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ASHBURY RAILWAY CARRIAGE AND IRON CO. LTD. V. RICHE (1875) L.R.7 H.L.

ASHBURY RAILWAY CARRIAGE AND IRON CO. LTD. V. RICHE (1875) L.R.7 H. L.

 

FACTS

  • The company was incorporated under the Companies Act 1862. Clause 3 of the memorandum of association stated that its objects were "to make and sell, or lend on hire, railway-carriages…"
  • By the articles of association the business of the company might be extended to objects beyond those expressed or implied in the memorandum of association by a special resolution, but no such resolution was ever passed.
  • Riche had obtained a concession from the Belgian Government to make a railway from Antwerp to Tournay, and the directors of the company entered into a contract with him, the purport of which was to take over the concession, to establish a société anonyme (public limited company, PLC), to raise money for constructing the railway, to pay towards the funds of the société, and to take bonds or shares in exchange and to give to Riche the business of supplying the iron and the rolling stock.
  • Later, the company repudiated the agreement. Riche sued, and the company pleaded that the action was ultra vires (beyond the powers).
  • The Court of Exchequer held that the contract was ultra vires, but Martin and Channel, BB., thought that it could be, and had been ratified by the shareholders, and gave judgement for the plaintiff, Bramwell, B., dissenting. Error was brought, and the Court of Exchequer Chamber was equally divided, Blackburn Brett, and Grove, JJ., being of the same opinion as the majority of the Court of Exchequer, Keating, Archibald, and Quain, JJ., taking the opposite view.

 

ISSUE

  • Whether a contract was validly formed between the parties and if so whether it was enforceable or not?
  • What is the true construction of the Act of Parliament with reference to the memorandum of association, and the powers conferred upon companies associated upon the limited principle, subject to that memorandum?

 

HELD

The House of Lords, agreeing with the three dissent judges in the Exchequer Chamber, pronounced the effect of the Companies Act to be the opposite of that indicated by Mr Justice Blackburn.

 

  • The court held that if a company pursues objects beyond the scope of the memorandum of association, the company's actions are ultra vires and void. 
  • Lord Cairns LC said:
    It was the intention of the legislature, not implied, but actually expressed, that the corporations should not enter, having regard to this memorandum of association, into a contract of this description. The contract in my judgement could not have been ratified by the unanimous assent of the whole corporation.
  • The objects under the object clause of this company were to supply and sell the materials required to construct railways. It does not cover construction of railway lines. The contract here was to construct a railway. That was contrary to the memorandum of association. So the contract was Ultra Vires to the company.
  • As held by House of Lords that this contract was ultra vires not only of the director but also of the whole company. Even if a majority of shareholders ratify it, then it can not change. It will still remain the ultra vires of the whole company.

 

COMMENTARY

“It is the function of the memorandum "to delimit and identify the objects in such a plain and unambiguous manner as that the reader can identify the field of industry within which the corporate activities are to be confined". And it is the function of the courts to see that the company does not move in a direction away from that field. That is where the doctrine of ultra vires comes into play in relation to joint stock companies. "Ultra" means beyond, "vires" means powers. An action outside the memorandum is ultra vires the company. Its application to such companies was first demonstrated by the House of Lords in Ashbury Railway Carriage and Iron Co Ltd v Riche (Ashbury). So far as English Law is.concerned, this decision and others of the same kind are to a certain extent of historic value only. This is so because the objects are not required to be stated in the memorandum. They may be stated in the articles. Articles are a contract between the company and its members. They do not bind outsiders unless it can be shown that a particular outsider had knowledge of the provision and knew that it was being exceeded.”