Company Law

Cotman v. Brougham
(Submissions of the assignment for/ to the Himachal Pradesh National Law University)

Sub-topic: In relation to the Doctrine of Ultra Vires

Submitted to: Respected Dr. Alok (Course Co-ordinator)

Submitted by:

Himachal Pradesh National Law University, Shimla

16 Mile, Shimla-Mandi National Highway, Ghandal

District Shimla, Himachal Pradesh- 171014

Ph. 0177-2779802, 0177-2779803, Fax- 0177-2779802

Website- https://hpnlu.ac.in
 Table of Contents

1. Acknowledgment

2. Introduction

3. Facts

4. Issues Raised

5. Judgment

6. Analysis

7. Conclusion

8. Bibliography & References

Acknowledgment
 Introduction

In the present assignment the topic covers analysis and comment on the case of Cotman v.
Brougham,1 a famous case from the United Kingdom company law concerning the objects clause
of a company and issues regarding the doctrine of ultra vires. The doctrine of ultra vires is a
long-standing company law concept. As per the Companies Act of 1908, the objectives of a
company must be prescribed in the object clause of the Memorandum of Association (MOA) of
the company. Doctrine of Ultra Vires is a fundamental part of company law as it binds the
directors in the company and the company itself to the limitations set forth by the MOA. Ultra
Vires literally means ‘beyond the authority or power’. If the actions by a company or its directors
are beyond what’s been provided in the object clause, it is considered to be null and void. For
example,2 a company’s constitution might outline the procedure for appointing directors to its
board. If board members are added or removed without following such procedures, those acts
would be described as ultra vires.

The doctrine originally first appeared in the case of Ashbury Railway Carriage and Iron
Co. Ltd. v. Riche,3 which was decided by the House of Lords. The doctrine announced its
presence in India for the first time in the case of Jahangir R. Modi vs. Shamji Ladha,4 which was
further endorsed by the landmark case of Laxman Swami Mudaliar vs. LIC of India.5 However,
the present case of Cotman v. Brougham is brings enough insights on the issues to be discussed.
The case delved deep into the technicalities revolving around the object clause of the company,
and as well as the issues involving doctrine of ultra vires acts. However, it must be noted that the
jurisprudence laid down in this case no longer applies in the contemporary legal position due to
the updated Companies Act, 2006 as the registration of the ‘object’ is no longer mandatory.

1
[1918] AC 514.
2
Investopedia, Ultra Vires Acts.
3
(1878) L.R. 7 H.L., 653.
4
(1866-67) 4 Bom HCR 185.
5
Chandlok S, “Critical Analysis of the Doctrine of Ultra Vires”.
 Facts

The facts of the present matter are herein enlisted as follows-

1. The Essequibo Rubber and Tobacco Estates Limited, incorporated under the
Companies Act, 1908 (hereafter referred as the ‘E’ company) contained a huge
number of object clauses in their MOA, as much as thirty sub-clauses, enabling the
company for carrying almost any conceivable kind of business which a company
could adopt. For instance, the sub-clause 1 allows the company to acquire, take over,
work, and develop any kind of license, concessions, estates, plantations, and
properties and in particular to collect rubber, balata and other like substances from the
Crown Lands of a British Colony. Sub-clause 12 authorizes the company to buy or
otherwise acquire in any way and hold, sell or deal with or in any stocks or any shares
of any company. The concluding sub-clause stated that every sub-clause must be read
individually, not limited or restricted by any other sub-clause provided and therefore
the sub-clauses must not be treated as subsidiary or auxiliary clauses of the main
clause.
2. November 1910, The ‘E’ company agreed on sub-underwriting 20,000 shares of 10s
each in the Anglo-Cuban Oil, Bitumen, and Asphalt Company Limited (hereafter
referred as the ‘A’ company) (which was being promoted by the London and
Mexican Exploitation Company, Limited, hereafter referred as the ‘L’ company), and
received an allotment of 17,200 in the ‘A’ company. There remained due and owing
from the ‘E’ company to the ‘A’ company the sum of 14,456l odd for unpaid calls in
respect to these shares.
3. On June 12, 1912, an order as made up for winding up the ‘E’ company, and the
appellant was appointed liquidator thereof.
4. On September 6, 1912 the ‘E’ company transferred the 17,200 shares in the ‘A’
company to the ‘L’ company, who failed to pay the amount remaining thereon.
5. On November 12, 1912, an order was made for winding up the ‘A’ company.
6. The respondent, the official receiver, as liquidator of the ‘A’ company, settled the ‘L’
company on the A list and the ‘E’ company on the B list, of contributories in respect
of the sum due on the 17,200 shares.
7. The appellant applied to vary the B list by excluding therefrom the ‘E’ company,
upon the ground that the true construction of its MOA the application of shares was
ultra vires.
 Issues Raised

BENCH- The matter moved from the Court of Appeal (Lord Cozens-Hardy M.R., Warrington
L.J., Lawrence J.) to the House of Lords (Lord Finlay L.C., Lord Parker, Lord Wrenbury and
Lord Atkinson).

The issue in the primary matter during the course of its activity was 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. The bench in the judgment
provided for the above issue has discussed the existence of doctrine of ultra vires in the matter as
well as the validity of object clause of a company’s MOA.

The issue exists in order to ascertain whether such an object clause could cease to exist as the
one of the company ‘E’. When read with the last sub-clause, all the sub-clauses provided under
the main clause of the MOA of company ‘E’ authorize the company of almost any manner of
conducting the business, thus, surpassing any ambit of doctrine of ultra vires from the company
‘E’. It is by the following judgment provided that we know if the object clause of the MOA of
company ‘E’ is legitimate and if not, is it within the ambit of doctrine of ultra vires?
 Judgment

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
basis of that, it arrived at the conclusion that the company was indeed authorized to deal with the
issues of shares, and that the act of the company was intra vires in regards to the scope of the
object clause of the company.

Lord Finlay L.C. relied on sub clauses 8 and 12 to say that the company could deal in
shares and it was clearly intra vires. He noted section 17 saying the incorporation certificate is
conclusive evidence that everything is complied with.

Whereas Lord Wrenbury and Lord Atkinson concurred, Lord Parker noted the argument
that a company should be wound up on the ground that its substratum had failed, but dismissed
it. He said the two purposes of the objects were to show subscribers what their money was to be
used for and show those who dealt with a company the extent of its powers. The narrower the
objects, he opined, the less the subscriber’s risk but the wider the objects, the greater the security
of those who contract with the company.
 Analysis

The judgment in Cotman v. Brougham does not holds 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, in the original statute.

In a country like India, the economy is still growing. New companies need to be formed
to increase the GDP of the country and thus having the doctrine of ultra vires is very necessary.
In 2009, in the case of Radhabari Tea Company Private Limited vs. Mridul Kumar
Bhattacharjee and Other,6 the Court decided that any action taken by the board of directors of a
company or the company itself beyond the scope of powers conferred on the company and/or its
directors by the object clause of the memorandum of association of the company is ultra vires.

In the new companies act, 2013 S. 245 (1) (a)7 states that any company that acts outside
the scope of the object clause of the memorandum of association will be censured under the
Doctrine of Ultra Vires.

Thus, it is amply clear the doctrine of ultra vires is still playing a very important and
dominant role in the country. It will continue to retain its importance in times to come since it
acts as a safeguard for investor and shareholders.

6
2009 IndLaw GUW 44.
7
 Bibliography and References

SCC Online

Manupatra

Investopedia

Wikipedia/ Google Results