INDEX

1. INTRODUCTION. 2. PURPOSE OF MEMORANDUM. 3. IMPORTANCE OF MEMORANDUM. 4. CHARACTERISTICS OF MEMORANDUM. 5. FORMS OF MEMORANDUM. 6. LEGAL REQUIREMENTS OF MEMORANDUM. 7. CONTENTS OF MEMORANDUM. 8. CLAUSES OF MEMORANDUM. 9. ALTERATION OF MEMORANDUM. 10. DOCTRINE OF ULTRA VIRES. 11. EFFECTS OF ULTRA VIRES TRANSACTIONS. 12. EXCEPTIONS TO THE DOCTRINE. 13. CASE NOTES.

MEMORANDUM OF ASSOCIATION
The Memorandum of Association of a company, often simply called the Memorandum, is the document that governs the relationship between the company and the outside world. It is one of the documents required to incorporate a company. A Memorandum is required to state the name of the company, the type of company (such as public limited company or private company limited by shares), the objects of the company, its authorized share capital, and the subscribers (the original shareholders of the company). A company may alter particular parts of its Memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law. Memorandum of association is one of the documents which have to be filed with the registrar of companies at the time of incorporation of a company. Section 2(28) defines a memorandum to mean the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this act. The definition, however, either does not give us any idea as to what a memorandum of association really is nor does it point out the role which it plays in the affairs of the company. The memorandum of association is an extremely important document in relation to the affairs of the company. It is a document which sets out the constitution of the company and is really the foundation on which the structure of the company is based. It contains the fundamental conditions upon which alone the company is allowed to be incorporated. A company may pursue only such objects and exercise only such powers as are conferred expressly in the memorandum or by implication therefore i.e. such powers as are incidental to the attainment of the objects. A company cannot depart from the provisions contained in its memorandum, however, great the necessity may be. If it does, it defines its relation with the outside world and the scope of its activities. The purpose of the memorandum is to enable shareholders, creditors and those who deal with the company to know what the permitted range of the enterprise is.

It defines as well as confines the powers of the company; it not only shows the object of its formation, but also the utmost possible scope of its operation beyond which its action cannot go. Lord Cairns in Ashbury Railway Carriage Co. V. Riche pointed out, The memorandum is as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.

PURPOSE OF MEMORANDUM:
The purpose of the memorandum is twofold. 1. The intending share holder who contemplates the investment of his capital shall know within what field it is to be put at risk. 2. Anyone who shall deal with the company shall know without reasonable doubt whether the contractual relation into which he contemplates entering with the company is one relating to a matter within its corporate objects. At least seven persons in the case of public company and at least two in the case of a private company must subscribe to the memorandum. The memorandum shall be printed, divided into consecutively numbered paragraphs, and shall be signed by each subscriber, with his address, description and occupation added, the presence of at least one witness who will attest the same.

IMPORTANCE OF MEMORANDUM OF ASSOCIATION:

1. A Company cannot be registered without filing this document. 2. The limits or boundaries of the Company are determined by the memorandum. 3. Informs the object of the business. 4. Informs the name, address, and capital of the company.

5. The provisions of the document cannot be altered without adopting a special resolution.

CHARACTERISTICS OF MOA
The Memorandum of Association is the basic document of the company. It is called the Charter of the company. The superstructure of the company is based on it. It is the constitution of the company as it defines its limitations and spheres of activities. It cannot be altered by the company accept by fulfilling the conditions laid down in the companies act and for specific activities and situations. It defines scope of companys activities and all acts beyond its scope are ultra vires It is a public document and is open o all those who deal with the company. It defines companys relation to outside individual and its activities in relation to them.

FORMS OF MEMORANDUM
Section 14 of companies act defines Form of memorandum: The memorandum of association of a company shall be in such one of the Forms in Tables B, C, D and E in Schedule I as may be applicable to the case of the company, or in a Form as near thereto as circumstances admit. Different forms as under: 1) 2) 3) limited company by sharesTable B Limited company by guarantee without share capitalTable C Limited company by share capital..Table D

4)

Non-limited companyTable E

LEGAL REQUIREMENTS OF MOA

As per section 15 the memorandum shall be printed be divided into paragraphs numbered consecutively, and be signed by each subscriber (who shall add his address, description and occupation, if any,) in the, presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

CONTENTS OF MEMORANDUM
According to section 13, the memorandum of association of every company must contain the following clauses: 1. The name of the company with limited as the last word of the name in the case of a public limited company and with private limited as the last word in the case of a private limited company. 2. The state in which the registered office of the company is to be situated. 3. The objects of the company to be classified as: a. The main objects of the company to be pursued by the company on its incorporation and objects incidental to the attainments of the main objects, and b. Other objects not included above 4. In the case of companies with object not confined to one state, the states to whose territories the objects extend. 5. The liability of members is limited if the company is limited by shares or by guarantee.

6. In the case of a company having a share capital, the amount of share capital with which the company proposes to be registered and its division into shares of a fixed amount. An unlimited company need not include items 5 and 6 in its memorandum. In the case of a company limited by guarantee, its memorandum of association shall state that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member or within or year after wards for the payment of the debts and liabilities of the company. Every subscriber to the memorandum shall take at least one share and shall write opposite to his name the number of shares taken by him. Different clauses: Brief discussions of the various clauses are as follows:

NAME CLAUSE
A company may be registered with any name it likes. But no company shall be registered by a name which in the opinion of the central government is undesirable and in particular which is identical or which too nearly resembles the name of an existing company. Where a company is registered by a name so similar to that of another company, that the public are likely to be deceived, the court will grant an injunction restraining it from using that name. Every public company must write the word limited after its name and every private limited company must write the word private limited after its name. The use of the word company is however, not compulsory. Companies, whose liabilities are not limited, are prohibited from using the word limited. The words limited may be dispensed with in the name of charitable companies. But companies formed to promote art, science, religion etc, which do not propose to pay dividend but intend to apply all its profits towards the working of the company, can be registered without the word limited under licenses granted by the central government.

A company cannot adopt a name which violates the provisions of the emblems and names act 1950. This act prohibits the use of the name and emblems of the united nation, and the world health organization, the official seal and emblem of the central and the state governments, the Indian National Flag, the name and pictorial representation of Mahatma Gandhi and the prime minister of India. If a limited company makes a contract without using the word limited the directors who make the contract on behalf of the company would be personally liable. Every company is required to publish its name outside its registered office, and outside every place where it carries on business, to have its name engraved on its seal and to have its name on all business letters, bill heads, notices and other official publications of the company.

REGISTERED OFFICE CLAUSE

This clause states the name of the state where the registered office of the company is to situate. The registered office clause is important for two reasons. Firstly, it ascertains the domicile and nationality of a company. This domicile clings to it throughout its existence. Secondly, it is the place where various registers relating to the company must be kept and to which all communications and notices must be sent. A company need not carry on its business at its registered office. A company shall have its registered office. Such office must be in existence from the date on which the company begins to carry on business or within 30 days after incorporation, whichever is earlier. Notice of situation of the registered office and every change therein must be given within 30 days from the date of incorporation of the company of after the date of change, as the case may be.

OBJECTS CLAUSE
The objects clause is the most important clause in the memorandum of association of a company. It is not merely a record of what is contemplated by the subscribers, but it serves a two-told purpose:

(a) It gives an idea to the prospective shareholders the purposes for which their money will be utilized. (b) It enables the persons dealing with the company to ascertain its powers. In case of companies which were in existence immediately before the commencement of the companies act 1965, the objects clause has simply to state the objects of the company. But in the case of a company to be registered after the amendment, the objects clause must state separately: (a) Main objects. This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects. (b) Other objects. This sub-clause shall state other objects which are not included in the above clause. Further, in the case of a non-trading company. Whose objects are not confined to one states clause must mention specifically the states to whose territories the objects extend. The subscribers to the memorandum of association may choose and object or objects for their company. There are, however, certain restrictions. 1. The objects should not be against the policy of the constitution. For example, the object should not be such as to encourage untouched ability which has been abolished under our constitution. 2. The objects should not include anything which is illegal or against public policy. For example, forming a company for dealing in lotteries or for trading with the alien enemies. 3. The object must not be against the provisions of the companies act, as for example, authorizing the company to purchase its own shares. On its being registered, the company has power to do whatever is necessary to do for attaining the objects stated in the memorandum, and to do whatever else is incidental to or consequential upon the attainment of the main object. It is,

therefore, clear that any act of the company outside its stated, objects is ultra viruses and therefore void and cannot be ratified even by the whole body of shareholders.

LIABILITY CLAUSE
This clause states that the liability of the members of the company is limited. In the company is limited. In the case of a company limited by shares, the member is liable only to the amount unpaid on the shares taken by him. In the case of a company limited by guarantee the members are liable to the amount undertaken to be contributed by them to the assets of the company in the event of its being wound up. However, this clause is omitted from the memorandum of association of unlimited companies. Any alteration in the memorandum compelling a member to take up more shares, or which increases his liability, would be null and void. If a company carries on business for more than six months, while the number of members is less than 7, in the case of public company and less than 2 in case of a private company each member aware of this fact, is liable for all the debts contracted by the company after the period of six months has elapsed. The following are exceptions to the rule of limited liability of members:1. If a member agrees in writing to be bound by the alteration of MOA / AOA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him. 2. If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimited liability. 3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being

constituting the company would be personally liable for the debts of the company contracted during that time.

CAPITAL CLAUSE
The memorandum of a company limited by shares must state the authorized or nominal share capital, the different kinds of shares, the authorized or nominal share capital, the different kinds of shares, and the nominal value of each share. The capital clause need not state anything else and it is usually better that it should not do so.

ASSOCIATION OR SUBSCRIPTION CLAUSE

This clause provides that those who have agreed to subscribe to the memorandum must signify their willingness to associate and form a company. According to section 12 of the act, at least seven persons are required to sign the memorandum in the case of a public company, and at least two persons in the case of a private company. The memorandum has to be signed by each subscriber in the presence of at least one witness who must attest the signatures. Each subscriber must write opposite his name the number of shares he shall take. No subscriber of the memorandum shall take less than one share. This clause need not be numbered.

ALTERATION OF MEMORANDUM
Section 16 Of The Act Provides That A Company Shall Not Alter The Conditions Contained In Its Memorandum Except In The Cases, In The Manner And To The Extent Provided In The Act.

For The Alteration Of The Conditions In The Memorandum Of Association A Rigid Procedure Is To Be Followed And Strict Compliance Of The Procedure Is Demanded By Law. The procedure for the alteration of the compulsory clauses of the memorandum is:

CHANGE OF NAME
BY SPECIAL RESOLUTION: A Company Can Change Its Name. It Must First Pass A Special Resolution And Then Obtain Approval Of The Central Government In Writing. No Approval Is Necessary For Merely including Or Deleting The Word Private Consequent On The Conversion Of The Public Company Into Private Company And Vice Versa. BY ORDINARY RESOLUTION: If A Company Is Registered By A Name and The Name Is Of An Existing Company, It Can Change Its Name By Passing An Ordinary Resolution And With The Previous Approval Of The Central Government Signified In Writing. DIRECTION FOR CHANGING NAME The central government may also, within 12 months of registration, direct the company to change its name. Within 3 months of such directions the company must change its name by passing an ordinary resolution and with the previous approval of the central government signified in writing. Default in complying with the direction is punishable with fine upto rs.1000 for every day during which the default continues. In considering applications for change of name, the government considers the following points: a) Whether the reasons are sufficient and adequate.

b) Whether the proposed name reflects object of the company and with the kind or kinds of business actually carried on. c) Whether the proposed name is not undesirable. NEW CERTIFICATE OF INCORPORATION The registrar shall enter the name on the register in place of former name and shall issue a fresh certificate of incorporation. The change is effective only on the issue of a certificate. The registrar shall also make the necessary alteration in the memorandum of association of the company. RIGHTS AND OBLIGATIONS TO REMAIN INEFFECTED The rights and obligations of a company will not be affected on the change of its name. Example: a company had changed its name from malhati tea syndicate ltd to malhati tea industries ltd. Thereafter it filed a writ petition in its former name. The court declared the petition to be incompetent.

CHANGE OF REGISTERED OFFICE

The change of registered office may involve any of the following: 1. change of registered office from one place to another place in the same city, town or village. 2. change of registered office from one town to another town in the same state. 3. change of registered office from one state to another state. 1. CHANGE WITHIN THE CITY: If a company wants to change its registered office from one place to another within the same city, town or village, the board of directors will pass a resolution and the registrar must be informed of the change within 30 days.

2. CHANGE WITHIN THE STATE: The registered office is to be changed outside the local limits of any city, town or village in the same state; a special resolution to that effect must be passed. 3. CHANGE OF REGISTERED OFFICE FROM ONE STATE TO ANOTHER: Section 17 deals with the change of place of registered office from one state to another state. A company may alter the provisions of its memorandum so as to change the place of its registered office from one state to another for certain purposes. SPECIAL RESOLUTION For effecting this change a special resolution must be passed by the company and a copy there of must be filed with the registrar within 30 days. CONFIRMATION BY CENTRAL GOVERNMENT: The alteration of the provisions of memorandum relating to the change of the registered office from one state to another state shall take effect only when it is confirmed by the central government on petition. the company shall file with the registrar a certified copy of the order of the central government confirming the alteration, within 3 months from the date of order together with a printed copy of the memorandum as altered and the registrar shall register the same and certify the registration under his hand within one month from date of filing of such documents. CHANGE OUTSIDE INDIA: A company cannot change its registered office from India to another country and the central government has no power sanction such alteration of the memorandum.

CHANGE OF OBJECT CLAUSE

A company has no limited right to alter the objects clause of the memorandum, however, urgent or beneficial such alteration may be. The power of alteration of objects clause is subject to two limits: 1. SUBSTANTIVE LIMITS A company may change its registered office from one state to another or objects clause in so far as it is necessary for any of the following purposes: a) To carry on its business more economically or more efficiently: This clause permits the alteration which will assist the company in the method of conducting its business and not alteration in the type of business which the company is conducting. When a company is not in fact carrying on any business, it cannot alter its objects under this clause. example: a company was engaged in the business of poultry breeding. Its memorandum prohibited payment of any remuneration to the directors. When the business of the company increased it was found that the directors could not pay sufficient unless some remuneration was paid to them. the company was allowed to alter its memorandum so as to enable it to pay remuneration to its directors, being necessary for efficient management. b) to attain its main purpose by new or improved means: This clause is intended to enable companies to take advantage of new scientific discoveries. The company cannot alter its main objects, but can merely alter its ancillary powers or provide new powers to assist it in achieving its main objects. c) to enlarge or change the local area of its operations: This clause permits alteration to enlarge or change the local area of operation but no alteration in the companys business is allowed.

d) to restrict or abandon any objects specified in the memorandum: A company may alter the memorandum to restrict or abandon any specified objects. But no alteration will be deemed valid if it is done to give effect to specified object on the winding up. e) to sell or dispose of the whole or any part of the undertaking of the company: Alteration may be required when a company sells the whole or part of its undertaking. under such circumstances policy changes become inevitable (unavoidable). f) to amalgamate with any other company or body of persons: Change of memorandum is required to include or exclude the objects in accordance with the common plan. g) to attain its main purpose by new or improved means: This clause is intended to enable companies to take advantage of new scientific discoveries. The company cannot alter its main objects, but can merely alter its ancillary powers or provide new powers to assist it in achieving its main objects.
RE CYCLISTS TOURING CLUB (1907)

Facts of the case are The companys was to promote, assist and protect recyclists on the public roads. The company by altering the object clause desired to include among the persons to be assisted all tourists including motorists. Held it was impossible to combine the two businesses as one of the objects of the company was to protect cyclists against motorists. 2. PROCEDURAL LIMITS: The following procedure must be followed for altering the objects clause: SPECIAL RESOLUTION Company shall pass a special resolution sanctioning the alteration. A special resolution to that effect and file it with the registrar of companies.

COPY OF THE SPECIAL RESOLUTION TO BE FILED WITH THE REGISTRAR The company shall file with the registrar a special resolution passed by the company in relation to clauses (a) to (g) within one month from the date of such resolution together with a printed copy of the memorandum as altered. The registrar shall register the same and certify the registration under his hand within one month from the date of filing of such documents. CONSEQUENCE OF NON FILING: If the copy of the order is not registered within the prescribed period, the proceedings connected with the order will become void.

CHANGE OF LIABILITY CLAUSE

Ordinarily liability clause cannot be altered so as to make the liability of members unlimited. Any alteration in memorandum will be void if the effect of the alteration is the enhancement of the liability of members. It does not apply to a case where the members agree in writing to be bound by the alteration. Section 32 permits an unlimited company to register as a limited company.

CHANGE OF CAPITAL CLAUSE

A limited company may alter by passing a special resolution in the general meeting. The confirmation of the court is not required if the alteration is made for any of the following purposes: 1. to increase its share capital 2. to consolidate and divide its capital into shares of larger amount. 3. to convert its fully paid shares into stock and reconvert the stock into fully paid shares. 4. to sub-divide its shares into shares of smaller amount. 5. to cancel its shares which are not issued.

DOCTRINE OF ULTRA VIRES

CONCEPT
The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashbury Railway Carriage and Iron Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the companys memorandum. Basic principles included the following: 1. An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. 2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party 3. A fortiori, a transaction which was fully performed by both parties could not be attacked. 4. If the contract was fully executory, the defense of ultra vires might be raised by either party.

5. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. 6. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.

ORIGIN AND DEVELOPMENT

Doctrine of ultra vires has been developed to protect the investors and creditors of the company. The doctrine of ultra vires could not be established firmly until 1875 when the Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653 was decided by the House of Lords. A company called The Ashbury Railway Carriage and Iron Company, was incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were to make, and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents. The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Socit Anonyme formed in that country, which Socit was to supply the materials for the construction of the railway, and to receive periodical payments from the English company. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862

It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act , was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association. Later on, in the case of Attorney General v. Great Eastern Railway Co.4, this doctrine was made clearer. In this case the House of Lords affirmed the principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche5 but held that the doctrine of ultra vires ought to be reasonable, and not unreasonable 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. The doctrine of ultra vires was recognized in Indian the case of Jahangir R. Mod i v. Shamji Ladha and has been well established and explained by the Supreme Court in the case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India8. Even in India it has been held that the company has power to carry out the objects as set out in the objects clause of its memorandum, and also everything, which is reasonably necessary to carry out those objects.9 For example, a company which has been authorized by its memorandum to purchase land had implied authority to let it and if necessary, to sell it. However it has been made clear by the Supreme Court that the company has, no doubt, the power to carry out the objects stated in the objects clause of its memorandum and also what is conclusive to or

incidental to those objects, but it has no power to travel beyond the objects or to do any act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company. To ascertain whether a particular act is ultra vires or not, the main purpose must first be ascertained, then special powers for effecting that purpose must be looked for, if the act is neither within the main purpose nor the special powers expressly given by the statute, the inquiry should be made whether the act is incidental to or consequential upon. An act is not ultra vires if it is found: (a) Within the main purpose, or (b) Within the special powers expressly given by the statute to effectuate the main purpose, or (c) Neither within the main purpose nor the special powers expressly given by the statute but incidental to or consequential upon the main purpose and a thing reasonably done for effectuating the main purpose. The doctrine of ultra vires played an important role in the development of corporate powers. Though largely obsolete in modern private corporation law, the doctrine remains in full force for government entities. An ultra vires act is one beyond the purposes or powers of a corporation. The earliest legal view was that such acts were void. Under this approach a corporation was formed only for limited purposes and could do only what it was authorized to do in its corporate charter. This early view proved unworkable and unfair. It permitted a corporation to accept the benefits of a contract and then refuse to perform its obligations on the ground that the contract was ultra vires. The doctrine also impaired the security of title to property in fully executed transactions in which a corporation participated. Therefore, the courts adopted the view that such acts were voidable rather than void and that the facts should dictate whether a corporate act should have effect. Over time a body of principles developed that prevented the application of the ultra vires doctrine. These principles included the ability of shareholders to ratify an ultra vires transaction; the application of the doctrine of estoppel, which prevented the defense of ultra vires when the transaction was fully performed by one party;

and the prohibition against asserting ultra vires when both parties had fully performed the contract. The law also held that if an agent of a corporation committed a tort within the scope of the agent's employment, the corporation could not defend on the ground that the act was ultra vires. Despite these principles the ultra vires doctrine was applied inconsistently and erratically. Accordingly, modern corporation law has sought to remove the possibility that ultra vires acts may occur. Most importantly, multiple purposes clauses and general clauses that permit corporations to engage in any lawful business are now included in the articles of incorporation. In addition, purposes clauses can now be easily amended if the corporation seeks to do business in new areas. For example, under traditional ultra vires doctrine, a corporation that had as its purpose the manufacturing of shoes could not, under its charter, manufacture motorcycles. Under modern corporate law, the purposes clause would either be so general as to allow the corporation to go into the motorcycle business, or the corporation would amend its purposes clause to reflect the new venture. State laws in almost every jurisdiction have also sharply reduced the importance of the ultra vires doctrine. For example, section 3.04(a) of the Revised Model Business Corporation Act, drafted in 1984, states that "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." There are three exceptions to this prohibition: it may be asserted by the corporation or its shareholders against the present or former officers or directors of the corporation for exceeding their authority, by the attorney general of the state in a proceeding to dissolve the corporation or to enjoin it from the transaction of unauthorized business, or by shareholders against the corporation to enjoin the commission of an ultra vires act or the ultra vires transfer of real or personal property. Government entities created by a state are public corporations governed by municipal charters and other statutorily imposed grants of power. These grants of authority are analogous to a private corporation's articles of incorporation. Historically, the ultra vires concept has been used to construe the powers of a government entity narrowly. Failure to observe the statutory limits has been characterized as ultra vires.

In the case of a private business entity, the act of an employee who is not authorized to act on the entity's behalf may, nevertheless, bind the entity contractually if such an employee would normally be expected to have that authority. With a government entity, however, to prevent a contract from being voided as ultra vires, it is normally necessary to prove that the employee actually had authority to act. Where a government employee exceeds her authority, the government entity may seek to rescind the contract based on an ultra vires claim.

EFFECTS OF ULTRA VIRES TRANSACTIONS

A contract beyond the objects clause of the companys memorandum is an ultra vires contract and cannot be enforced by or against the company as was decided in the cases of In Re, Jon Beaufore (London) Ltd ., (1953) Ch. 131, In S. Sivashanmugham And Others v. Butterfly Marketing Private Ltd., (2001) 105 Comp. Cas Mad 763, A borrowing beyond the power of the company (i.e. beyond the objects clause of the memorandum of the company) is called ultra vires borrowing. However, the courts have developed certain principles in the interest of justice to protect such lenders. Thus, even in a case of ultra vires borrowing, the lender may be allowed by the courts the following reliefs: (1) Injunction --- if the money lent to the company has not been spent the lender can get the injunction to prevent the company from parting with it. (2) Tracing--- the lender can recover his money so long as it is found in the hands of the company in its original form. (3) Subrogation---if the borrowed money is applied in paying off lawful debts of the company, the lender can claim a right of subrogation and consequently, he will stand in the shoes of the creditor who has paid off with his money and can sue the company to the extent the money advanced by him has been so applied but this subrogation does not give the lender the same priority that the original creditor may have or had over the other creditors of the company.

EXCEPTIONS ULTRA VIRES

TO

THE

DOCTRINE

OF

There are, however, certain exceptions to this doctrine, which are as follows: 1. An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form. 2. An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting.

3. If the company has acquired any property through an investment, which is ultra vires, the companys right over such a property shall still be secured. 4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Companys Act.

5. There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For example, a business company can raise its capital by borrowing. 6. If an act of the company is ultra vires the articles of association, the company can alter its articles in order to validate the act.

CASE NOTES
The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862 It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act, was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association.

Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B. 9 It was held that the contract, if any, between the plaintiff and the company contained in the articles in their original form was subject to the statutory power of alteration and if the alteration was bona fide for the benefit of the company it was valid and there was no breach of that contract; there was no ground for saying that the alteration could not reasonably be considered for the benefit of the company; there being no evidence of bad faith, there was no ground for questioning the decision of the shareholders that the alteration was for the benefit of the company; and, the plaintiff was not entitled to the relief claimed. In Re New British Iron Company, [1898] 1 Ch. 324 It was held that the article is not in itself a contract between the company and the directors; it is only part of the contract constituted by the articles of association between the members of the company inter se. But where on the footing of that article the directors are employed by the company and accept office the terms of art. 62 are embodied in and form part of the contract between the company and the directors. Under the article as thus embodied the directors obtain a contractual right to an annual sum of 1000l as remuneration. It was held also that although these provisions in the articles were only part of the contract between the shareholders inter se, the provisions were, on the directors being employed and accepting office on the footing of them, embodied in the contract between the company and the directors; that the remuneration was not due to the directors in their character of members, but under the contract so embodying the provisions; and that, in the winding-up of the company, the directors were entitled to rank as ordinary creditors in respect of the remuneration due to them at the commencement of the winding-up.