Company's Capacity, Object Clause and Ultra Vires Doctrine →

A company is an artificial person, and like any creature of statute it can do only what the law that brings it into being permits. The boundary of its legal capacity is drawn by the objects clause of its memorandum of association. Any act that crosses that boundary is ultra vires the company — beyond its powers — and is void from the very beginning, incapable of being made good even by the unanimous assent of every shareholder. The doctrine, born in the railway boom of Victorian England and naturalised into Indian company law by the Supreme Court, performs two protective functions: it shields the investor, who knows the field in which his money will be ventured, and it shields the creditor, who can gauge the field within which the company may bind itself.

This chapter traces the capacity of an incorporated company, the structure and contents of the objects clause under Section 4 of the Companies Act, 2013, the rise of the ultra vires doctrine in Ashbury Railway Carriage and Iron Co. v. Riche and its Indian reception in A. Lakshmanaswami Mudaliar v. LIC, the judicial techniques developed to soften the doctrine's harshness, the special rules for ultra vires borrowing and lending, and the three-tier distinction between acts ultra vires the company, the directors and the articles. It builds on the foundation laid in our chapters on the introduction to company law and the memorandum of association.

Capacity of an incorporated company

On incorporation, a company becomes a body corporate with perpetual succession and a legal personality distinct from its members — the principle established in Salomon v. Salomon and Co. Ltd., (1897) AC 22, and codified in Section 9 of the Companies Act, 2013. Section 9 declares that from the date of incorporation the subscribers and other members become a body corporate "capable of exercising all the functions of an incorporated company under this Act," with power to acquire, hold and dispose of property, to contract, and to sue and be sued. The capacity conferred is, however, a statutory capacity, and the touchstone of its scope is the company's own constitution.

A registered company is not a natural person endowed with general legal capacity; it is closer in this respect to a statutory corporation, which can act only within the four corners of the statute that creates it. The functional equivalent of that statute, for a registered company, is the memorandum of association — and specifically its objects clause. As the House of Lords put it in Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653, the memorandum "states affirmatively the ambit and extent of the vitality and powers which by law are given to the corporation." Everything within the objects is intra vires; everything outside is ultra vires and void. This is why the memorandum, and not the articles, is the true measure of a company's capacity, a theme developed in our chapter on the articles of association.

The object clause and Section 4

Section 4(1)(c) of the Companies Act, 2013 requires the memorandum to state "the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof." The objects clause defines the field of the company's permitted activity. It tells the subscribers where their funds will be deployed and tells outsiders the limits within which the company can contract. A company cannot, by a course of conduct or by majority resolution, expand its capacity beyond what the objects authorise; the only lawful route to expansion is amendment of the memorandum under Section 13.

The objects must be lawful. Section 4(5) and the incorporation rules prohibit objects that are illegal, contrary to public policy, or in contravention of the Act. The reservation of the company's name and the contents of the memorandum are dealt with in detail in our chapter on the memorandum of association; what matters here is that the objects clause is the operative provision from which a company's capacity is read. In Ashbury, the term "general contractors" appearing after a list of railway-engineering objects was read down by the ejusdem generis principle to mean contracts connected with mechanical engineering, not general contracting of every kind — a reminder that the words of the objects clause are construed in their context.

The 1956 three-fold division and its abolition

Under the Companies Act, 1956, the objects clause had to be divided into three parts: the main objects to be pursued on incorporation, the objects incidental or ancillary to the attainment of the main objects, and the other objects not included in the first two categories. This three-fold division generated litigation about which limb a particular activity fell within, and made the doctrine of the company's "main object" and the failure of its "substratum" central to construction.

The Companies Act, 2013 did away with the three-fold division. Section 4 now requires only a statement of the objects for which the company is incorporated and matters necessary in furtherance thereof, and permits a company to be registered with a broad object such as "to engage in any lawful act or activity or business." This simplification was one of the salient reforms of the 2013 Act. The objects clause survives — so the doctrine of ultra vires continues to apply to registered companies in India — but the drafting is more flexible. The procedural steps for incorporating a company with its objects clause are set out in our chapter on the incorporation of a company.

The doctrine of ultra vires

The doctrine of ultra vires provides that an act beyond the scope of a company's objects clause is beyond the company's powers, and is therefore void. The expression is Latin: ultra ("beyond") and vires ("powers"). The doctrine has a positive and a negative limb. Positively, a company may do everything that is within its objects and everything reasonably incidental to those objects. Negatively, a company cannot do anything outside its objects, and a contract entered into beyond the objects is a nullity — neither the company nor the other contracting party can sue upon it.

The rationale is twofold. First, the doctrine protects the shareholders: a person who invests in a company formed to carry on a particular business is entitled to assume that his money will be applied to that business and not diverted to an unrelated venture. Second, it protects the creditors: those who deal with the company can rely on the fact that the company's capital will not be dissipated on objects outside the memorandum. A void ultra vires act cannot be ratified even by the unanimous assent of all the members, because ratification cannot supply a capacity that the law has withheld — the company simply has no power to do the act, and the members cannot confer on it a power it does not possess.

Ashbury Railway Carriage v. Riche

The foundational authority is Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653. The company's memorandum stated its objects as making, selling and lending on hire railway carriages, wagons and all kinds of railway plant, and carrying on the business of mechanical engineers and general contractors. The directors entered into a contract with Riche to finance the construction of a railway line in Belgium. The company later repudiated the contract, and Riche sued for breach. The directors' acts had subsequently been ratified by all the shareholders in general meeting.

The House of Lords held the contract ultra vires the company and therefore void. The phrase "general contractors" had to be read in the context of the preceding words, as referring to contracts connected with the company's engineering business; read literally it would have allowed the company to undertake any contract whatever and would have rendered the objects clause meaningless. Crucially, the Lords held that because the contract was beyond the company's capacity, it was void from the beginning, and the subsequent assent of every shareholder could not ratify it. "If every shareholder of the company had been in the room, and had said, 'That is a contract which we desire to make, which we authorise the directors to make,' the case would not have stood in any different position." The decision settled three propositions that remain the doctrinal core: a registered company's capacity is limited by its objects clause; an act outside the objects is void; and such an act is incapable of ratification.

Lakshmanaswami Mudaliar v. LIC

The Indian reception of the doctrine is A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185. The shareholders of the United India Life Assurance Company Ltd. passed a resolution at an extraordinary general meeting sanctioning a donation of Rs. 2 lakhs out of the shareholders' dividend account to a trust to be formed for the promotion of technical and business knowledge, including knowledge of insurance. After the life-insurance business of the company was nationalised and taken over by the Life Insurance Corporation, the LIC called upon the directors to refund the amount on the footing that the donation was ultra vires the company.

The Supreme Court held the donation ultra vires. The company's objects authorised it to carry on life-insurance business and to do acts incidental to that business; a charitable donation for an object unconnected with the company's business, and made after the business itself had been taken over, could not be said to be incidental or conducive to the company's objects. Because the act was ultra vires the company, it was void and could not be ratified by the shareholders, and the directors who had sanctioned the payment were held bound to make good the amount to the company. Lakshmanaswami Mudaliar firmly anchored the Ashbury principle in Indian law: an object clause confers a finite capacity, an act outside it is void, and shareholder approval cannot cure the defect.

Express and implied powers

A company's capacity extends beyond the objects expressly stated. Whatever is reasonably incidental to, or consequential upon, the express objects is treated as impliedly within the company's powers, unless the memorandum expressly excludes it. Thus a trading company impliedly has power to borrow money for the purposes of its business, to draw and accept negotiable instruments, to engage employees, and to do the many ordinary acts without which a business cannot be carried on. The test of an implied power is whether the act is reasonably incidental to the attainment of the company's objects — a question to be answered by reference to the objects as a whole.

The distinction between objects and powers matters. An object is an end the company is formed to pursue; a power is a means of pursuing that end. A power, such as the power to borrow or to give guarantees, cannot be exercised except in furtherance of an authorised object. In Lakshmanaswami Mudaliar, the company undoubtedly had power to make donations, but the donation in question was not in aid of any of its objects, and the exercise of the power for an unauthorised purpose was therefore ultra vires. Powers exercised divorced from the objects fall outside the company's capacity just as much as activities outside the objects themselves.

Judicial relaxation — Cotman and Bell Houses

The rigour of Ashbury drove draftsmen to expand objects clauses to enormous length, and the courts responded with techniques of construction. In Cotman v. Brougham, (1918) AC 514, the memorandum listed some thirty separate heads of objects, followed by a declaration that each sub-clause was to be construed as an independent main object, not limited or restricted by reference to any other sub-clause. The House of Lords, while deprecating the practice of drafting objects clauses of such breadth, held that the independent-objects clause was valid and had to be given effect; underwriting and acquiring shares in another company, which a sub-clause expressly authorised, were therefore intra vires. Cotman established that an express independent-construction clause defeats any attempt to subordinate the listed objects to a single "main" object for the purpose of testing capacity.

The other great softening device was the subjective objects clause, validated in Bell Houses Ltd. v. City Wall Properties Ltd., (1966) 2 QB 656. The memorandum empowered the company to carry on any other business which in the opinion of the directors could be advantageously carried on in connection with the company's general business. The company introduced a financier to the defendants and claimed a procuration fee; the defendants pleaded that the transaction was ultra vires. The Court of Appeal upheld the clause: where the directors had bona fide formed the opinion that the activity could advantageously be carried on in connection with the company's business, the transaction was within the company's capacity. Bell Houses accepted that a company could, by an appropriately drafted clause, make its own directors' bona fide opinion the measure of its objects. Together, Cotman and Bell Houses show the judicial trajectory: the doctrine survived in principle but was confined in practice by liberal construction of widely drafted clauses.

Ultra vires borrowing and lending

The doctrine produces asymmetrical results in borrowing and lending. Where a company borrows money ultra vires, the borrowing is void and the lender cannot sue the company on the contract of loan or recover as a creditor. Equity, however, mitigates the harshness: if the borrowed money can be traced into identifiable property or assets of the company, the lender may follow and recover it; if the money has been used to pay off the company's lawful (intra vires) debts, the lender is subrogated to the position of the creditors so paid off, on the principle that the company's debt-burden has not increased; and the lender may obtain an injunction to restrain the company from parting with property acquired with the money. These remedies are proprietary or restitutionary, not contractual — they restore the lender's money, they do not enforce the void loan.

Where a company lends money ultra vires, the position of the borrower is different. The contract is void as against the company, but the borrower cannot keep the company's money on the plea that the company had no power to lend. The borrower remains liable to repay, because to allow him to retain the money would be to let him profit from the company's want of capacity, and the doctrine exists to protect the company's capital, not to enrich a defaulting borrower. The asymmetry is principled: in both situations the law works to preserve the company's funds, which is the very interest the ultra vires doctrine was designed to protect.

Constructive notice and Jon Beauforte

The memorandum and articles are public documents, registered with and open to inspection at the office of the Registrar. Every person who deals with a company is deemed to have constructive notice of their contents — the doctrine of constructive notice. The harsh consequence for outsiders is that they cannot plead ignorance of the objects clause; if they contract with the company on a matter outside its objects, they are taken to have known that the company lacked capacity, and the contract is void against them.

The leading illustration is In re Jon Beauforte (London) Ltd., (1953) 1 Ch 131. The company was authorised by its memorandum to carry on the business of costumiers and gown-makers, but in fact embarked on the wholly ultra vires business of making veneered panels. Suppliers who furnished veneers, and a fuel merchant who supplied coke, sought to prove in the winding up. The court held the claims unenforceable: the suppliers were fixed with constructive notice of the company's objects, and the company's letterhead, which described it as "veneered panel manufacturers," gave them actual notice that the goods were ordered for an ultra vires purpose. Even the coke, which could in principle have been used for an intra vires activity, was on the facts ordered for the ultra vires business, and the claim failed. Jon Beauforte shows how the constructive-notice rule and the ultra vires doctrine combine to defeat even innocent third-party creditors — one of the reasons modern company law in many jurisdictions has abolished the doctrine as against outsiders.

Three tiers — company, directors, articles

It is essential to distinguish three quite different senses in which an act may be described as ultra vires. An act ultra vires the company is one outside the objects clause of the memorandum; it is void, and no ratification by anyone can validate it — Ashbury and Lakshmanaswami Mudaliar. An act ultra vires the directors is within the company's capacity but beyond the authority delegated to the board by the articles; it is merely irregular, and can be ratified by the company in general meeting. An act ultra vires the articles — done in breach of the company's internal regulations — can similarly be cured by altering the articles by special resolution or by ratification, because the articles are subordinate to the memorandum and within the company's control.

Sense of "ultra vires"	Source of limit	Effect	Curable?
Ultra vires the company	Objects clause of the memorandum	Void from the beginning	No — incapable of ratification
Ultra vires the directors	Authority delegated by the articles	Irregular, not void	Yes — ratifiable in general meeting
Ultra vires the articles	Internal regulations of the company	Irregular, not void	Yes — by altering or waiving the article

The distinction is decisive for outsiders dealing with the company. Against an act merely ultra vires the directors or the articles, a third party may invoke the rule of indoor management laid down in Royal British Bank v. Turquand, (1856) 6 E&B 327, and assume that the company's internal procedures were duly complied with. But against an act ultra vires the company, the outsider has no such protection: he is fixed with constructive notice of the objects clause and cannot assume away a defect of capacity. The line between want of capacity and want of authority is, for this reason, one of the most heavily tested distinctions in company-law papers.

Consequences and effects of ultra vires acts

The effects of an ultra vires act may be grouped under several heads. First, an injunction lies: any member may apply to restrain the company from committing or continuing an ultra vires act, and the court will grant an injunction even at the instance of a single shareholder, because an ultra vires transaction threatens the application of the company's capital to unauthorised ends. Second, the contract is void: neither party can sue on it, and the company cannot be made liable upon it even where the other party has fully performed.

Third, the directors are personally liable. Directors owe a duty to apply the company's funds only to authorised purposes; if they divert funds to an ultra vires transaction, they must replace the money out of their own pockets, as the directors in Lakshmanaswami Mudaliar were held bound to do. Fourth, ultra vires acquisitions of property are protected: where a company applies its money ultra vires in acquiring property, the company's right to and over the property is not affected, because the property nonetheless represents the company's money and belongs to it. Fifth, ultra vires torts: a company is not liable for a tort committed by its servant in the course of an activity that is itself ultra vires, because the company cannot authorise, expressly or impliedly, what it has no capacity to do. These consequences flow from the central premise — the company simply lacks the power, and the law works to neutralise the unauthorised act and to restore the position.

Alteration of the object clause

Because the objects clause fixes the company's capacity, the only lawful way for a company to widen its field of activity is to alter the memorandum. Section 13 of the Companies Act, 2013 governs alteration of the memorandum, including the objects clause, and requires a special resolution of the members. Where a company has raised money from the public through a prospectus and has unutilised amounts, additional safeguards apply: the alteration of objects must be accompanied by a special resolution passed in the manner prescribed, with the details published and dissenting shareholders given an exit opportunity, so that public investors are not prejudiced by a change of objects after they have subscribed on the faith of the original objects.

An alteration of the objects clause operates prospectively. It cannot validate acts that were ultra vires when done, because such acts were void from the beginning and there is nothing capable of being validated; the most an alteration can do is bring future acts of the kind within the company's capacity. The procedure underscores the constitutional character of the objects clause: it is the source of the company's capacity, alterable only by the deliberate, qualified-majority process that the Act prescribes, never by the conduct or the after-the-fact assent of those who run the company. The relationship between the memorandum and the company's other constitutional documents is developed further in our chapter on the articles of association, and the foundational concepts in the introduction to company law.

MCQ angle — the recurring distinctions

Three propositions recur in prelims with high frequency. First, an act ultra vires the company is void and incapable of ratification even by the unanimous assent of all shareholders — Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653, and A. Lakshmanaswami Mudaliar v. LIC, AIR 1963 SC 1185. This is the single most tested point, and the trap is the option that says shareholders can ratify by unanimous vote. Second, the doctrine of ultra vires protects shareholders and creditors by confining the company's activity, and its capacity is read from the objects clause of the memorandum, not the articles.

Two further distinctions are worth carrying forward. The three-fold division of the objects clause into main, ancillary and other objects belonged to the 1956 Act and was abolished by Section 4 of the 2013 Act. And the line between an act ultra vires the company (void, source: memorandum) and an act ultra vires the directors (irregular and ratifiable, source: articles) governs whether an outsider can invoke the indoor-management rule from Royal British Bank v. Turquand. The borrowing-versus-lending asymmetry — equitable tracing and subrogation for the ultra vires lender; repayment liability for the ultra vires borrower — is a favourite of the more searching papers. These points, drawn together with the memorandum of association and the incorporation procedure, complete the picture of corporate capacity. For the full syllabus map, return to the Companies Act notes hub.

Frequently asked questions

What is the doctrine of ultra vires in company law?

Ultra vires means "beyond the powers." A company incorporated under statute possesses only the capacity conferred by the objects clause of its memorandum of association. Any act outside the objects clause is ultra vires the company, void, and incapable of ratification even by the unanimous assent of all shareholders. The foundational authority is Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653, where a contract to construct a railway line, falling outside the company's objects, was held void; and in India, A. Lakshmanaswami Mudaliar v. LIC, AIR 1963 SC 1185, where a donation outside the objects clause was struck down.

Can an ultra vires act of a company be ratified by the shareholders?

No. An act that is ultra vires the company — outside the objects clause of the memorandum — is void from the outset and cannot be ratified even by the unanimous vote of every shareholder, because no one can confer on the company a capacity that the law has withheld. This was settled in Ashbury Railway Carriage and Iron Co. v. Riche, (1875) LR 7 HL 653, and reaffirmed by the Supreme Court in A. Lakshmanaswami Mudaliar v. LIC, AIR 1963 SC 1185. This is distinct from acts that are merely ultra vires the directors or ultra vires the articles, which the company in general meeting can ratify.

What did Ashbury Railway Carriage and Iron Co. v. Riche decide?

The company's objects were to make, sell and lend railway carriages and wagons, and to carry on the business of mechanical engineers and general contractors. The directors contracted with Riche to finance the construction of a railway line in Belgium. When the company repudiated, Riche sued. The House of Lords held in (1875) LR 7 HL 653 that the contract was ultra vires the objects — "general contractors" had to be read ejusdem generis with the engineering business — and was therefore void from the beginning, and that the later assent of all the shareholders could not ratify it.

How does the Companies Act, 2013 treat the objects clause differently from the 1956 Act?

Under the Companies Act, 1956, the objects clause of the memorandum had to be split into main objects, objects ancillary or incidental to the attainment of the main objects, and other objects. Section 4 of the Companies Act, 2013 abolished this three-fold division: the memorandum now states the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. A company may also be registered with a generic object "to engage in any lawful act or activity or business." The objects clause survives, so the ultra vires doctrine continues to operate, but the drafting is simplified.

Are ultra vires borrowings and ultra vires lending treated the same way?

Both are void as against the company, but the lender's position differs. Where a company borrows ultra vires, the lender cannot sue on the loan because the contract is void; however, equity allows the lender certain remedies — tracing the money if it can be identified, subrogation to the rights of creditors paid off with the borrowed money, and an injunction to restrain disposal of property bought with it. Where a company lends ultra vires, the borrower remains liable to repay, because the borrower cannot retain the company's money on the plea that the company had no power to lend. The doctrine protects the company's capital, not the wrongdoer.

What is the difference between an act ultra vires the company and an act ultra vires the directors?

An act ultra vires the company is outside the objects clause of the memorandum; it is void and cannot be ratified by anyone. An act ultra vires the directors is within the company's capacity but beyond the authority delegated to the board by the articles; it is merely irregular and can be ratified by the company in general meeting. The distinction is decisive for outsiders: a third party dealing with the company may invoke the rule of indoor management from Royal British Bank v. Turquand, (1856) 6 E&B 327, against an act ultra vires the directors, but not against an act ultra vires the company, of which he is fixed with constructive notice.