Incorporation of companies is full of many advantages, whereas it is not free from some disadvantages. Incorporated companies are subject to technical rules, from which partnerships are free, restricting the range of their activities and securing the raising and maintenance of their share capital. This is the basic rule known as “ultra vires”. In many instances, these rules could probably be disadvantageous from the viewpoint of the members.
A company which owes its incorporation to statutory authority cannot effectively do anything beyond the powers expressly or impliedly conferred upon it by its statute or memorandum of association. Herein, any purported activity in excess or beyond limits will be ineffective even if agreed to by all members.
The genuine purpose of these restrictions, we could say, is twofold. First, to protect investors in the company so that they may know the objects in which their money is to be employed, and, secondly, to protect creditors by ensuring that the company’s funds, to which they must look for payment, are not used or placed in unauthorised activities.
It must be pointed out, however, that the expression “ultra vires” is also used in practice to describe the situation when the directors of the company have exceeded the powers delegated to them. This use is to be avoided for it is possible to cause confusion between two entirely distinct legal principles. When the company has exceeded its powers it is not bound by its act because it lacks legal capacity to incur responsibility for it. When the directors exceed their powers the company is not bound because its agents have exceeded, no question of capacity arises and the company may ratify what the directors have done and sometimes may be unable to set up the director’s lack of actual authority when they have acted within their usual or common powers.
The rule of ultra vires has started since long time. Before Courts, as per English law, it has generally been taken to establish that a chartered corporation has all the powers of a natural person in so far an artificial entity is physically capable of exercising them, if it misuses its powers by exceeding the objects in the charter, it may be that proceedings could be taken to restrict it or to forfeit the charter, but with the aim that its actions will be fully effective. Companies, shall be careful not to exceed or over-step powers, otherwise it will revert back at a very high cost. There are many cases to be taken as a lesson.