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Unit 5: Memorandum of Association

declaring such act as ultra vires is to protect the interests of shareholders and all others who deal Notes
with the company. Some points worth noting as regards doctrine of ultra vires are:
A company exists only for the objects which are expressly stated in its objects clause or
which are incidental to or consequential upon these specified objects.
Any act done outside the express or implied objects is ultra vires.
The ultra vires acts are null and void ab initio. The company is not bound by these acts; and
neither the company nor the other contracting party can sue upon it.

Example: (1) A company with the objects, namely (i) to make and sell or lend on hire
railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling
stock; (ii) to carry on the business of mechanical engineers and general contractors; (iii) to
purchase, lease, work and sell, mines, minerals, land and buildings; (iv) to purchase and sell as
merchants timber, coal, metals or other materials. The company contracted to finance the
construction of a railway bridge in Belgium and there was evidence that the agreement had been
ratified by all the members. Later, the company repudiated the agreement and was sued for
breach of contract. In its defence, the company repudiated its lack of capacity to enter into a
contract which was outside the scope of its objects clause. The other party brought an action for
damages for breach of contract. His contentions were that the contract in question came well
within the meaning of the words ‘general contractors’ and, was, therefore, within the powers of
the company and secondly, that the contract was ratified by the majority of the shareholders.
Held: That the term ‘general contractors’ must be taken to indicate the making generally, of such
contracts as were connected with the business of mechanical engineers. If the term ‘general
contractors’ was so interpreted it would authorise the making of contracts of any and every
description, such as, for instance, of fire and marine insurance and the memorandum in place of
specifying the particular kind of business, would virtually point to the carrying on of business
of any kind whatsoever and would, therefore, be altogether not meaningful. Hence, the contract
was entirely beyond the objects in the memorandum of association. [Ashbury Railway Carriage
and Iron Co. v. Riche (1875) LR 7 HL 653].
(2) The objects clause of a company included making of costumes, gowns and similar things
within the clothing trade. However, it extended its activities to the manufacture of veneered
panels and became indebted to three parties (a) builders of the veneered panels factory,
(b) suppliers of veneers and (c) fuel merchants. In the meantime the company went into liquidation
and rejected the claim of the three creditors. The creditors filed suits for the recovery of money.
Held: the contention of the liquidator was correct as all the three contracts were clearly ultra
vires.
In case a company is about to undertake an ultra vires act, the members of a company (even
a single member) can get an order of injunction from the court restraining the company
from going ahead with the ultra vires act.
If the directors have exceeded their authority and done something then such matter can be
ratified by the general body of the shareholders, provided the company has the capacity to
do so by its memorandum of association.

Example: Company has the power to borrow money, but the Articles of the company
provide that in case the directors borrow more than 50,000, they should get prior approval by
the company in general meeting. However, the directors can issue debentures to the extent of
75,000 without getting the approval from the shareholders.

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