Ashbury Railway Carriage and Iron Company Limited v. Riche (1875)

This is the foundation of the doctrine of ultra vires and the reason the objects clause matters at all. Everything else in the law of the memorandum — Cotman v. Brougham on wide objects clauses, Bell Houses on subjective objects, Re Introductions on ultra vires borrowing — is an argument about how to live with Ashbury, or how to escape it.

The case is also the cleanest available illustration of the difference between the memorandum and the articles, and between an act that is beyond the powers of the directors and one that is beyond the powers of the company. If you can state that distinction in Lord Cairns's own terms, most ultra vires problems answer themselves.

The company was incorporated under the Companies Act 1862. Clause 3 of its memorandum stated the objects:

"3. The objects for which the company is established are, to make, or sell, or lend on hire railway carriages and waggons, and all kinds of railway plant, fittings, machinery, and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work, and sell mines, minerals, land and buildings; to purchase and sell, as merchants, timber, coal, metals or other materials, and to buy and sell any such materials on commission or as agents."

By article 4 the business might be extended beyond the objects "expressed or implied in the memorandum of association" by a special resolution — but no such resolution was ever passed.

Riche, a contractor in Belgium, had obtained a concession from the Belgian Government to make a railway from Antwerp to Tournay. The directors of the company entered into a contract with him. Its purport was to take over the concession, to establish a société anonyme, to raise money for constructing the railway, to pay towards the funds of the société and take bonds or shares in exchange, and to give Riche the business of supplying the iron and rolling stock. The company paid the concessionaires £26,000, part of the price.

Money difficulties arose. The shareholders, learning of the contract, appointed a committee of investigation, which reported that it was ultra vires altogether. The shareholders nevertheless allowed the accounts to pass, amicable arrangements were recommended, and a deed of 24 December 1867 made the directors, as between themselves and the shareholders, bear the burden of the contract, the company consenting to let its name be used in legal proceedings.

Riche, finding the contract not performed, sued the company in May 1868, insisting that whatever the directors and shareholders had arranged between themselves, the company was liable to him.

The courts below divided almost perfectly. In the Court of Exchequer the contract was held ultra vires, but Martin and Channell BB thought it could be and had been ratified by the shareholders, and gave judgment for the plaintiff, Bramwell B dissenting. In the Exchequer Chamber six judges divided three and three, so the judgment stood affirmed. Error was brought to the House of Lords.

1. Was the contract with Riche within the objects stated in clause 3 — in particular, within the words "general contractors"?
2. If it was outside them, could it be ratified by the assent of the shareholders?

Judgment reversed; judgment entered for the defendant company. The contract was beyond the objects of the memorandum, therefore beyond the power of the company to make, therefore void, and incapable of ratification even by the unanimous assent of every shareholder.

A company incorporated under the Companies Act with objects stated in its memorandum has capacity to do only those things which the memorandum authorises expressly or by implication. A contract outside the objects is not merely voidable at the company's election but wholly void, because the company never had the power to make it; and a contract wholly void cannot be ratified — not by the directors, not by a special resolution, not by the unanimous assent of all the members.

Reading "general contractors"

The argument for Riche was that "general contractors" covered anything. Lord Cairns disposed of it by ordinary construction. The objects clause divides into four classes of words, each complete in itself: making and selling railway plant; carrying on the business of mechanical engineers and general contractors; acquiring and working mines and minerals; and buying and selling materials as merchants or agents. On ordinary principles, "general contractors" takes its meaning from what immediately precedes it, and indicates "the making generally of contracts connected with the business of mechanical engineers".

The reason for that reading is structural, and it is a point worth reproducing whenever an objects clause is drafted widely:

If the term "general contractors" is not to be interpreted as I have stated, the consequence would be this, that it would stand absolutely without any limit of any kind. It would authorize the making, therefore, of contracts of any and every description, and the memorandum in place of specifying the particular kind of business, would virtually point to the carrying on of business of any kind whatsoever, and would therefore be altogether unmeaning.

Lord Hatherley agreed and noted that even those arguing for the company's liability had conceded that the words "must have some limit."

Applied to the contract, Lord Cairns adopted Bramwell B's analysis: the directors bought a railway concession for the company's benefit, and undertook to fund a société anonyme as Riche did the work. Whatever "mechanical engineers and general contractors" means, "to my mind it clearly does not include the making of either of these contracts." Lord Cairns added the sharp observation that the arrangement inverted the company's own hypothesis: under the memorandum the company was to be employed; here "they were the employers."

Memorandum against articles — the passage to memorise

This is the most quotable half-page in the law of the memorandum:

With regard to the memorandum, as has often been pointed out, although it appears to have been somewhat overlooked in the present case, the memorandum of association is, as it were, the charter and the limitation of the powers of any company established under the Act. With regard to the articles of association, these play a part subsidiary to the memorandum.

And the consequence for characterising a defect:

With regard, therefore, to the memorandum of association, if you find anything which goes beyond it, or is not warranted by it, the question will arise whether that which is done is intra vires not of the directors of the company, but of the company itself. With regard to the articles of association, if you find anything which, still keeping within the memorandum is a violation of, or is in excess of the articles, the question will arise whether that is anything more than an act extra vires of the directors, but intra vires of the company.

That distinction is the whole of the difference between Ashbury and Turquand. Break the articles and you have an irregularity the company can cure; break the memorandum and there is nothing to cure.

Lord Cairns built the conclusion out of the 1862 Act itself: s. 6 incorporates a company by reference to a memorandum rather than conferring inherent common law capacity; s. 8 requires the memorandum to state the objects, and the company comes into existence "for those objects alone"; s. 11 gives the memorandum the effect of a deed, so that every member covenants to observe its conditions; and s. 12 restricts change. The memorandum is therefore both affirmative and negative — it "states affirmatively the ambit and extent of vitality and power which by law is given to the incorporation", and states negatively "that nothing shall be done beyond the ambit".

Article 4 did not help. Although no special resolution was in fact passed, Lord Cairns said that even if one had been it "would have been nugatory and inefficacious", because article 4 was an attempt "to claim and arrogate to the company a power, under the guise of internal regulation, to go beyond the objects or purposes expressed or implied in the memorandum." An article cannot enlarge the memorandum.

Void, not illegal — and therefore unratifiable

Lord Cairns was careful about vocabulary, and the care is examinable. He preferred extra vires and intra vires to the language of illegality: the contract was assumed to be perfectly legal in itself, not malum in se or malum prohibitum. "The question is not the illegality of the contract, but the competency and power of the company to make the contract."

The consequence is absolute, and he states it with the famous hypothetical of the whole membership in one room:

If every shareholder of the company had been in this room, and every shareholder of the company had said, "That is contract which we desire to make, which we authorize the directors to make, to which we sanction the placing the seal of the company," the case would not have stood in any different position to that in which it stands now.

The reason is that the members would then be doing by unanimity the very thing the Act forbade them to do. And if they could not have authorised it in advance, they cannot sanction it afterwards; to hold otherwise "would be perfectly fatal to the whole scheme of legislation".

He adopted Blackburn J's formulation from the Exchequer Chamber, which is the sentence to quote if you may quote only one: where it appears to be the intention of the legislature that a corporation shall not enter into a particular contract, every court "is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified."

Both Lord Cairns and Lord Hatherley added that, in any event, they found no sufficient evidence of ratification on the facts — but neither rested his opinion on it.

1. Who is protected. Lord Cairns identified the beneficiaries of limited liability legislation as three groups: the present shareholders, "those who might become shareholders in succession", and the outside public, particularly creditors. Ultra vires exists to protect the second and third groups, which is why the first cannot waive it.
2. The drafting response. Because the doctrine bites on the objects clause, draftsmen widened objects clauses until an objects clause stated everything. Cotman v. Brougham is the case that tested how far that could go; Bell Houses tested a clause framed by reference to the directors' own opinion.
3. The lending response. A creditor who lends for an ultra vires purpose has no contract to sue on; Re Introductions is the working out of that.
4. The statutory position in India. Under the Companies Act 2013 the memorandum must state the objects (s. 4), the memorandum and articles bind on registration (s. 10), and the objects may be altered only by the procedure in s. 13. Section 245(1)(a) allows members or depositors to apply to the Tribunal to restrain a company from committing an act "ultra vires the articles or memorandum of the company", so the doctrine has a live procedural life in the class-action provision.