JV Limited borrowed a secured loan of 5 crore from Star Bank Limited (the bank) to meet its working capital requirement. However, the borrowing…

Doctrine of ultra vires: The meaning of the term ultra vires is simply “beyond (their) powers”. It is a fundamental rule of Company Law that any act done or a contract made by the company which travels beyond the powers not only of the directors but also of the company is wholly void and inoperative in law and is therefore not binding on the company. The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public document”, it is open to public inspection. Therefore, when one deals with a company one is deemed to know about the powers of the company. If in spite of this you enter into a transaction which is ultra vires the company, you cannot enforce it against the company. In the instant case, borrowing more than 1crore was clearly beyond JV Limited’s powers as per its MoA, making the loan transaction ultra vires to the extent of the excess amount over 1crore. Hence, the decision of the company denying the repayment of the loan being ultra virus the company shall be valid for 4crore. If the funds have been applied for legitimate business purposes (such as repaying lawful debts), the lender steps into the shoes of the debtor paid off and consequently he would be entitled to recover his loan to that extent from the company. Therefore, JV Limited cannot deny repayment of 3crore, as it was utilised for lawful purposes, despite the ultra vires nature of the loan. Ultimately, the company has no remedy available to recover the balance amount of loan of 1crore as the spending thereof is not traceable.