Corporate Law Case Brief – Ashbury Rly. Carriage & Iron Company v. Riche

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Facts:

  • In this case the objects set out in the company’s memorandum were “to make and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents.” The Directors of the Company entered into a contract with Riches for financing a construction of a railway line in Belgium. The Contract was ratified by all the members of the company, but later on it was repudiated by the Company. Riche sued the company for the breach of contract.

Issue:

  • Whether the contract was valid and if not, whether it could be ratified by the members of the company?

Held:

  • The contract was beyond the objects as defined in the objects clause of memorandum and therefore it was void, and
  • The Company had no capacity to ratify the Contract.
  • The contract of employment with Mr Riche was ultra vires for the words in the objects clause
  • ‘to make sell or lend on hire….. all kinds of railway plant …. to carry on the business of  mechanical engineers and general contractors’ DID NOT extend to the construction of an actual railway line.
  • An ultra vires act or contract is void because the Company lacks the capacity to make such contract, how can they have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be permitting to do the Act which Parliament is prohibiting to do so.
  • The Company incorporated under the Companies Act has power to do only those things which are authorized by its object clause of its memorandum and anything not so authorized (expressly or impliedly) is ultra vires the company and cannot be ratified or made effective even by unanimous agreement of the members.
  • The Directors were made personally liable.

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