Company Law

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche

(1875) LR 7 HL 653

Facts

The memorandum of Ashbury Railway Carriage and Iron Co. Ltd. stated that its objects included:
manufacturing and selling railway carriages and wagons;
carrying on the business of mechanical engineers;
supplying railway equipment; and
acting as “general contractors.”
The company entered into an agreement with Riche to finance and assist the construction of a railway in Belgium.
The directors later repudiated the agreement.
Riche sued the company for breach of contract.
He argued that the railway-construction arrangement fell within the words “general contractors.”
He also argued that the company’s shareholders had approved or ratified the agreement.
The company maintained that financing the construction of an entire railway was outside the objects stated in its memorandum.
The dispute reached the House of Lords and became the foundational authority on the doctrine of ultra vires.

Whether the railway-financing contract fell within the objects in the company’s memorandum.
Whether the expression “general contractors” gave the company unlimited contractual power.
Whether an act beyond the company’s objects could be ratified by unanimous shareholder approval.

The memorandum defines the purposes for which a company is created and the outer limit of its corporate capacity.
An act falling outside those objects is ultra vires the company.
An ultra vires act is:
void from the beginning;
incapable of producing an enforceable contract; and
incapable of ratification, even by unanimous shareholders.
Broad expressions in the memorandum must be read in their context.
General words cannot be interpreted so widely that the specific objects become meaningless.
A distinction exists between:
an act beyond the company’s capacity; and
an act within its capacity but performed irregularly by directors.
The latter may sometimes be ratified; the former cannot.

The House of Lords interpreted “general contractors” alongside the surrounding railway-manufacturing and mechanical-engineering objects.
It did not treat those words as authority to undertake every form of commercial contract.
Such a broad reading would have allowed the company to:
construct railways;
conduct banking;
provide insurance;
trade in unrelated goods; or
enter any conceivable enterprise.
That would defeat the purpose of requiring companies to state their objects.
The phrase therefore meant general contracts connected with the company’s authorised mechanical and railway-equipment business.
Financing the construction of an entire railway in Belgium was fundamentally different from manufacturing or supplying railway carriages.
It was not reasonably incidental to the stated objects.
The agreement was therefore beyond the company’s legal capacity.
Riche’s ratification argument also failed.
Shareholders derive their powers through the company’s constitution and governing statute.
They cannot unanimously authorise the company to undertake something that the legislature and memorandum place outside its existence.
Approval by every shareholder would therefore remain legally ineffective.
This differed from a case where directors merely fail to obtain an internal approval for a transaction that the company itself has power to undertake.
Here, the defect concerned corporate capacity, not internal procedure.

The House of Lords held that the agreement with Riche was ultra vires and void.
The words “general contractors” had to be confined to contracts connected with the stated railway and engineering business.
The agreement could not be enforced or ratified by the shareholders.
The judgment established the classical ultra vires doctrine intended to protect:
shareholders from unauthorised use of capital; and
creditors who rely on the company’s stated business limits.
Use this case for: an act outside the memorandum’s objects is void and cannot be validated even by unanimous shareholder consent.