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CA Intermediate · Corporate and Other Laws · Incorporation of Company and Matters Incidental Thereto

Kavya Pvt Ltd's Articles say that every share transfer needs board approval. The Memorandum's objects clause does not mention real estate trading, but the board enters into a major real estate trading contract with Zenith Builders, which knows the Memorandum. Under the doctrine of ultra vires, what is the legal position of this contract?

The contract is void and unenforceable. A contract outside the objects stated in the Memorandum is ultra vires the company and void from the start, and not even unanimous member ratification can validate it. Outsiders are deemed to know the Memorandum through constructive notice.

  1. AValid, because the board approved it
  2. BValid, because Zenith Builders is an outsider and acted in good faith
  3. CVoid and unenforceable, because it is beyond the objects in the Memorandum and even ratification by members cannot validate itCorrect
  4. DVoidable at the option of the company, and ratifiable by an ordinary resolution

Explanation

An act beyond the objects clause of the Memorandum is ultra vires and void ab initio. It cannot be ratified even by all members. Knowledge of the Memorandum is imputed to outsiders through constructive notice, so good faith does not help Zenith Builders.

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