STATEMENT OF FACTS

The brief fact of the case is that Mr. Akash herein as respondent was a successful
businessman and planned to setup a public limited company and named its company Skyline
& Co. Ltd. In 2020. He became the managing director of the company holding 20% of the
shares and also acting up as a promoter. During the pre-incorporation stage, Mr. Akash
promised to invest in Apex Limited which is a software company on behalf of the company
so that in return they would help them with their services related to developing the enterprise
resource planning software. The investment was of 120 crores and was duly executed by the
board of directors after the incorporation of the company. But the shareholders of the
company were not happy with the decision as they were not aware about the contract while
investing. They planned to sue Mr. Akash for using company capital for personal interest
claiming that the contract is invalid and ultravires. Shareholder also urged the board to restore
the fund that the company has invested which was done without the approval of the
shareholder. Mr. Akash claims that the promise was done to pay when he did not have the
means to pay for the investment. As a response the shareholders approached the National
Company Law Tribunal on account of Doctrine of Ultra Vires claiming that the investment in
Apex Limited was an Ultra Vires Act and that the Promoter has not exercised his rights in a
responsible manner.
 ISSUES RAISED

ISSUE I

1. Whether the shareholders can sue Mr. Akash for being the promoter,

major shareholder and for having acted out of personal interest?

ISSUE II

2. WHETHER THE COMPANY HAS ACTED ULTRA VIRES BY INVESTING IN

APEX LIMITED?

ARGUMENTS ADVANCED

2. Whether the company has acted ultra vires by investing in Apex

Limited?

It is contented that my clients which are the shareholders of the company are just demanding
the board to restore the funds which are invested in the Apex Limited as what the promoters
did is against the doctrine the Ultra vires even though the promoter is stating that what he did
is an exception to the Doctrine of Ultra vires. But it should not be forgotten that the amount is
the funds of the shareholders themselves and no opinion was taken before investing such a
huge amount of the company funds. A promoter is an important position in a company. He is
personally liable when a contract is made on behalf of the intended company. And if
something goes wrong the promoter can be made liable in the suit by the aggrieved
shareholder if there is a noncompliance of provisions as per section 56 for the damages
caused due to deceit.
  The doctrine of ultra-vires
Ultra Vires means any action which is committed by the person who does not even have the
authority to commit that action. In the company law, it means any action committed by a
person which is not mentioned in the object clause of the memorandum of the association
(MoA). The company's constitution is said to be its MoA. It outlines the company's goals,
authority, and operational area both internally and externally. A corporation is only allowed
to act in accordance with the memorandum's powers, which are limited in scope. A business
may also take any action that is incidental to the major goals outlined in the memorandum.
Anything that goes beyond what the memorandum permits is considered ultra-vires.
According to this doctrine, the company's shareholders and creditors are guaranteed that its
cash will only be used for the purposes laid out in its memorandum of association. Investors
in the firm may be confident that their money will not be used for purposes that were not
disclosed at the time of investing in this way. If a firm's assets are used improperly, this might
lead to the company's insolvency, which would prevent the company from paying its
creditors. This doctrine assists in minimizing such a disaster. This approach clearly defines
the point at which corporate directors are not permitted to act.

Section 4 (1)(c) of the Companies Act, 2013 says that all the objects which is needed for the
incorporation of the company should be stated in the Memorandum of Association.

As per section 245(1)(b) of the Company Law, 2013 it provides the members of the company
to file an application before the tribunal if they have the reason to believe that the working of
the company is conducted in a prejudicial manner which is against the interest of the
company or its shareholder or the depositors. This put a restrain on the company from
committing anything which can be considered as the breach of the clauses of the MoA.

There are certain remedies which are possible if Ultra vires is proved.

a) All the ultra vires act are declared as null and void ab initio as these acts are not
within the company. In such a case neither the company can sue nor the company can
be sued, as happened in the case of Ashbury Railway Carriage and Iron Company v.
Riche where as per the MoA, the company objects were to supply and sell material
which are needed for railways construction but the company comes into the contract
for the construction of railways which was no where mentioned and was contrary to
 the MoA. The court held that the above contract was ultra vires to the memorandum
and could not be granted.
b) And lastly if any funds are diverted for a purpose not mentioned and authorized by the
Memorandum of Company then the directors of the company are personally liable for
such function as it the duty of the director of the company to ensure that all the funds
are used for only legitimate purposes and should be mentioned in the MoA.

Therefore, the company has no liability in the committed offences and only the promoter who
is the managing director as well of the company shall be only personally liable for the action
committed.