general meeting and thereby be bound by it.

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4. Ultra-vires Acquisition of Property:

When money of a company is spent ultra vires in acquiring a property, the right of the company over that property would be secure. This is because the property represents corporate capital, though acquired wrongly.

However, where the payment for an ultra vires acquired property/asset has not been made, the vendor can obtain a tracing order to recover the property from the hands of the company. A company cannot be allowed to benefit from such transactions at the cost of the other party.

5. Ultra-vires Borrowings:

A bank or other person lending to company for purposes ultra-vires the memorandum cannot recover the money under that loan agreement. But nothing prevents the company from repaying that money. The lender is also entitled to a tracing order, and if the money lent is traced in specie or into any investment held by the company, the lender can recover it from the company.

Further, if that money is used by the company in discharging any debts or liabilities of the company, the lender will, on accounts of principle of subrogation, step into the shoes of the creditors whose claims have been paid off by the company and acquire their rights against the company.

6. Ultra-vires Lending:

If the money has been lent by the company and the lending is ultra-vires, the contract void. No action can be brought on it, but the company can sue for recovery of its money. This is because the borrower who has made a promise to repay that money cannot be allowed to refrain from paying it back on the ground that it is without authority.

7. Ultra-vires Torts:

In order to make the company liable for the torts (civil wrongs) of its employees, it is to be proved that:

(i) The tort was committed in the course of an activity which falls within the purview of the company’s memorandum, and

(ii) The tort was committed by the employee in the course of his employment.