Legal Case Summary

Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7

HL 653

Introduction
The case of Ashbury Railway Carriage & Iron Co. versus Riche 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 act ivity 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 sta ted
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.

Facts
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superseded this requirement and agreed to give Riches the loan and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 Ri ches.
Riches sued the company for the breach of the contract and claimed
damages.
Issue
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 th e 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, consequen tially
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.

Analysis
The judgment in Ashbury Railway Carriage & Iron Co. versus Riche 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 fo r 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 decis ion of the Ashbury
case followed a period where the ultra vires rules were avoided from being
used even further.

Conclusion
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.

Introduction
In this case, the court applied the doctrine of constructive notice while
interpreting the terms of a contract. The Memorandum of
Association (hereinafter ‘MOA’), as well as the Articles of
Association (hereinafter ‘AOA’) of any company, are two vital documents
for any company. These documents are also available for public
access. This means that whenever any person is contemplating entering
into a contract or a business relation with any company, he/s he has the
opportunity to ascertain the facts about the powers and other relevant
information about the company’s directors. Therefore, it is a presumption
that a person contracting with a company has sufficient knowledge about
the company and its directors and the power/authority delegated to the
directors. This information is generally available in the AOA or MOA. A
person should retain knowledge from these documents can be retained by
simply reading them.

Facts
The plaintiff, in this case, had appeared before this court to enforce a
mortgage deed for Rs. 1000. “South Indian Agricultural and Industrial
Improvement Co., Ltd”– the company, had executed the deed in favor of
Venkamma. Later, Venkamma had veste d her interest to the plaintiff. The
company underwent voluntary liquidation soon after the mortgage and sold
off the property purchased by one of the defendants. The two defendants -
the working director and secretary to the company signed this mortgage
deed When the company went into liquidation, to enforce the mortgage
deed, the plaintiff filed a case before a lower court. The lower court rejected
the contentions made by the plaintiff. The Courts rejected the first appeal
by the plaintiff on similar grounds. Finally, the plaintiff appeared before the
Madras High Court on the second appeal, seeking appropriate relief.

Issue
Madras High Court discussed the following as one of the major issues:

1. Whether the mortgage deed was validly executed such that the company would
be liable and bound by the same?
Held
The Court read the AOA of the company and held that the low er court’s
decision to reject Plaintiff’s request is correct. The company was not held
liable for non-execution of mortgage deed because the conditions of AOA
were not fulfilled. The court dismissed the suit with costs and stated that
the Plaintiff failed to take sufficient steps to ensure valid execution of the
deed.

Analysis
The decision of the court was appropriate because the mortgage deed was
invalid according to the AOA of the company. Article 15 of the AOA required
signature by the Company’s Managing Director, the Secretary, and the
Working Director, on a valid deed. In the absence of even a single signature,
the deed was to be considered invalid. The AOA is a public doc ument which
allows people to gain information about a company. The Court applied the
Doctrine of Constructive Notice and held that the mortgage deed between
the plaintiff and the company was invalid because it was signed by the
Secretary and the Working Director of the company, but not by the
Managing Director. The Plaintiff was expected to have constructive notice
of what is laid down in the AOA of the company before entering into a
transaction with the company.

Conclusion
The Court dismissed this suit to execute the deed of mortgage by applying
the Doctrine of Constructive Notice. This doctrine mandates that before
entering into a transaction with a company, one should be well aware of the
rights and obligations of the company’s directors, specially when t he
concerned documents are publicly available. Additionally, the plaintiff failed
to justify the absence of Managing Director’s signature on the deed. She
claimed that the managing director was absent because he was facing
criminal charges. However, there was no evidence to support this claim.
The Madras High Court did not delve into this question.