Cotman versus Brougham, 1918 AC 514

The doctrine of ultra vires against third parties has been mostly done away with. This doctrine is only relevant to ascertain the object of any company who has registered the object clause as a part of its MOA. The case in itself holds little or no relevance in any other scenario due to changes made by the Companies Act of 2006.
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Topics Covered in this article

Introduction

The Doctrine of ultra vires is a long-standing doctrine in the Company Law. The earlier law (Companies Act 1908) demanded that in the Memorandum of Association (hereinafter referred to as ‘MOA’) of a company, there should be an object clause wherein the objects of the company should be laid down. The case of Cotman versus Brougham delved deep into the technicalities revolving around this object clause of the company, and as well as the problems involving the doctrine of ultra vires acts. The case held that if there was a clause wherein the courts were not supposed to read multiple objects as being subordinate to the other, then such a clause was a valid inclusion in the MOA of the company.

However, the jurisprudence laid down in this case no longer applies in the contemporary legal positions, since the updated Companies Act, 2006 (hereinafter referred as ‘the Act’) does not require that the companies register their objects as per Section 31 of the Act. Even if the companies have had their objects registered, then the doctrine of ultra vires has been abolished against the third parties as under Section 39 of the Act. As of right now, by the virtue of Section 171 of the Act, the doctrine of ultra vires is only relevant in the case where a director has conducted a breach of duty for having exceeded the limit of their constitutional power.

Facts of the Case

In Cotman versus Brougham, a company was registered under the Companies Act, 1908 (hereinafter referred to as ‘the old Act’) on April 6th, 1910 – Essequibo Rubber and Tobacco Estates Limited. Back then, under the old Act, the companies were required to register the object of the incorporation of the company as per Section 3 of the old Act. In the current case, the company had a lot many numbers of objects. Of all the clauses stating the objects of the company, the last clause stated that the objects should read as individual objects of the company, and not as sub-clauses of the same clause of the objects of the company.         

Issues

The question that the court faced was –

  1. Whether the company had the power or authority or the capacity to guarantee the value of the shares being issued in the Anglo Cuban Bitumen and Asphalt Company Limited?

Held

The case appeared before the Court of Appeals and thereafter, the same was presented before the House of Lords on appeal. The House of Lords perused the object clause of the company, and on the basis of that, it arrived at the conclusion that the company was indeed authorised to deal with the issue of shares, and that the act of the company was intra vires in regards to the scope of the object clause of the company.

The House of Lords also noted the fact that the company had a certificate of incorporation in its hand, in light of Section 17 of the old Act it meant that all the requirements which needed to be mandatorily fulfilled had been complied with, and the incorporation had not suffered from any form of infirmity.

Another note was made by the House of Lords stating that the larger and detailed the object clause, the more ease it accorded to those who were going to be contracting with the company. The House of Lords stated that the purpose of the object clause was to show the subscribers of the company where their money is going to be spent by the company and how the same is going to be done. The narrower the scope of the object clause, the more secure were the interests of the subscribers of the company, but if the same were to be widened, the third parties contracting with the company had their interests secured much better.

Analysis

The judgment in Cotman versus Brougham does not hold any importance as a precedent since the theory so laid down here does not weigh any more due to the amendment that was introduced in the old Act. The amended Companies Act of 2006 has brought changes that render this legal position unnecessary. This legal position is irrelevant where the company has not registered the object clause in the MOA. However, since the doctrine of ultra vires against third parties has been mostly done away with, the same is only relevant to ascertain the object of any company that has registered the object clause as a part of its MOA. The case in itself holds little or no relevance in any other scenario.

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