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CA Foundation · Business Laws · The Companies Act, 2013

Sundar Agro Ltd's memorandum of association states that its main object is to trade in agricultural implements. The board now enters into a contract to run a chain of cinema halls, which is not covered by the objects clause. What is the legal position of this contract?

The contract is ultra vires the company and therefore void from the start. Neither a board resolution nor the unanimous consent of shareholders can ratify it, because the company lacks capacity to act beyond its memorandum objects. Only a proper alteration of the objects clause could permit such business.

  1. AIt is valid because the directors approved it by a board resolution
  2. BIt is ultra vires the company and void, and cannot be ratified even by all the shareholdersCorrect
  3. CIt is valid if the Registrar of Companies is informed within 30 days
  4. DIt is voidable and can be ratified by a unanimous vote of the shareholders

Explanation

An act beyond the objects clause of the memorandum is ultra vires the company. Such a contract is void ab initio and cannot be ratified even by unanimous shareholder consent. Option D is wrong because ratification is not possible for ultra vires acts; the objects clause must first be properly altered.

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