COTMAN V. BROUGHAM, (1918-19) ALL ER REP. 265 (HL)

COTMAN V. BROUGHAM, (1918-19) ALL ER REP. 265 (HL)

 

FACTS

• Essequibo Rubber and Tobacco Estates Limited (E. company) was a company, which was registered on April 6, 1910. It was registered under the Companies (Consolidation) Act 1908 in the United Kingdom, whose section 3 required a company to register its objects.
• The E. company underwrote and took up shares in another company the business of which was not connected or mentioned in its objects.
• When the other company went on to liquidation, the E. company which was also on liquidation, was placed in list B of contributors in respect of 14000 pounds due upon those shares.
• To remove its name from the list of contributors, the E. company made an application on the ground that the whole transaction was ultra vires.
• The objects clause was a critical element as it defined the scope and limits of the company’s activities.
• The company had a huge number of objects and its last clause said that clauses should be read individually and not as subclauses of main clauses. 

 

ISSUE

• Whether the interpretation of the objects clause in the memorandum of association, especially considering the unique provision that the objects should be read as subordinate to each other or as main clauses?
• Whether the company had the power or authority or the capacity to guarantee the value of the shares being issued in the Anglo Cuban Bitumen and Asphalt Company Limited?

 

HELD
The Court held that the acquisition of powers by the Essequibo Company was not ultra vires. However, the only question before the Court was the construction of the memorandum as it stands, and the appeal was dismissed with costs.

• Lord Finlay LC relied on subclauses 8 and 12 to say that the company could deal in shares, and it was clearly intra vires. He noted section 17 (now Companies Act 2006 section 15(4)) saying the incorporation certificate is conclusive evidence that everything is complied with.
• Lord Parker noted the argument that a company should be wound up on the ground that its substratum had failed but dismissed it. He said the two purposes of the objects were to show subscribers what their money was to be used for and show those who dealt with a company the extent of its powers. The narrower the objects, he opined, the less the subscriber’s risk but the wider the objects, the greater the security of those who contract with the company.
• A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association and need not investigate the equities between the company and its shareholders.
• Lord Wrenbury and Lord Atkinson concurred.
• Thus, Lord Wrenbury agreed with the decision to dismiss the appeal, stating that the decision below was right. He noted that the Act does not require powers to be specified in the memorandum and that the memorandum in question was not a compliance with the Act.

 

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”. The ultra vires doctrine confines corporate action within fixed limits. While it handicaps the ambitious manager, it lays a trap for the unwary creditor. That is why there has been a revolt against it almost ever since its inception. The businessman has always endeavoured to evade the limitations imposed by the doctrine on their freedom of action. One of the methods of bypassing ultra vires is the practice of registering memoranda containing a profusion of objects and powers. For example, in Cotman V Brougham the House of Lords had to consider a memorandum which contained an objects clause with 30 sub-clauses enabling the company to carry on almost every conceivable kind of business which a company could adopt. Such an objects clause naturally defeats the very purpose for which it is there. In a bid to control this tendency the courts adopted the "main objects rule" of construction. The rule owes its origin to the decision in the Ashbury case where it was held that the words “general contractors” must be read in connection with the company's main business.”