Powers
Case Law
Ashbury Railway Carriage and Iron Co Ltd v Riche
(1875) LR 7 HL 653 Blackburn J said,“it was at common law an incident to a corporation that its capacity should be limited by the instrument creating it, I should agree that the capacity of a company incorporated under the act of 1862 was limited to the object in the memorandum of association. But if I am right in the opinion which I have already expressed, that the general power of contracting is an incident to a corporation which it requires an indication of intention in the legislature to take away, I see no such indication here. If the question was whether the legislature had conferred on a corporation, created under this act, capacity to enter into contracts beyond the provisions of the deed, there could be only one answer. The legislature did not confer such capacity. But if the question be, as I apprehend it is, whether the legislature have indicated an intention to take away the power of contracting which at common law would be incident to a body corporate, and not merely to limit the authority of the managing body and the majority of the shareholders to bind the minority, but also to prohibit and make illegal contracts made by the body corporate, in such a manner that they would be binding on the body if incorporated at common law, I think the answer should be the other way ”
the House of Lords Lord Cairns LC said,”It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter, having regard to this memorandum of association, into a contract of this description. The contract in my judgment could not have been ratified by the unanimous assent of the whole corporation.”
Cotman v Brougham
[1918] AC 514
concerning the objects clause of a company is now largely historical as companies no longer have objects under the Companies Act 2014. It remains relevant in an action against a director for breach of duty for failure to observe the limits of their constitutional power. Lord Parker wrote
“ A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association, and need not investigate the equities between the company and its shareholders. ”
Rolled Steel Products (Holdings) Ltd v British Steel Corp
[1986] Ch 246 was one of the last significant cases on ultra vires before the provisions abrogating that doctrine in the UK Companies Act 1985 became effective. Browne-Wilkinson LJ in the Court of Appeal wrote
“The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company. As between the shareholders and the directors, for most purposes it makes no practical difference whether the transaction is beyond the capacity of the company or merely in excess or abuse of its power: in either event the shareholders will be able to restrain the carrying out of the transaction or hold liable those who have carried it out. Only if the question of ratification by all the shareholders arises will it be material to consider whether the transaction is beyond the capacity of the company since it is established that, although all the shareholders can ratify a transaction within the company’s capacity, they cannot ratify a transaction falling outside its objects.
In this judgment I therefore use the words “ultra vires” as covering only those transactions which the company has no capacity to carry out, i.e., those things the company cannot do at all as opposed to those things it cannot properly do.
The two badges of a transaction which is ultra vires in that sense are (1) that the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or not the third party had notice. It is therefore in this sense that the transactions in In re David Payne & Co Ltd [1904] 2 Ch 608 and Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch. 62 were held not to be ultra vires. The distinction between the capacity of the company and abuse of powers was also drawn by Oliver J in In re Halt Garage (1964) Ltd [1982] 3 All ER 1016 , 1034. I consider the reasoning of the decision in In re Lee, Behrens and Co Ltd [1932] 2 Ch. 46 to be wrong for the reasons given by Pennycuick J. in the Charterbridge case [1970] Ch 62: the decision itself can only be justified (if at all) on the footing that the widow who was granted a pension had notice of the impropriety of the grant…”
Slade LJ wrote
“The signed minutes of the board meeting of that day, a copy which was subsequently supplied to Colvilles’ solicitors (and indeed had been drafted by them), made no mention whatever of any declaration of a personal interest by Mr. Shenkman. Since Colvilles and its legal advisers must be taken to have had knowledge of the relevant provisions of the plaintiff’s articles, they must also be taken to have known that the resolution could not have been validly passed unless Mr. Shenkman had duly declared his personal interest at that board meeting or a previous board meeting.
If, therefore, the defendants are to be allowed both to take and succeed on the Turquand’s case point, this must mean that, in the circumstances subsisting in late January 1969, they were as a matter of law entitled to assume (contrary to the fact and without further inquiry) that Mr. Shenkman had duly declared his personal interest either at the board meeting of 22 January 1969 or at some previous board meeting of the plaintiff.
This contention might well have been unanswerable if the rule in Turquand’s case, 6 E. & B. 327 were an absolute and unqualified rule of law, applicable in all circumstances. But, as the statement of the rule quoted above indicates, it is not. It is a rule which only applies in favour of persons dealing with the company in good faith. If such persons have notice of the relevant irregularity, they cannot rely on the rule.”