Corporate Law: Director Liability & Ultra Vires

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Questions and Answers

What is the personal liability of directors in a company regarding unlawful disbursement of funds?

Directors are personally liable to restore any unlawfully disbursed corporate funds to the company.

What can shareholders do if directors unlawfully disburse corporate funds?

Shareholders can maintain an action against the directors to compel them to restore the misappropriated funds.

In the case of A Lakshmanaswami Madaliar v. Life Insurance Corporation, what was deemed ultra vires?

The donation of rupees two lakh by the directors to a trust was deemed ultra vires.

What is the significance of indemnity for directors who refund ultra vires payments?

Directors can seek indemnity from recipients who knowingly received ultra vires payments. Signup and view all the answers

What is the impact of an ultra vires contract on the involved parties?

An ultra vires contract is void, and neither party can enforce it against the other. Signup and view all the answers

How does knowledge of the company's memorandum affect transactions with third parties?

Third parties are deemed to have knowledge of the company's memorandum, making them responsible for not engaging in ultra vires contracts. Signup and view all the answers

Describe a scenario where a company was unable to pay for damages due to ultra vires actions.

Purchasers of inferior-quality rice could not sue the company for damages because the company's rice trading was ultra vires. Signup and view all the answers

What can a company do with property acquired using ultra vires expenditure?

A company can protect its property acquired through ultra vires expenditure. Signup and view all the answers

What is the legal consequence of a company borrowing money beyond its powers?

The loan contract is void, and the lender cannot recover the money lent. Signup and view all the answers

In cases of ultra vires borrowing, what remedy can a lender pursue if the loan was used to pay enforceable debts?

The lender may assert a claim to 'subrogation', allowing them to take the place of the original creditor. Signup and view all the answers

If a lender cannot recover a loan due to it being ultra vires, what method allows them to potentially trace their funds?

The lender can use a tracing order to identify and recover their money from assets acquired with the loan. Signup and view all the answers

Can a company be held liable for torts committed outside its stated objects?

No, a company is not liable for torts committed in activities that are ultra vires its purpose. Signup and view all the answers

What are the key distinctions between remedies available for creditors vs. lenders in ultra vires borrowing cases?

Creditors have a direct claim for the debt, whereas lenders must rely on subrogation or tracing methods to recover their funds. Signup and view all the answers

What happens to the rights of the lender if the company is liquidated after borrowing ultra vires?

The lender cannot sue for the repayment of the loan, but may trace their funds into the company's assets. Signup and view all the answers

How did the House of Lords rule in the Sinclair v. Brougham case regarding ultra vires contracts?

The House of Lords ruled that customers could not sue on the ultra vires contract but could trace their funds into the company. Signup and view all the answers

Why is the doctrine of ultra vires increasingly being circumvented by company promoters?

Promoters find ways to engage in activities that might be considered outside the company's articles, thus frustrating the doctrine. Signup and view all the answers

Study Notes

Director Liability

Directors are responsible for using company funds for legitimate business purposes.
If directors misuse funds, they are personally liable to reimburse the company.
Shareholders can sue directors to recover misappropriated funds.
Directors who reimburse the company can seek indemnification from the party who received the funds if they knew the payment was unauthorized.

Ultra Vires Contracts

Contracts made by a company beyond its authorized objects are void and unenforceable.
This applies even if the third party is unaware of the company's limitations.
Individuals dealing with a company are presumed to know its memorandum.
Contracts entered into knowingly beyond the company's powers cannot be enforced.

Ultra Vires Property

A company can protect property acquired through an ultra vires expenditure.
A company can claim damages for harm inflicted on ultra vires property, for example, if telephone wires are cut.

Ultra Vires Borrowing

When a company borrows money beyond its authorization or for unauthorized purposes, the loan agreement is void.
The lender cannot sue to recover the loan, but may have alternative remedies:
- Subrogation: If the company used the loan to pay legitimate debts, the lender can claim the rights of the original creditors.
- Tracing: If the lender can identify the loan money or assets purchased with it, they can pursue a "tracing order" to claim the funds.

Ultra Vires Torts

Companies are generally liable for torts (civil wrongs) committed while pursuing authorized objectives.
They are not liable for torts committed during ultra vires activities.
Officers, agents, or employees who commit torts during ultra vires activities are personally liable.
The doctrine of ultra vires is often undermined by clever company promoters.

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Description

This quiz focuses on essential concepts of corporate law, specifically the responsibilities of directors, the implications of ultra vires contracts, and property acquired through unauthorized actions. Understand the liability directors face and the enforceability of contracts beyond a company's authority. Test your knowledge on these critical topics in corporate governance.