Doctrine of Ultra Vires:
The Doctrine of ultra-vires was given under s. 4(1)(c), s. 245(1)(b) of the Companies Act, 2013. The term Ultra-vires (Beyond-powers) for a firm refers to an action that is beyond the company’s legal capacity and jurisdiction. If a corporation does an act or a series of activities that are in violation of the Companies Act of 1956, they are subject to legal penalties. The word “Ultra vires” refers to conduct carried out beyond of the legal powers granted by the object clause.
The doctrine of ultra vires restricts the company’s actions to those defined under the object clause of MOA. The effects of ultra-vires transactions are void-ab-initio, they cannot be turned into intra-vires after the ratification by the share-holders. The injunction orders can be issue. The directors can be personally made liable. Sometimes, even criminal action can be taken against deliberate fraud/misapplication.
Types of ultra vires and their ratification:
- In case of Ultra-vires to the companies act, it is Void-ab-initio, Shareholders cannot ratify.
- In case of Ultra vires to the memorandum of the company, it is Void-ab-initio and Shareholders cannot ratify.
- In case of Ultra-vires to the articles of the company which is otherwise Intra-vires to the company, Shareholders can ratify after alterations.
- In case of Ultra vires to the directors of the company, which is otherwise Intra-vires to the company, Shareholders can ratify.
Doctrine of Constructive Notice
Section 399 of the Companies Act, 2013 states that any person may, after payment of the prescribed fees inspect by electronic means any documents kept with the Registrar of Companies. Any person can also obtain a copy of any document including the certificate of incorporation from the Registrar.
In line with this provision, the Memorandum of Association and the Articles of Association are public documents once they are filed with the Registrar. Any person may inspect the same after payment of the fees prescribed. The special resolutions are also required to be registered with the Registrar under the Companies Act, 2013.
The doctrine presumes that every person has knowledge of the contents of the Memorandum of Association, Articles of Association and every other document such as special resolutions as it is filed with the Registrar and available for public view.
- The Memorandum of Association and Articles of Association of any company are public documents which can be inspected by the general public on MCA portal by paying the required fees.
- Doctrine of constructive notice assumes that any person who deals with a company, must have inspected its documents and establish conformity with the provisions.
- Though, if a person fails to read them, then the law assumes that he is aware of the all the contents of the documents. Such an assumption or presumption notice is called Constructive Notice.
- In simpler words, if a person enters into a contract which is beyond the powers of a company, then he has no right to sue the company for its redemption.
- The Memorandum of Association is the charter documents that state the powers of its directors and its members.
- If a person enters into a contract which is beyond the powers of the company or outside the limits of its authority, he cannot acquire any rights against the property of the company.
Doctrine of Indoor Management
- The doctrine of indoor management is contrary to the doctrine of constructive notice.
- Doctrine of indoor management assumes that outsiders are unaware internal affairs of the company.
- Hence, if an act performed is authorized by the Memorandum or Articles of Association of the company, then the outsider can assume that the company complies with all the detailed formalities. This assumption is known as Doctrine of Indoor Management.
- This principle is based on the landmark case between The Royal British Bank and Turquand.
- Therefore, this rule of indoor management is important to people who deals with a company through its directors or other persons.
- They can assume that the members of the company are performing within the scope of their authority as mentioned in the charter documents i.e. Memorandum / Articles of association. The Doctrine of Indoor Managements states that outsider person has no responsibility to have the knowledge about the internal affairs of the company. The outsider person cannot be bound by the duty to review the internal functioning or the internal managerial proceedings of the company. So, the outsider person shall not be made liable for the irregularities in the internal proceedings of the company. The company cannot transfer its liability on the outsider person of its own irregular internal actions. This principle is called the Doctrine of the Indoor Management.
Exceptions to the Doctrine of Indoor Management
Listed below are the exceptions to the doctrine that have been judicially established, which provide circumstances under which the benefit of indoor management cannot be claimed by a person dealing with the company.
Knowledge of Irregularity
This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity.
Suspicion of Irregularity
In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.
Transactions involving forgery are void ab initio (null and void) since it is not the case of absence of free consent; it is a situation of no consent at all.
A person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder contented that he was not aware of the forgery, and he is not required to look into it. The Court held that the company is not liable for forgery done by its officers.