Whenever a company acts outside its rights, its consequences arise.
1. Unauthorized works to be useless and ineffective – When a company does unauthorized work. So that work is considered useless and ineffective from the very beginning. These acts cannot be enforced in court under any circumstances.
Example- A company went out of its rights and bought a rice mill and operated it. The company obtained the price from a person and sold the rice to the consignee at a very heavy loss due to the substandard quality of that rice. The directors of the company gave an undertaking to compensate the consignee for the loss. The court ruled that the company was not liable to recover the loss as trading in rice was outside the company’s objectives.
2. Ratification is not possible – Unauthorized works are completely useless. Therefore, unauthorized works i.e. useless works cannot be confirmed or ratified even by the consensus of the shareholders.
3. Injunction When a company acts outside its rights, any member of it can get the injunction issued by praying to the court. The injunction issued by the court has to stop the work being done by the company outside its rights.
4. No liability of the company Since the works and contracts done outside the memorandum are void, hence no liability of any kind arises from those works and contracts. Therefore, neither the company can sue any outside party nor the outside party can sue the company.
5. Personal liability of the directors to the company – When the directors of the company do any act or contract which is outside the memorandum (unauthorized) then the directors can be held liable. Any member of the company can sue the directors in court to get compensation for the loss arising out of such works and contracts.
6. Rights on property acquired outside rights- If a company ever buys some property outside its rights and powers, even then the right of the company on that property remains safe, because that property is purchased from the company’s capital only.
9. Borrowed money cannot be recovered If a bank or any person lent money to a company for purposes outside its ‘rights’, it cannot recover that money. But if the company wishes to make the payment, it can. Once the company has paid this amount, it cannot recover it again.
10. The company is not liable for the misdemeanor if a company acts outside its rights and as a result of a tort, then the company cannot be held liable for that misdemeanor. The company can be held liable for the misdemeanor only if the misdemeanor is committed by an employee in the course of his service for carrying out the purposes specified in the memorandum.
Exceptions to actions outside rights Actions outside rights are generally meaningless, but these actions can also be enforced in the following circumstances:
1. Confirmation of acts outside the articles – If any act is outside the articles but within the memorandum, that act may be confirmed in the general meeting of the company. Therefore, unauthorized work can also be made legal in this way.
2. Confirmation of acts outside the rights of the directors – If the directors do some acts which are outside their rights but within the rights of the company, they can be confirmed and legalized in the general meeting of the company. could.
3. Exemption from liability for acts done in good faith in the interest of the company If directors do any work outside their rights, then that work is generally useless. The operators are personally responsible for such actions. But if the directors prove that they have done all those things keeping in mind the good faith and interest of the company, then they can be relieved of their personal liability.
4. Right to recover unauthorized debts Any company can recover debts from any other person outside its rights. He cannot take the guise that the loan is given out of rights.
5. No right on taking loan or making purchase on credit outside rights- If a company takes loan or buys some assets on credit outside its rights, then the lender or seller can recover that loan or property. Is. The lender or seller can apply to the court to obtain an order to find and recover that property or that money or the property received from that money.
6. Liability of the directors on taking loans outside the rights of misrepresentation.
If the directors have obtained loans for the company by misrepresenting, then those operators will be liable to pay those debts.
7. Liability of directors for payment made out of rights. If the director company
If any payment is made for works outside the rights of the Director, he shall be liable to reimburse the amount to the Operator. Provided that the Director may, if he so desires, demand the refund of the amount paid to the persons making such payment. If they also came to know that this payment is being made to them outside the rights of the company. 8. Liability for irregular acts- Sometimes the company does not follow the procedure of legal provisions or provisions of Articles of Association in doing any work. In this case, those works are called irregular functions. The company is responsible for them when the process is duly followed.