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This case held much importance prior to the Companies Law, 2006 came into force. With the introduction of Section 17 of the new amended act, the crux of this case has been rendered moot. However, prior to the enforcement of the amended act, for the companies incorporated under the Companies Act 1985, it was a mandatory requirement to have a Memorandum of Association (hereinafter referred as ‘MOA’) wherein the purpose/object for the formation of the company was clearly stated. The company was not allowed to indulge in any unlawful activity or any other activity beyond the scope of the object clause in the MOA. However, prior to this case, there was little or no jurisprudence on the issue as to how to deal with a company that was doing a lawful task, but the task was out of the scope of the object clause stated in the MOA. For the first time the House of Lords in the case of Ashbury Rly Carriage and Iron Co Ltd v Riche, (1875) LR 7 HL 653 laid down the jurisprudence for the same.
Ashbury Railway Carriage and Iron Co. Ltd., in the object clause of its MOA had stated that the object of the incorporation of the company was ‘to make or sell, or lend, or hire, railway carriages and waggons, and all kinds of railway plants, fittings, machinery and rolling stock; to carry on the business of the mechanical engineers and the 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.’ The directors of the company entered into a contract with Riches, wherein a railway line was to be constructed in Belgium, and the contract was for the financing of the construction. The Clause 4 of the object clause specifically mentioned that beyond the scope of the above-mentioned clause, there was a need of a special resolution to indulge in any activity which was beyond the scope of this clause of the object clause in the MOA. However, the company superseded this requirement and agreed to give Riches the loan and financing they needed to build the railway line. The contract which was thus entered into by the company was ratified by all the members of the company. However, later on, the company reneged on their side of the deal repudiating the contract that was entered into by the company and Riches. Riches sued the company for the breach of the contract and claimed damages.
Whether the company can enter into a contract which is beyond the scope of the object clause in the MOA of the company?
Summary of Judgement
The House of Lords held that the objectives of the company as mentioned in the object clause of the company’s MOA were absolute. House of Lords, in this case, applied this same principle and held that the contract which had been entered into by the company was beyond the scope of the object clause of the MOA of the company. The House of Lords also held that by entering into the concerned contract with Riches, the company was in breach of the clauses that had been included in the constitution of the Company. The clauses that were included in the MOA did not allow the company to make a contract. Keeping this in mind, the House of Lords held that the transaction concerned here was invalid, and thus, consequentially held that the contract shall have no legal effect for the company or the Riches. The judgment resulted in a defeat for Riches to have the contract enforced since there could not be any breach. This was due to the fact that there could not have been any contract to be breached in the first place.
The judgment laid down, in this case, laid the foundation of the rule of ‘ultra vires’, which meant that the company was only allowed to do what it had been enabled to do in the object clause of the MOA. Even if in this case, if the contract which the company entered into had been included as an allowed transaction in the object clause, the same might have been allowed. The rules, however, presented a lot of problems for those who were supposed to deal with these companies. The MOA of the company is placed with the Registrar of Companies, and anyone seeking to enter into a transaction with a company would have had to access that concerned MOA from the Registrar of Companies to ensure that the company was allowed to enter into such transaction, or they would find themselves in a position where they are stuck in an unenforceable contract which would be considered as void in the eyes of the law. The situation after the decision of the Ashbury case followed a period where the ultra vires rules were avoided from being used even further.
The Ashbury Railways case laid the foundation of the ultra vires rules and confined the acts of the company within the ambit of the object clause of the MOA. However, this was rendered moot to a great extent after the introduction of the changes in the Companies Act 2006, since Section 17 of the Act does not mandate any company to have a MOA. This has made this judgment rather unnecessary to be considered since this applies to all the companies incorporated under the amended Companies Act, 2006.