ABSTRACT
When a company is registered, the incorporators are required to send a memorandum of association to the registrar and, as was described in Chapter 2, one of the clauses of the memorandum is the ‘objects clause’.3 The original intention of the legislature was that the incorporators would identify the purposes for which the company was formed and that these would be publicly known. The House of Lords decision in Ashbury Rly Carriage and Iron Co v Riche4 drew the conclusion that this laid down the extent of the company’s contractual capacity and that any contract entered into outside the terms of the objects clause was ultra vires and, therefore, void. Further, the contract could not be ratified by the shareholders, even voting unanimously on a resolution to adopt the contract. Here, a company, which had clauses in its memorandum stating that the objects of the company were to make and sell, etc, railway carriages, wagons, all kinds of railway plant and rolling stock, and to carry on the business of mechanical engineers and general contractors, purchased a concession for making a railway in Belgium. Riche was to construct the railway under a contract with the company but, subsequently, the company repudiated it as being ultra vires. This contention was upheld after finding that the contract was outside the terms of the objects clause. Lord Cairns went on to state that:
The clear view of their Lordships was that the rule existed for the protection of both the shareholders, both present and future, and the persons who might become creditors of the company. Although it is difficult to see that the rule benefited the latter as individuals, since they were at risk of having their transactions impugned, the benefit was presumably to those creditors who were comforted by the knowledge that the assets of the company could not be dissipated on speculative ventures. Even the shareholders might regret the existence of the rule in certain circumstances, since, if an unforeseen profitable opportunity presented itself to the directors, the company would not be able to pursue it.
