The case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche is a landmark decision in company law, particularly concerning the ultra vires doctrine.
Overview
Ashbury Railway Carriage & Iron Co. Ltd. was formed under the Companies Act, 1862. The memorandum of association of the company mentioned that the object of the company was to manufacture or sell, or hire-purchase, railway-carriages and waggons, and all sorts of railway plant, fittings, machinery and rolling-stock; to engage in the business of mechanical engineers and contractors general; to buy and sell, as merchants, timber, coal, metals, or other materials; and to sell or buy any such materials on commission, or as agents. In spite of this, the company signed a contract with Riche, a contractor, for constructing and financing a railway in Belgium.
Subsequently, the company declined to honour the contract on the grounds that it exceeded its statutory authority because railway building was not one of the goals laid out by the memorandum. Riche sued on the grounds of breach of contract, alleging that the shareholders had ratified the transaction and hence was binding.
The question at the House of Lord’s was whether the contract enforceable by law if it was outside the company’s stated goals?
The main legal issue in this case was if a company enters into a contract to do an act beyond the stated objects in its memorandum will the contract be considered null and void.
Decision of the house of lord’s
The House of Lords held in the case of Ashbury Railway Carriage & Iron Co. Ltd, and ruled that:
The contract was ultra vires, which means beyond the jurisdiction of the company. Even if the agreement was made by all the shareholders, an ultra vires contract was void and could not be ratified. The words ‘General Contractors’ could not be interpreted as one for the construction of railway lines if interpreted in light of the memorandum of association.
The Lord’s house thus also upheld that the powers of a company were strictly confined to its memorandum of association so that it did not undertake unauthorized operations.
The court upheld the following contentions:
1. If a company does something that is not contemplated in its memorandum, the action is void and unenforceable.
2. Even if all directors and shareholders concur, an ultra vires action cannot be ratified or sanctioned.
3. The ruling reiterated the significance of the memorandum of association as the company’s governing document that determines the ambit of a company’s powers.
Significance of the case
- If a company does something that is not contemplated in its memorandum, the action is void and unenforceable.
- Even if all directors and shareholders concur, an ultra vires action cannot be ratified or sanctioned.
- The ruling reiterated the significance of the memorandum of association as the company’s governing document that determines the ambit of a company’s powers.
A. LAKSHMANASWAMI MUDALIAR V. LIFE INSURANCE CORPORATION OF INDIA (1963).
The fundamental doctrine of Ultra Vires was re-established in this case.
A company limited its objects clause to the conducting of a banking and finance business. The firm contributed Rs 2 lakh to an education promotion trust. When the Life Insurance Corporation of India (LIC) acquired the firm, the issue was whether the contribution was a valid corporate action since under its Memorandum of Association.
Judgement
The Supreme Court of India ruled that the donation was ultra vires because it was not related to the company’s objectives.
Since the act was outside the memorandum, it was void and could not be ratified, even if all shareholders approved of the act/donation.
Changes bought in the legislations in India
- The Companies Act, 2013 has relaxed the ultra vires doctrine to some extent. Companies now have more flexibility in drafting their objects clause.
- However, if an act is completely outside the objects clause, it is still void and cannot be enforced.
- Section 4(1)(c) of the Companies Act, 2013, allows companies to specify a wider range of objectives to prevent ultra vires disputes.
- Additionally, Section 245 empowers shareholders to file a class action suit if a company’s activities go beyond its memorandum.
- Companies can now include broad and flexible objectives in their MOA.
- If a company acts beyond its objects, affected parties (such as shareholders or creditors) can challenge it in court.
- Government and regulatory authorities also play a role in ensuring companies do not misuse their legal capacity.
- Public interest and stakeholder protection remain key concerns, preventing companies from misusing the relaxed framework.
- Regulatory bodies such as the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) play a crucial role in overseeing corporate activities. If a company violates its memorandum, these authorities can take corrective action, including penalties or restrictions on operations. The Companies Act, 2013, also mandates that companies file necessary disclosures to ensure transparency regarding their business activities.
Conclusion
Both the cases, Ashbury Iron & Co. Ltd and A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, upheld the doctrine of Ultra Vires. which held that companies would strictly comply with their memorandum of association. Although the rule has loosened up in contemporary company law, it was instrumental in defining the manner in which businesses engage and the manner in which their powers are determined. The case reminds us of the need for corporate governance, legal compliance, and balancing business growth and legal constraints. As legal principles keep changing, the lessons established in this case continue to hold true, especially in ensuring accountability, transparency, and investor protection in business transactions. Though newer laws give more options, the spirit of the ultra vires doctrine that businesses need to work within predefined legal limits still holds strong even today
While these cases have framed the foundation for the doctrine of ultra- vires, The Indian legislation has adapted and evolved with time having a balanced mix between corporate flexibility and accountability making sure that businesses work within their legal limit while allowing room for adaptation and opportunities.
Thus, while Indian corporate law has moved towards a more flexible framework, the core principle of ultra vires remains intact, ensuring that companies do not act beyond their lawful authority. This balance between business expansion and legal compliance continues to shape corporate governance in India.
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