Applicability of Doctrine of Ultra Vires to LLP

Meaning of Ultra Vires

The word ultra means going beyond what is usual or ordinary, excessive and the word vires
means natural powers or forces or granted powers. The expression ultra vires means beyond
the legal power or authority of an entity.

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.

Applicable to Whom
The ultra vires doctrine typically applies to a corporate body, such as a limited company, a
government department or a local council so that any act done by the body which is beyond its
capacity to act will be considered invalid.

Establishment of the Doctrine in U.K
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.

Ashbury Railway Carriage and Iron Company Ltd v. Riche,
1
In this case, the objects of the
company as stated in the objects clause of its memorandum, were to supply and sell the
materials required to construct railways. The company agreed to give Riche and his brother a
loan to build a railway in Belgium. This was not covered under object clause of memorandum of
association. The contract was ratified by all the members of the company. Later, the company
rejected the agreement. Riche sued for enforcement of the contract. The company pleaded the
action was ultra vires and hence was treated as it can be enforced on the company.

Object clause under the Companies Act 1956
It is a requirement of Section 13 of the Companies Act, 1956 that the memorandum of
association shall state the objects of the companies. The objects clause owes its existence to
check the misuse of funds by company. However, Ultra vires doctrine as observed by Gower
2

is meant to protect the company against itself so as to safeguard its members and its creditors.
The object clause of the memorandum is intended to serve double purpose. In the first place it
gives protection to subscribers, who learn from it the purposes to which their money can be
applied. In the second place it gives protection to a person who deals with the company, and

1
(1875) L.R. 7 H.L. 653.
2
Page 171, Grower, The Principles of Modern Company Law (Fourth edition)
who can infer from it the extent of the companys power. There is no mention of doctrine of
ultra vires in Companies Act 1956. In case of artificial person, protecting interest of
shareholders, creditors, persons dealing with the entity is critical. Hence the doctrine of ultra
vires has been established and accepted by court of law
3
.

Establishment of the Doctrine in India
In India the origin of the doctrine dates back to 1866 when the Bombay High Court applied it to
a joint stock company and held on the facts of the case before it that the purchase by the
directors of a company on behalf of the company of shares in other joint stock companies,
unless expressly authorized in the memorandum is ultra vires
4
. Since then this rule has been
applied and acted upon in a number of cases
5
.

The doctrine has been affirmed by the Supreme Court in its decisions in A. Lakshmanaswami
Mudaliar v. Life Insurance Corporation of India
6
. The directors of a company were authorized
to make payments towards any charitable or any benevolent object or for any general public,
general or useful object. In accordance with a shareholders resolution the directors paid two
lakh rupees to a trust formed for the purpose of promoting technical and business knowledge.
The payment was held to be ultra vires. The court said that the directors could not spend the
companys money on any charitable or general object which they might choose. They could
spend for the promotion of only such charitable objects as would be useful for the attainment
of the companys own objects. The companys business having been taken over by the Life
Insurance Corporation, it had no business left to promote.

What is LLP?
A Limited Liability Partnership, known as LLP combines the advantages of both the Company
and Partnership into a single form of organization. In an LLP one partner is not responsible or
liable for another partner's misconduct or negligence; this is an important difference from that
of an unlimited partnership. LLP is not liable for any unauthorized act done by any partner of
LLP
7
.

Whether doctrine of ultra vires to be made applicable to LLP?

As per aforesaid principles/judgments, doctrine of ultra vires should be applicable to LLP
because :

(a) LLP is an Artificial Person (b) LLP is a separate Legal entity (c) Liability of partners is
limited in LLP (d) LLP is governed by LLP agreement (e) LLP is not liable for

3
Page no 599 para 3 K.M.Ghosh & Dr.K.R.Chandratres comm. on company law
4
Jehangir R. Modi v Shamji Ladha, (1866-67) 4 Bom HCR 185
5
Port Canning & Land Investment Co, Re (1871) 7 Beng LR 583; Ahmed Sait v Bank of Mysore, (1930) 59 MLJ 28;
Imperial Bank of India v Bengal National Bank, AIR 1930 Cal 536: (1931) Comp Cas 63:ILR 57 Cal 328, Madras Native
Permanent Fund, Ltd, Re (1931) 60 MLJ 270; Wamanlal v Scindia Steam Navigation Co, AIR 1944 Bom 1311944)
14 Comp Cas 69; Iron Traders v Hiralal Mittal, AIR 1962 Punj 277: (1962) 32 Comp Cas 1022.
6
AIR 1963 SC 1185: (1963) 33 Comp Cas 420.
7
Section 27 of the Limited Laibility Partnership Act, 2008.
unauthorized acts of partners (f) Hence, to protect the interest of partners, creditors
and others dealing with LLP doctrine of ultra vires should become applicable to LLP.

Learning from this doctrine

It is advisable to make the objects clause in LLP agreement very comprehensive,
exhaustive
It protects the interest of members and creditors
Partners /LLP can enter into transactions which are authorized by LLP agreement.

Conclusion

The memorandum is the charter of the company, likewise LLP agreement is the charter of LLP.
Company is an artificial person, LLP is also an artificial person. All the documents filed by
Company with Registrar of companies are in public view and anyone can view the documents of
company, likewise the documents of LLP are also available to public for scrutiny,
8
so as to
protect the interest of creditors and persons dealing with LLP. Hence, Doctrine of ultra vires
should be made applicable to LLP.

CASE NOTES:

Ashbury Railway Carriage & Iron Co. v Riche (1875) LR 7 HL 653.
Jehangir R. Modi v Shamji Ladha, (1866-67) 4 Bom HCR 185.
A. Lakshmanaswami Mudaliar v Life Insurance Corporation Of India
Attorney General v Great Eastern Railway Co. (1880) 5 App Cas 473.
Re, Jon Beaufore (London) Ltd ., (1953) Ch. 131.






The object of the ultra vires doctrine is to protect the interests of the
partners and creditors by ensuring that the LLP does not invest or utilize
the money in those acts, which is not contemplated by the partners or
creditors of the LLP.








8
Section 36 of the Limited Liability Partnership Act 2008