Effect of Ultra Vires Transaction:
An ultra vires transaction with a company may result in:
a) a transfer of specific property to the company, or
b) money being lent to the company.
The remedies available against the company will be as follows.
If specific property is transferred to a company pursuant to a transaction which, unknown to the transferor, is ultra vires the company, the ownership of the property is not transferred. The property remains the property of the transferor while the company only acquires possession of it. This is because an ultra vires transaction cannot constitute a "contract" which, pursuant to the Sale of Goods Act, s.3, is capable of vesting or transferring the ownership of the property in the transferee company. The transferor, on becoming aware of the legal position, would be entitled to trace his property and, on finding it, take possession of it. This remedy is known as "tracing".
The company has no right to retain the property and its attempt to do so would constitute the tort of detinue.
The other consequence of this rule is that, since there was no contract of sale, the transferor cannot sue the company for breach of contract, or the agreed price. The legal position in the converse situation is not clear. It is probable that the company cannot recover its property by tracing if the transferee is willing to pay the agreed price. However, the company might be able to recover it if the transferee has failed or refused to pay for it because to allow him to retain it after refusing to pay for it would constitute "unjust enrichment" which a court of equity is unlikely to condone.