10/9/2020 Ashbury Railway Carriage v Riche Case Summary

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Ashbury Railway Carriage and Iron Co

v Riche (1875) LR 7 HL 653 Case
Summary
For the constitution of companies incorporated under the Companies Act 2006, a memorandum
[1]
of
 association containing the purpose for which it is incorporated is no longer
Ordera requirement.
  
However, for companies limited by shares incorporated under the Companies Act 1985, a
memorandum of association clearly stating, the purpose for which it was formed was required.
Such object may not be unlawful[2], or its registration may be quashed.[3] The lawful purpose for
which a company may be formed is unlimited, and companies can do most of the things required
to fulfil this purpose. However, the position of a company performing a lawful activity, which is
outside of the scope of its objects clause was unclear, until the House of Lords dealt with this
issue in Ashbury Railway Carriage and Iron Co. Ltd v Richie.[4]

The objects of Ashbury Railway Carriage and Iron Co Ltd were ‘to make or sell, or lend on hire,
railway-carriages and waggons, and all kinds of railway plant, fittings, machinery and rolling-
stock; to carry on the business of mechanical engineers and 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’.[5] The House of Lords considered the contract to be beyond, or
outside of, the powers of the company because it was not included in the objects clause in its
memorandum. It was held that by entering into the transaction the company was in breach of its
constitution, for it had no ‘competence’ or ‘power’ to make the contract and therefore, the
transaction had no legal effect. This meant that Richie’s claim against the company for breach of


contract failed, as there was no contract to be enforced.

This case established the ultra vires rules, which meant that a company only had legal capacity to
do what its objects clauses enabled it to do. In the case of Ashbury, had the transaction been
      
included in its objects clause, the company would have had the capacity, making it valid. Another
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10/9/2020 Ashbury Railway Carriage v Riche Case Summary

point to distinguish is that the memorandum in Ashbury talks about the objects clauses
restricting powers of the company. The difference between these are that objects are those parts
of the constitution which describe the activity a company is set up to carry on. Powers of a
company are the things it needs to be able to do to carry on the activity.

The difficulty with the ultra vires rules was that those dealing with a company would have to
check that it had capacity to enter into the contract by looking at its memorandum in the
Register of Companies, otherwise they risked finding themselves unable to enforce a contract
that the law would consider void unless the contract entered into was within its object clause.
This was quite impractical.

In order to appreciate the ways in which the law responded to the decision in Ashbury, it is
necessary to take a detailed look at the memorandum in Ashbury, which states that the objects
clauses restricts powers of the company. It is important to distinguish between these: the objects
describe the activity a company is set up to carry out, and powers are what the company needs
to be able to do to carry out this activity.

The inclusion of powers is not a requirement in company constitutions under CA 2006 or its
predecessors, yet it has been accepted practice to expressly include them. One of the ways in
which the law reacted to the decision in Ashbury was to imply powers not expressly included in
the objects clause. This is illustrated in the case of The Attorney-General & Ephraim Hutchings
(Relator) v The Directors of the Great Eastern Railway Company.[6] Lord Selborne LC considered
that ‘whatever may fairly be regarded as incidental to, or consequential upon, those things which
the legislature has authorised, ought not (unless expressly prohibited) to be held, by judicial
construction, to be ultra vires’. Anything which might fairly be regarded as incidental to, or
consequential upon, its objects, ought not to be held to be ultra vires’.[7]

This decision limited the effect of the ultra vires rules by bringing acts not expressly identified in
the memorandum within the powers of the company. But although this represented an improved
state of affairs for those transacting with a company, a reliance on the company’s object clause
still existed.

In order to further restrict the effect of the rules, the attention shifted to the drafting of the
object clauses in company constitutions. In Cotman v Brougham,[8] Lord Parker stated the object
clauses aimed at protecting shareholders and persons who deal with the company, although
both had very different interests in how wide the clause should be. Protection of shareholders
was best achieved by drafting the objects clause narrowly, limiting the purposes for which the
capital they invest in the company can be used. And protection of those dealing with the
company would be achieved by drafting the objects clause widely,[9] so a particular transaction
was less likely to be outside the company’s objects. Clauses which were so wide to include every
eventuality were called ‘Cotman v Broughman’ clauses.

Later cases used yet more devices to avoid the impact of the ultra vires rule. In Bell Houses Ltd. v
City Wall Properties Ltd.[10] the objects clause contained the object: ‘to carry on any trade or


business whatsoever which can,in the opinion
 ofthe board
  of directors,
 be advantageously

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10/9/2020 Ashbury Railway Carriage v Riche Case Summary

carried on by the company in connection with or as ancillary to any of the above business or the
general business of the company’.[11] The claimant charged a fee for a kind of transaction not
covered in the objects. The defendant refused to pay arguing that the transaction was ultra vires
the claimant company. The Court of Appeal held that the transaction was intra vires the
company, as falling within the objects. ‘Bell Houses’ clauses were born.

In order to simplify matters, Parliament enabled companies to have a ‘general commercial

objects clause’ to include ‘any trade or business whatsoever’, this would give companies the
requisite powers to carry out any trade or business.[12] However, it is still common practice to
draft constitutions with long objects clause just in case.

It is evident that the ultra vires rules has had a significant effect on how company law and
company constitutions have evolved. However, its effect is becoming less significant as a result of
legislation, which provides that a company’s objects are unrestricted, unless the articles restrict
these.[13]

Footnotes
[1]
Companies Act 2006, s 17

[2]
ibid s 7 (2)

[3]
R v Registrar of Companies, ex parte Attorney General [1991] BCLC 476, Ackner LJ considered
that the purpose of carrying on the business of prostitution was a sexually immoral purpose, and
so the association of the subscribers of Lindi St Clair Ltd was not for lawful purposes and ordered
that the registration be quashed

[4]
(1874-75) LR 7 HL 653

[5] ibid page 654

[6] (1880) 5 App Cas 473

[7] ibid [478]

[8]
[1918] AC 514

[9]
ibid page 520- 521

[10] [1963 B No 2029] [1966] 2 QB 656

[11] ibid page 657

[12] Companies Act 1985, s 3 (a)

[13]
Companies Act 2006, s 31

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