(1875), L.R. 7 H.L. 653

Facts

In this case, the company’s objects, as stated in the memorandum of association, were:

(a)      To make and sell, and lend or hire railway carriages and wagons, and all kinds of railway plants, fittings, machinery and rolling stock;

(b)      To carry on the business of mechanical engineering and general contractors;

(c)      To purchase, lease, work and sell mines, minerals, land and buildings, and

(d)      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.

The directors entered into a contract with the defendant, Riche for financing the construction of a railway line in a foreign country and the company subsequently purported to ratify the act of the directors by passing a special resolution at a general meeting.

The company, however, repudiated the contract.

Riche thereupon sued the company for breach of contract.

Judgment

The House of Lords held that the contract, being of a nature not included in the company’s objects, was void as being ultra vires not only of the directors but of the whole company, and could not be made valid by ratification on the part of the shareholders, and therefore the company was not liable to be sued for breach.

If the borrowing is ultra vires the memorandum of association it is incapable of ratification by the company even with the assent of every shareholder, but if the borrowing is ultra vires the articles only, members in the general meting may ratify it by altering the articles. Being subordinate to the memorandum, the articles cannot extend the objects as defined in the memorandum of association.

Lord Cairns in this case observed that “The memorandum of association of a company is its character and defines the limitation of the power of a company.” “The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated”.

On further observation he came to the conclusion that “the articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which the business of company is to be carried on, and the mode and form in which changes on the internal regulations of the company may from time to time be made.”

According to Lord Macmillian : “The purpose of the memorandum is to enable the shareholder, creditors and those who deal with the company, to know what is its permitted range of enterprise.”

Thus after going through the evidence and contentions of both the parties in this case the Court finally gave the decision in favour of the plaintiff, Ashbury Railway Carriage Co. Ltd. and turned down the arguments of the defendant, Riche.

By LawZ Bureau,