Ultra Vires (Company Law)

Historically, a company incorporated with a specific objects clause in its constitution had no legal capacity to act outside those objects: any such act was ultra vires and void, even where every shareholder agreed to it. The Companies Act 2006 abolished this rule for practical purposes. Section 39 provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution — meaning a company can no longer avoid a contract simply because entering into it exceeded its objects.

Section 40 gives a complementary protection to third parties dealing with a company's directors: in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution. This does not remove internal accountability, however. The section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors, nor does it affect any liability incurred by the directors, or any other person, by reason of the directors' exceeding their powers.