Ashbury Railway Carriage v Riche

Legal Case Summary

Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653

For the constitution of companies incorporated under the Companies Act 2006, a memorandum of association containing the purpose for which it is incorporated is no longer a requirement.[1]  However, for companies limited by shares incorporated under the Companies Act 1985, a memorandum of association clearly stating, the purpose for which it was formed was required. Such object may not be unlawful[2], or its registration may be quashed.[3] The lawful purpose for which a company may be formed is unlimited, and companies can do most of the things required to fulfil this purpose. However, the position of a company performing a lawful activity, which is outside of the scope of its objects clause was unclear, until the House of Lords dealt with this issue in Ashbury Railway Carriage and Iron Co. Ltd v Richie.[4]

The objects of Ashbury Railway Carriage and Iron Co Ltd were ‘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 and sell, as merchants, timber, coal, metals, or other materials; and to buy and sell any such materials on commission, or as agents’.[5] The House of Lords considered the contract to be beyond, or outside of, the powers of the company because it was not included in the objects clause in its memorandum. It was held that by entering into the transaction the company was in breach of its constitution, for it had no ‘competence’ or ‘power’ to make the contract and therefore, the transaction had no legal effect. This meant that Richie’s claim against the company for breach of contract failed, as there was no contract to be enforced.

Ultra Vires Rules

This case established the ultra vires rules, which meant that a company only had legal capacity to do what its objects clauses enabled it to do. In the case of Ashbury, had the transaction been included in its objects clause, the company would have had the capacity, making it valid. Another point to distinguish is that the memorandum in Ashbury talks about the objects clauses restricting powers of the company. The difference between these are that objects are those parts of the constitution which describe the activity a company is set up to carry on. Powers of a company are the things it needs to be able to do to carry on the activity.

The difficulty with the ultra vires rules was that those dealing with a company would have to check that it had capacity to enter into the contract by looking at its memorandum in the Register of Companies, otherwise they risked finding themselves unable to enforce a contract that the law would consider void unless the contract entered into was within its object clause. This was quite impractical.

Outcome Decision in Ashbury

In order to appreciate the ways in which the law responded to the decision in Ashbury, it is necessary to take a detailed look at the memorandum in Ashbury, which states that the objects clauses restricts powers of the company. It is important to distinguish between these: the objects describe the activity a company is set up to carry out, and powers are what the company needs to be able to do to carry out this activity.

The inclusion of powers is not a requirement in company constitutions under CA 2006 or its predecessors, yet it has been accepted practice to expressly include them. One of the ways in which the law reacted to the decision in Ashbury was to imply powers not expressly included in the objects clause. This is illustrated in the case of The Attorney-General & Ephraim Hutchings (Relator) v The Directors of the Great Eastern Railway Company.[6] Lord Selborne LC considered that ‘whatever may fairly be regarded as incidental to, or consequential upon, those things which the legislature has authorised, ought not (unless expressly prohibited) to be held, by judicial construction, to be ultra vires’. Anything which might fairly be regarded as incidental to, or consequential upon, its objects, ought not to be held to be ultra vires’.[7]

This decision limited the effect of the ultra vires rules by bringing acts not expressly identified in the memorandum within the powers of the company. But although this represented an improved state of affairs for those transacting with a company, a reliance on the company’s object clause still existed.

Impact of Ashbury

In order to further restrict the effect of the rules, the attention shifted to the drafting of the object clauses in company constitutions. In Cotman v Brougham,[8] Lord Parker stated the object clauses aimed at protecting shareholders and persons who deal with the company, although both had very different interests in how wide the clause should be. Protection of shareholders was best achieved by drafting the objects clause narrowly, limiting the purposes for which the capital they invest in the company can be used. And protection of those dealing with the company would be achieved by drafting the objects clause widely,[9] so a particular transaction was less likely to be outside the company’s objects. Clauses which were so wide to include every eventuality were called ‘Cotman v Broughman’ clauses.

Later cases used yet more devices to avoid the impact of the ultra vires rule. In Bell Houses Ltd. v City Wall Properties Ltd.[10] the objects clause contained the object: ‘to carry on any trade or business whatsoever which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above business or the general business of the company’.[11] The claimant charged a fee for a kind of transaction not covered in the objects. The defendant refused to pay arguing that the transaction was ultra vires the claimant company. The Court of Appeal held that the transaction was intra vires the company, as falling within the objects. ‘Bell Houses’ clauses were born.

In order to simplify matters, Parliament enabled companies to have a ‘general commercial objects clause’ to include ‘any trade or business whatsoever’, this would give companies the requisite powers to carry out any trade or business.[12] However, it is still common practice to draft constitutions with long objects clause just in case.

It is evident that the ultra vires rules has had a significant effect on how company law and company constitutions have evolved. However, its effect is becoming less significant as a result of legislation, which provides that a company’s objects are unrestricted, unless the articles restrict these.[13]

Footnotes

[1] Companies Act 2006, s 17

[2] ibid s 7 (2)

[3] R v Registrar of Companies, ex parte Attorney General [1991] BCLC 476, Ackner LJ considered that the purpose of carrying on the business of prostitution was a sexually immoral purpose, and so the association of the subscribers of Lindi St Clair Ltd was not for lawful purposes and ordered that the registration be quashed

[4] (1874-75) LR 7 HL 653

[5] ibid page 654

[6] (1880) 5 App Cas 473

[7] ibid [478]

[8] [1918] AC 514

[9] ibid page 520- 521

[10] [1963 B No 2029] [1966] 2 QB 656

[11] ibid page 657

[12] Companies Act 1985, s 3 (a)

[13] Companies Act 2006, s 31