3PLR – ASHBURY RAILWAY CARRIAGE AND IRON CO. V. RICHE
POLICY, PRACTICE AND PUBLISHING, LAW REPORTS 3PLR
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ASHBURY RAILWAY CARRIAGE AND IRON CO.
V.
RICHE
DIVISIONAL COURT
1875 June 1, 4, 7.
3PLR/1875/1 (DC-E)
CITATION
[L.R.] 7 H.L. 653
BEFORE THEIR LORDSHIPS
THE LORD CHANCELLOR (Lord Cairns)
LORD CHELMSFORD
LORD HATHERLEY
LORD O’HAGAN and
LORD SELBORNE.
REPRESENTATION
Mr. Watkin Williams, Q.C., and Mr. Cohen, Q.C., for the Plaintiffs in Error
Mr. Giffard, Q.C., and Mr. Benjamin, Q.C. (Mr. W. G. Harrison was with them), for the Plaintiff in the Court below, the now Defendant in Error
Attorney for Plaintiff in Error: H. Skynner.
Attorneys for Defendant in Error: Stevens, Wilkinson, AND Harries.
BETWEEN
THE DIRECTORS, AND C., OF THE ASHBURY RAILWAY CARRIAGE AND IRON COMPANY (LIMITED)PLAINTIFFS IN ERROR;
AND
HECTOR RICHE DEFENDANT IN ERROR
MAIN ISSUES
COMPANY LAW: Companies Act, 1862 – Memorandum of Association – Articles of Association – Directors – Shareholders – Ultra vires.
HISTORY AND SUMMARY OF FACTS
A company, created a corporation under the Companies Act, 1862 (25 AND 26 Vict. c. 89), is not thereby created a corporation with inherent Common Law rights.
The objects of a company proposed to be incorporated under that Act, as stated in the Memorandum of Association required by the 8th section of the Act, cannot be departed from, except so far as the 12th section permits the change. The Memorandum is the Charter of the company.
Consequently a contract made by the directors of such a company upon a matter not included in the Memorandum of Association is ultra vires of the directors, and is not binding on the company.
Nor can such a contract be rendered binding on the company though afterwards expressly assented to at a general meeting of shareholders. Being in its inception void, as beyond the provisions of the statute, it cannot be ratified even by the assent of the whole body of shareholders.
A company was registered under the Joint Stock Companies Act, 1862 Its objects, as stated in the Memorandum of Association, were these: “to make, and 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, lease, work, and sell mines, minerals, land, and buildings; 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 agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Sociètè Anonyme formed in that country, which sociètè was to supply the materials for the construction of the railway, and to receive periodical payments from the English company:-
Held, that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it.
Observations upon what must have been done to constitute a ratification of any contract which, though not absolutely void, as unwarranted by the
Memorandum of Association, had been in excess of the powers possessed by the directors under the articles of association.
The 50th section only authorizes alterations which are within the limits provided by the Memorandum of Association.
- JOHN ASHBURY had carried on at two places in Lancashirea very extensive business in making railway carriages and waggons, turn-tables, points, crossings, and roofs, and other things of a like sort needed by a railway company, but had not been concerned in the construction of railways themselves.
A company called “The Ashbury Railway Carriage and Iron Company,” incorporated under the Companies Act, 1862, was started for the purpose of buying Mr. John Ashbury’s business, and among the other articles in the agreement for its purchase was this, that the said John Ashbury shall not be interested (except as shareholder in a company) in “the business of a railway-carriage maker, iron manufacturer or contractor, or any other business or branch of business theretofore carried on by him at the said works.”
A Memorandum of Association of the company, dated on the 12th of September, 1862, was drawn up. By the 3rd clause of this memorandum of association the objects of the company were thus defined: “The objects for which the company is established are to make and 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.”
The Articles of Association recited an agreement to purchase the business of John Ashbury. The first portion of these articles need not be referred to. In a second portion (which was marked by a different enumeration of clauses), under the heading “Business” the 4th clause was in these terms: “An extension of the company’s business beyond or for other than the objects or purposes expressed or implied in the memorandum of association shall take place only in pursuance of a special resolution.” By clause 36 of the articles it was provided that “the directors may, with the sanction of a special resolution of the company, previously given in general meeting, increase its capital,”
By clause 68 the directors were to have the general conduct of the business of the company, and to “exercise all such powers of the company as are not, by the Act of Parliament or the regulations of the company” to be exercised in general meeting. By clause 70 the directors might “at any board meeting direct the affixing of the seal of the company to any deed or document.” By clause 85 the directors might delegate “any of their powers to committees consisting of such member or members of their body as they shall think fit.”
In 1864 Mr. Riche, the Defendant in Error, was carrying on business in Belgium, in partnership with his brother (since deceased) as a railway contractor. On the 14th of March, 1864, the Belgian Government granted to certain persons named Gillon and Bertsoen a provisional concession for making a line of railway from Antwerp to Tournay, the payment of two sums of £4000 and £16,000 being settled as what is called “caution money.” The two concessionaries desired a company to be formed to carry this concession into effect. It was agreed that Messrs. Riche were to have the construction of the line; and in the early part of 1865 the two concessionaries and Messrs. Riche and the directors of the Ashbury Company met together, and agreed to form a company (Sociètè Anonyme) to work the concession. The arrangement was for the Ashbury Company to purchase the concession from Messrs. Gillon for £70,000, and to give the contract for its construction to Messrs. Riche, the company thus becoming, in fact, the contractor for the construction of the line. In this negotiation Mr. James Ashbury, one of the directors of the English company, represented that company, and entered into the contracts. Sir Cusack Roneyafterwards acted in the same character.
The formation of a sociètè anonyme in Belgium, and the agreement with Messrs. Riche that they should construct the line – the Ashbury company undertaking to supply the sociètè anonyme with the requisite funds – was said to have been adopted because the rails, supplied by a Belgian house would be free from the duty that the Belgian Government imposed on rails imported from England,and consequently the profit from the construction of the line would be increased. Messrs. Riche began and for some time continued the works for the construction of the line; and for some time, too, the Ashbury directors paid, in the name of their company, money to the sociètè anonyme to which Messrs. Riche had become entitled.
Difficulties about payment arose as the work went on, the English shareholders not adopting the views of their directors as to the speculation.
In May, 1867, there was an “extraordinary meeting of the shareholders of the company,” at which a report was read from a committee previously appointed at the general meeting of December, 1866. This report disapproved of what had been done by the directors in the matter of the Belgian railway (and likewise of what had been done by them in a similar manner with respect to a Spanish railway), and contained the following declarations: “As regards the two railway concessions, the committee consider the items appertaining to these concessions should not have appeared in the company’s books, nor in the balance sheets. But, looking at the important interests involved, and the extent to which they would be jeopardised by proceedings in Chancery, extending over a considerable period, they would recommend the shareholders to endeavour to effect an amicable settlement with the directors, without having recourse to legal proceedings.”
The annual meeting was held on the 14th of May, 1867, to consider (among other things) this report. This recommendation in the report of an “amicable settlement with the directors” was considered, and an arrangement was proposed by which the Directors were to “purchase from the Ashbury Company any estate or interest which the company may have in the Antwerp and Tournayrailway contract or concession.” The Ashbury Company was, by the same arrangement, to allow legal proceedings to be taken to enforce the claims or defend any actions, or otherwise, in relation to the said businesses, which might be required, in the name of the Ashbury Company, but “at the expense of the said purchasers” (the Directors), who were to indemnify the company against all liabilities.
At a general meeting on the 24th of December, 1867, this arrangement was sanctioned, and though a resolution was proposed “That the accounts be approved and adopted, with the exception that the term ‘advances or contracts’ be expunged,” that was withdrawn and the accounts passed, including that item.
The Company, however, dealing with the brothers Riche repudiated the contract for constructing the line as one ultra vires. Messrs. Riche brought an action for damages for breach of contract. The case was referred to a barrister to state a special case, and the question of ultra vires was that on which the decision was to depend. The Court was to be at liberty to draw inferences of fact. The question of ultra vires was to depend on the following considerations:-
First: The declaration of the objects of the company made in the Memorandum of Association.
Secondly: The words of several of the Articles of Association.
Thirdly: The acts of the Directors, and of meetings of the Company.
The case, setting forth the various matters already stated, was heard, on the 25th of November, 1872, before the Court of Exchequer, consisting of Barons Martin, Bramwell, and Channell, when the Judges differed in opinion, Baron Bramwell thinking that the verdict ought to be entered for the Defendants, who represented the shareholders of the company, and the other two learned Barons being in favour of entering the verdict for the Plaintiffs, the Messrs. Riche. It was so entered, and the judgment was taken on Error to the Exchequer Chamber, where there was again a difference of opinion; Mr. Justice Blackburn delivering a judgment in which Mr. Justice Brett and Mr. Justice Grove concurred, in favour of affirming the judgment of the Court below, and Mr. Justice Archibald delivering an opinion on behalf of Mr. Justice Keating, Mr. Justice Quain, and himself, for reversing it (1). The Judges being thus equally divided, it stood affirmed, and Error was then brought to this House.
Mr. Watkin Williams, Q.C., and Mr. Cohen, Q.C., for the Plaintiffs in Error (the shareholders of the company, who were Defendants in the Court below):-
The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction. The contract here was to construct a railway, using Messrs. Riche only as the persons to be employed in the construction. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862 (1). The 12th section of that statute permits a company, limited by shares, so far to modify the conditions contained in its memorandum of association (subject to certain regulations therein stated) as to increase its capital by the issue of new shares, or so as to divide its shares in a different manner, or to convert its paid-up shares into stock; “but save as aforesaid, and save as is hereinafter provided in the case of a change of name, no alteration shall be made by any company in the conditions contained in its memorandum of association.” It was, therefore, not merely in excess of legal powers, but was absolutely illegal for the directors to change those conditions. No consent of the shareholders could make such a contract legal. But in fact no such assent was ever given. The whole body of the shareholders could not give such an assent, and never had intended or attempted to give it.
(1) The case, in both Courts, is fully reported Law Rep. 9 Ex. 224, 249.
The very numerous cases arising out of the affairs of the Agricultural Assurance Company, such as Spackman v. Evans (2), Evans v. Smallcombe (3), and Houldsworth v. Evans (4), and all of that class are inapplicable here. In all of them there was no legal objection to the power of the directors; the question was whether they had exercised it properly; whether the conditions on which they had granted compromises were ratified or not, and whether the persons to whom they were granted had fulfilled the conditions. Here the objection was to the power of the directors to do anything of the kind they had done, namely, to change the object of the company and to make it engage in a business never mentioned in the memorandum of association. It was insisted that they had no such power. It was a farther objection that if they could have done such a thing as that, the shareholders had not in fact ratified it. And, lastly, that even if, as a matter of fact, the shareholders had pretended to ratify it, the legal objection still existed that they had no power to give any such ratification. The contract itself was made without lawful authority; it was therefore void. Being void, it could not be ratified even by the assent of the whole body of shareholders. But finally, the shareholders had never done anything which was intended to be, or could be construed to be, a ratification.
(1) 25 AND 26 Vict. c. 89.
(2) Law Rep. 3 H. L. 171.
(3) Law Rep. 3 H. L. 249.
(4) Law Rep. 3 H. L. 263.
In the case of the Attorney-General v. Great Northern Railway Company (1) it was held that a company might be restrained at the instance of a relator from carrying on a trade for which no certificate had been granted. The Phosphate of Lime Company v. Green (2) had no application to this case, for there it was, at the utmost, only doubtful whether the directors had not the power to act as they did, and that doubt was settled in their favour by the conduct of the shareholders. Here there was no authority whatever for the directors so to act. In all the three cases of Spackman v. Evans (3), Evans v. Smallcombe (4), and Houldsworth v. Evans (5), the same explanation of the decisions may be given. In the East Anglian Railway Company v. Eastern Counties Railway Company(6), it was distinctly declared that a railway company cannot, even with the assent of all its shareholders, legally enter into contracts involving the application of any portion of its funds to purposes foreign from those for which it was incorporated. The case of Reg. v. Arnaud (7) is another instance that the legal right must be clear; it was so there, for though it was urged that the corporation consisted of foreigners as well as natives, and that the policy of the navigation laws was not to permit foreigners to be owners of British ships, the answer was that the Court could only recognise the corporation, and not the individual members of it, and that as the application for registration was made by the corporation, and the corporation was a lawfully existing body, the registration must be granted. There the title was plainly apparent, and was not allowed to be contradicted by suggestions into which the Court had no power to inquire. Here the title of the directors depends altogether on the memorandum of association, and that memorandum shewed on the face of it that they had no title to do what they had done. So in Taylor v. Chichester Railway Company(8), the directors were acting within the scope of their legal authority, and the person with whom they contracted had a good title to contract so far as they were concerned. It is true that all corporate bodies are primâ facie bound by contracts under their common seal, but they are not so when the legal object of their incorporation prohibits them from making such contracts. In Soames v. Spencer (1)there was a mere defect in the power to contract; that defect could be removed, and, in fact, was removed by the person who alone could have prevented the contract; he ratified it, and then, of course, the other parties had no power to object. Here it was not a mere defect of power, but the contract itself, not being in accordance with the Memorandum of Association, must be treated as actually prohibited by the words of the statute.
(1) 6 Jur. 1006.
(2) Law Rep. 7 C. P. 43.
(3) Law Rep. 3 H. L. 171.
(4) Ibid. 249.
(5) Ibid. 263.
(6) 11 C. B. 775; 21 L. J. (C.P.) 23.
(7) 9 Q. B. 806.
(8) Law Rep. 2 Ex. 356; Ibid. 4 H. L. 628.
Mr. Giffard, Q.C., and Mr. Benjamin, Q.C. (Mr. W. G. Harrison was with them), for the Plaintiff in the Court below, the now Defendant in Error:-
There had not been here any contravention of the words contained in the memorandum of association, and, consequently, the case is in no way brought within the provisions of the statute. That document not only described the proposed company as a company intended to deal in railway materials and carriages, but also to purchase, lease, and work mines and minerals, and also to carry on the business of mechanical engineers and “general contractors.” The description of the objects of the company was, therefore, of the most extensive kind. Surely if the company could purchase, lease, and work mines and minerals, and land, and buildings, it could employ them, or any of them, in any way which promised to be profitable. And then came the words “general contractors,” which were large enough to include the making of any contracts – at least, contracts which had some reference to the use of mines, lands, and buildings. So that, upon a fair construction of the memorandum of association, what had been done was really within the objects of the company as there described.
It might be that the construction of a railway was not positively authorized by the very words of the memorandum, but it was not prohibited by them. And if the making of such a contract could be said to be an excess of the powers actually conferred on the directors (which was not admitted), still that contract was capable of ratification by the shareholders if they deemed it to be one which was for the benefit of the company. They had thought so here, and so far from repudiating it, they had actually adopted it, for they treated themselves as having, the power (which they could only have obtained through the act of their directors) to sell the contract; they treated their directors as having the power to become the purchasers from them of that contract, and though they stipulated to be held free from liability on it, they so far acknowledged themselves to be the formal legal holders of it, that they agreed to let the purchasing directors sue on the contract in the name of the company. It would be difficult to say what could be a ratification of any contract if these acts on the part of the shareholders did not constitute a ratification.
(1) 1 Dowl. AND R. 32.
A corporation has at common law a right to enter into contracts, and is bound by any contract into which it has entered, as attested by the affixing of its corporate seal. That common law right of a corporation cannot be taken away, except by the express words of a statute, or by the intention of the Legislature so clearly implied as not to be mistaken. Nothing of the sort is so expressed or implied here. And that was the opinion of Mr. Justice Blackburn, who, on this point, referred to the cases of the South Yorkshire Railway Company v. Great Northern Railway Company (1), and Taylor v. Chichester and Midhurst Railway Company (2), in the latter of which this House had treated as valid an agreement to take land, made by the directors of a railway company before the bill passed which gave them the power to enter into such an agreement.
It could not be said that the Ashbury directors had parted with a contract to supply the materials for the railway, and had made themselves merely the contractors to make the railway, leaving the supply of the materials in the hands of another company, the sociètè anonyme, for there was in the arrangement with that body (which was really created only for the benefit of the Ashbury company) a stipulation that there should always be a certain number of the Ashbury directors in the direction of the sociètè anonyme. And this had been done, and in fact the Belgian sociètè consisted chiefly of the directors of the English company, that it might be under the control of the Ashbury Company. It was, therefore, quite natural that the shareholders of the English company should consider the contract as their own property, and should deal with it as such, even when they were casting on their directors all the liabilities that might possibly attach to it. But, if so, there was an end of their claim to repudiate it.
(1) 9 Ex. 55, per Parke, B., 84.
(2) 4 H. AND C. 409; Law Rep. 2 Ex. 56; Ibid. 4 H. L. 628.
But, if there was any objection capable of being raised to the contract itself as being in any way unsuited to the declared objects of the company, it is clear that that contract has been ratified by the acts of the shareholders themselves, and ratified, too, not in hasty mistake, but after deliberate consideration. For, first, there was a discussion upon some items in the company’s accounts; then a committee of investigation appointed; then a report of that committee made; then a discussion of that report; and then a resolution of the company that the directors who had made the contract should themselves purchase it from the company, and undertake its execution. There was no distinct repudiation of it; on the contrary, there was a real adoption of it; for, though the company required the directors to undertake it, they were required to do so as purchasers of it from the company; while, at the same time, the shareholders, treating the contract as one which could be enforced, authorized the directors to sue on it in the name of the company, only indemnifying the company against all costa. In this way the shareholders really asserted the contract to be a valid contract, and themselves to be the owners of it; they affected to sell it as a property belonging to themselves, and claimed to have the power of authorizing the name of their company to be used in suits relating to it. Surely these acts constituted a complete ratification of the contract. Or if they did not, as between the directors and the company, they did so as between the company and those with whom the directors had been dealing. It would be so even where a contract had been entered into without the observance of those forms which a public statute required in order to give a contract validity. The case of Soames v. Spencer (1)abundantly proved that. And Bargate v. Shortridge (2) clearly established that acts which, as between a shareholder and the directors, might be wholly invalid, so as to subject the directors to liability to him, might be perfectly good as to third persons, so as to subject the whole company, shareholders included, to liability to such third persons.
(1) 1 Dowl. AND R. 32.
(2) 5 H. L. C. 297.
This is not a question merely between a shareholder who says that his agents, the directors, have exceeded their powers, and that his fellow-shareholders have never adopted what they have done; it is a question between the directors and shareholders on the one hand, and an innocent third party, a contractor with them, on the other. In such a case the principle must be in favour of the innocent contractor, and the relative powers of the directors and shareholders are matters which cannot affect him. He was not bound to inquire what was the exact extent of the powers of the directors. To all appearance they were in the full enjoyment of the powers they pretended to exercise, and the contract into which they entered was for some time fully performed; and when, afterwards, their prudence in entering into it was questioned, the shareholders did not treat it as null and void, but substantially adopted it.
In all respects, therefore, it was a good contract, and the judgment of the Court below was right.
The cases already cited were commented on; and others, where subsequent confirmation had affirmed contracts, were referred to.
Mr. Watkin Williams replied.
MAIN JUDGMENT
THE LORD CHANCELLOR (Lord Cairns):-
My Lords, the history and progress of the action out of which the present appeal arises is not, I must say, creditable to our legal proceedings. There was not in the case any fact in dispute; and the only questions which arose were questions of law, or questions, perhaps, as to the proper inference to be drawn from facts as to which there was no dispute. The action, however, was commenced so long ago as the month of May, 1868. The litigation appears to have been active and continuing, and yet seven years have been consumed, and the result of all, up to the present time, is this, that in the Court of Exchequer, two out of the three Judges were of opinion that the Plaintiff should have judgment; and when the case came before the Exchequer Chamber, it was heard before six Judges, three of whom were of opinion that the Plaintiff was entitled to judgment, the other three thinking that the Defendant was entitled to judgment. The result, therefore, was that the judgment of the Court of Exchequer was affirmed.
My Lords, but for this difference of opinion among the learned Judges, I should have said that the only questions of law which arise in the case, the questions which appear to me to be sufficient altogether to dispose of the case, were of an extremely simple character. The action was brought by the Plaintiffs, who appear to be contractors in Belgium, and it was brought for damages for the breach of an agreement entered into between the Plaintiffs and the shareholders, constituting the Ashbury Railway Carriage and Iron Company, Limited.
These persons constituted a company established under the Joint Stock Companies Act of 1862. I think your Lordships will find it necessary to consider with some minuteness some of the leading provisions of that Act of Parliament. But, in the first place, you will find it convenient to ascertain the purposes for which this company was formed, and then the nature of the agreement, or contract, for the breach of which the present action was brought.
The purposes for which a company, established under the Act of 1862, is formed, are always to be looked for in the Memorandum of Association of the company. According to that Memorandum, the Ashbury Railway Carriage and Iron Company, Limited, is formed for these objects – “to male and 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, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agent.” Part of the argument at your Lordships’ Bar was as to the meaning of two of the words used in this part of the memorandum – the words “general contractors.” My Lords, as it appears to me, upon all ordinary principles of construction those words must be referred to the part of the sentence which immediately precedes them. The sentence which I have read is divided into four classes of words. First, “to make and sell or lend on hire railway carriages and waggons and all kinds of railway plant, fittings, machinery, and rolling stock.” That is an object sui generis and complete in the specification which I have read. The second is “to carry on the business of mechanical engineers and general contractors.” That, again, is the specification of an object complete in itself; and, according to the principles of construction, the term “general contractors” would be referred to that which goes immediately before, and would indicate the making generally of contracts connected with the business of mechanical engineers – such contracts as mechanical engineers are in the habit of making, and are in their business required, or find it convenient, to make for the purpose of carrying on their business. The third is, “to purchase, lease, work, and sell, mines, minerals, land, and buildings.” That is an object pointing to the working and the acquiring of mineral property, and the generality of the last two words, “land and buildings,” is limited by the purpose for which land and buildings are to be acquired, namely, the leasing, working, and selling, mines and minerals. The fourth head is, “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.” That requires no commentary.
My Lords, if the term “general contractors” were not to be interpreted as I have suggested, the consequence would be that it would stand absolutely without any limit of any kind. It would authorize the making, therefore, of contracts of any and every description, and the memorandum in place of specifying a particular kind of business would virtually point to the carrying on of business of any kind whatever, and would therefore be altogether unmeaning.
My Lords, that being the object for which the company professes by the memorandum of association to be incorporated, I now turn to examine the contract upon which the present action is brought. I may relieve your Lordships from any lengthened exposition of the nature of that contract by referring you to the account given of it by Mr. Baron Bramwell in the Court of Exchequer, which appears to me accurately to describe the general nature of the contract. Mr. Baron Bramwell states this (1): “The substance of those contracts” – that is, the contract upon which the action was brought, and two other contracts, which are inseparably connected with it – “The substance of those contracts was this: Gillon and Baertsoen had obtained the right to make a railway in Belgium. This right the Defendants’ directors supposed to be valuable to its owners; that is to say, the line could be constructed for a certain sum, and a sociètè anonyme could be constituted with shareholders to take its shares to an amount which would give a large sum over the cost of construction. The benefit of this the directors desired to obtain for the Defendant company, and to do so purchased the concession. This was their main object. But the Plaintiffs held a contract with the concessionaries to construct the line, and to accomplish the directors’ object it was necessary or desirable, or they thought it was, that they should agree with the Plaintiffs that the Defendants should constitute a sociètè anonyme and, as the Plaintiffs went on with the work, the Defendants should pay into the hands of the sociètè proportionate funds. The farther contract entered into in the Defendants’ name, called D., is of no importance in this case. The directors accordingly entered into two contracts in the Defendants’ name – one with the concessionaries to purchase the concession; the other with the Plaintiffs to furnish the sociètè anonyme with funds, the latter contract being auxiliary to the former. They paid the concession aries £26,000, part of the price. Now, whatever may be the meaning, of ‘carry on the business of mechanical engineers and general contractors,’ to my mind it clearly does not include the making of either of these contracts. It could only be held to do so by holding that the words ‘general contractors’ authorized generally the making of any contracts; and this they certainly do not.”
(1) Law Rep. 9 Ex. 234.
My Lords, I agree entirely, both with the description given here by Mr. Baron Bramwell of the nature of the contract and with the conclusion at which he arrived, that a contract of this kind was not within the words of the memorandum of association. In point of fact it was not a contract in which, as the memorandum of association implies, the limited company were to be the employed, they were the employers. They purchased the concession of a railway – an object not at all within the memorandum of association; and having purchased that, they employed, or they contracted to pay, as persons employing, the Plaintiffs in the present action, as the persons who were to construct it. That was reversing entirely the whole hypothesis of the memorandum of association, and was the making of a contract not included within, but foreign to, the words of the memorandum of association.
Those being the results of the documents to which I have referred, I will ask your Lordships now to consider the effect of the Act of Parliament – the Joint Stock Companies Act of 1862 – on this state of things. And here, my Lords, I cannot but regret that by the two Judges in the Court of Exchequer the accurate and precise bearing of that Act of Parliament upon the present case appears to me to have been entirely overlooked or misapprehended; and that in the Court of Exchequer Chamber, speaking of the opinion of those learned Judges who thought that the decision of the Court of Exchequer should be maintained, the weight which was given to the provisions of this Act of Parliament appears to me to have entirely fallen short of that which ought to have been given to it. Your Lordships are well aware that this is the Act which put upon its present permanent footing the regulation of joint stock companies, and more especially of those joint stock companies which were to be authorized to trade with a limit to their liability.
The provisions under which that system of limiting liability was inaugurated, were provisions not merely, perhaps I might say not mainly, for the benefit of the shareholders for the time being in the company, but were enactments intended also to provide for the interests of two other very important bodies; in the first place, those who might become shareholders in succession to the persons who were shareholders for the time being; and secondly, the outside public, and more particularly those who might be creditors of companies of this kind. And I will ask your Lordships to observe, as I refer to some of the clauses, the marked and entire difference there is between the two documents which form the title deeds of companies of this description – I mean the Memorandum of Association on the one hand, and the Articles of Association on the other hand. With regard to the memorandum of association, your Lordships will find, as has often already been pointed out, although it appears somewhat to have been overlooked in the present case, that that is, as it were, the charter, and defines the limitation of the powers of a company to be established under the Act. With regard to the articles of association, those articles play a part subsidiary to the memorandum of association. They accept the memorandum of association as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made. With regard, therefore, to the memorandum of association, if you find anything which goes beyond that memorandum, or is not warranted by it, the question will arise whether that which is so done is ultra vires, not only of the directors of the company, but of the company itself. With regard to the articles of association, if you find anything which, still keeping within the memorandum of association, is a violation of the articles of association, or in excess of them, the question will arise whether that is anything more than an act extra vires the directors, but intra vires the company.
The clauses of the statute to which it is necessary to refer are four: in the first place, the sixth clause. That provides that “Any seven or more persons associated for any lawful purpose may, by subscribing their names to a memorandum of association, and otherwise complying with the requisitions of this Act in respect of registration, form an incorporated company, with or without limited liability.” My Lords, this is the first section which speaks of the incorporation of the company; but your Lordships will observe that it does not speak of that incorporation as the creation of a corporation with inherent common law rights, such rights as are by common law possessed by every corporation, and without any other limit than would by common law be assigned to them, but it speaks of the company being incorporated with reference to a memorandum of association; and you are referred thereby to the provisions which subsequently are to be found upon the subject of that memorandum of association.
The next clause which is material is the eighth: “Where a company is formed on the principle of having the liability of its members limited to the amount unpaid on their shares, hereinafter referred to as a company limited by shares, the Memorandum of Association shall contain the following things” (I pass over the first and second, and I come to the third item which is to be specified): “The objects for which the proposed company is to be established.” That is, therefore, the memorandum which the persons are to sign as a preliminary to the incorporation of the company. They are to state “the objects for which the proposed company is to be established;” and the existence, the coming into existence, of the company is to be an existence and to be a coming into existence for those objects and for those objects alone.
Then, my Lords, the 11th section provides: “The memorandum of association shall bear the same stamp as if it were a deed, and shall be signed by each subscriber in the presence of, and be attested by, one witness at the least, and that attestation shall be a sufficient attestation in Scotland, as well as in England and Ireland. It shall, when registered, bind the company and the members thereof to the same extent as if each member had subscribed his name and affixed his seal thereto, and there were in the memorandum contained, on the part of himself, his heirs, executors, and administrators, a covenant to observe all the conditions of such memorandum, subject to the provisions of this Act.” Your Lordships will observe, therefore, that it is to be a covenant in which every member of the company is to covenant that he will observe the conditions of the memorandum, one of which is that the objects for which the company is established are the objects mentioned in the memorandum, and that he not only will observe that, but will observe it subject to the provisions of this Act. Well, but the very next provision of the Act contained in the 12th section is this: “Any company limited by shares may so far modify the conditions contained in its memorandum of association, if authorized to do so by its regulations as originally framed, or as altered by special resolution in manner hereinafter mentioned, as to increase its capital by the issue of new shares of such amount as it thinks expedient, or to consolidate and divide its capital into shares of larger amount than its existing shares, or to convert its paid-up shares into stock, but, save as aforesaid, and save as is hereinafter provided in the case of a change of name, no alteration shall be made by any company in the conditions contained in its memorandum of association.” The covenant, therefore, is not merely that every member will observe the conditions upon which the company is established, but that no change shall be made in those conditions; and if there is a covenant that no change shall be made in the objects for which the company is established, I apprehend that that includes within it the engagement that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association.
Now, my Lords, if that is so – if that is the condition upon which the corporation is established – if that is the purpose for which the corporation is established – it is a mode of incorporation which contains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is necessary so to state, negatively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified.
Now, my Lords, with regard to the articles of association, observe how completely different the character of the legislation is. The 14th section deals with those articles: “The memorandum of association may, in the case of a company limited by shares, and shall, in the case of a company limited by guarantie, or unlimited, be accompanied, when registered, by articles of association, signed by the subscribers to the memorandum of association, and prescribing such regulations for the company as the subscribers to the memorandum of association deem expedient.” They are to be the masters of the regulations which (always keeping within the limit allowed by law) they may deem expedient for the internal regulation of the company. “The articles shall be expressed in separate paragraphs, numbered arithmetically. They may adopt also any of the provisions contained in the table marked A. in the first schedule hereto.” I need not read the remainder of that section.
But your Lordships must take, in connection with that, the 50th section of the Act. That provides that “subject to the provisions of this Act, and to the conditions contained in the memorandum of association, any company formed under this Act may, in general meeting, from time to time, by passing a special resolution in manner hereinafter mentioned, alter all or any of the regulations of the company contained in the articles of association, or in the table marked A. in the first schedule, where such table is applicable to the company, or make new regulations to the exclusion of, or in addition to, all or any of the regulations of the company.” Of the internal regulations of the company the members of it are absolute masters, and, provided they pursue the course marked out in the Act, that is to say, holding a general meeting and obtaining the consent of the shareholders, they may alter those regulations from time to time; but all must be done in the way of alteration subject to the conditions contained in the memorandum of association. That is to override and overrule any provisions of the articles which may be at variance with it. The memorandum of association is, as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit.
My Lords, that reference to the Act will enable me to dispose of a provision in the articles of association in the present case which was hardly dwelt upon in argument, but which I refer to in order that it may not be supposed to have been overlooked. It appears that there has come into the articles of association of this company one which is in these words: “An extension of the company’s business beyond or for other than the objects or purposes expressed or implied in the memorandum of association shall take place only in pursuance of a special resolution.” In point of fact, no resolution for the extension of the business of the company was in this case come to; but even if it had been come to, it would have been entirely inept and inefficacious. There was, in this 4th article, an attempt to do the very thing which, by the Act of Parliament, was prohibited to be done – to claim and arrogate to the company a power under the guise of internal regulation to go beyond the objects or purposes expressed or implied in the memorandum.
Now, my Lords, bearing in mind the difference which I have just taken the liberty of pointing out to your Lordships between the memorandum and the articles, we arrive at once at all which appears to me to be necessary for the purpose of deciding this case. I have used the expressions extra vires and intra vires. I prefer either expression very much to one which occasionally has been used in the judgments in the present case, and has also been used in other cases, the expression “illegality.”
In a case such as that which your Lordships have now to deal with, it is not a question whether the contract sued upon involves that which is malum prohibitum or malum in se, or is a contract contrary to public policy, and illegal in itself. I assume the contract in itself to be perfectly legal, to have nothing in it obnoxious to the doctrine involved in the expressions which I have used. The question is not as to the legality of the contract; the question is as to the competency and power of the company to make the contract. Now, I am clearly of opinion that this contract was entirely, as I have said, beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If so, my Lords, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void because the company could not make the contract. If every shareholder of the company had been in the room, and every shareholder of the company had said, “That is a contract which we desire to make, which we authorize the directors to make, to which we sanction the placing the seal of the company,” the case would not have stood in any different position from that in which it stands now. The shareholders would thereby, by unanimous consent, have been attempting to do the very thing which, by the Act of Parliament, they were prohibited from doing.
But, my Lords, if the shareholders of this company could not ab ante have authorized a contract of this kind to be made, how could they subsequently sanction the contract after it had, in point of fact, been made. I endeavoured to follow as accurately as I could the very able argument of Mr. Benjamin at your Lordships’ Bar on this point; but it appeared to me that this was a difficulty with which he was entirely unable to grapple. He endeavoured to contend that when the shareholders had found that something had been done by the directors which ought not to have been done, they might be authorized to make the best they could of a difficulty into which they had thus been thrown, and therefrom might be deemed to possess power to sanction the contract being proceeded with. My Lords, I am unable to adopt that suggestion. It appears to me that it would be perfectly fatal to the whole scheme of legislation to which I have referred, if you were to hold that, in the first place, directors might do that which even the whole company could not do, and that then, the shareholders finding out what had been done, could sanction, subsequently, what they could not antecedently have authorized.
My Lords, if this be the proper view of the Act of Parliament, it reconciles, as it appears to me, the opinion of all the Judges of the Court of Exchequer Chamber; because I find Mr. Justice Blackburn, whose judgment was concurred in by two other Judges who took the same view, expressing himself thus (1): “I do not entertain any doubt that if, on the true construction of a statute creating a corporation it appears to be the intention of the Legislature, expressed or implied, that the corporation shall not enter into a particular contract, every Court, whether of law or equity, is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified.” My Lords, that sums up and exhausts the whole case. In my opinion, beyond all doubt, on the true constructiou of the statute of 1862, creating this corporation, it appears that it was the intention of the Legislature, not implied, but actually expressed, that the corporation should not enter, having regard to its memorandum of association, into a contract of this description. If so, according to the words of Mr. Justice Blackburn, every Court, whether of law or of equity, is bound to treat that contract, entered into contrary to the enactment, I will not say as illegal, but as extra vires, and wholly null and void, and to hold also that a contract wholly void cannot be ratified.
(1) Law Rep. 9 Ex. 262.
My Lords, that relieves me, and, if your Lordships agree with me, relieves your Lordships from any question with regard to ratification. I am bound to say that if ratification had to be considered I have found in this case no evidence which to my mind is at all sufficient to prove ratification; but I desire to say that I do not wish to found my opinion on any question of ratification. This contract, in my judgment, could not have been ratified by the unanimous assent of the whole corporation.
I have only to add to what I have already said, that I observe that some cases have been referred to here – those arising out the Agriculturist Cattle Insurance Company in your Lordships’ House (1), and the case of the Phosphate of Lime Company v. Green in the Court of Common Pleas (2) – as if they had some bearing on the present question. Those cases have a bearing upon some of the observations with which I have troubled your Lordships. They are cases which illustrate extremely well what I have said just now, that the articles of association of a company of this kind are the documents which define the power of directors as between themselves and the company. In those cases which I have mentioned the whole question was, whether the directors had gone beyond the powers which were entrusted to them, and by which their authority was limited under the articles of association, or whether that which had been agreed to had been duly performed. In no one of those cases was there any question as to whether the power of the whole company had been exceeded. In the cases of the Agriculturist Cattle Insurances Company (1) no person ever doubted that if the shareholders had assembled together they might have released from the obligation of a partnership contract inter se (for there was no question of outside creditors) any member of the company upon any terms that they thought fit. The only question was whether the directors had released those who were released upon terms which they were authorized to make, or whether, if they had not released them upon such terms, the release subsequently became known to the company and was sanctioned by the company. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, it was quite clear that that would have been perfectly sufficient. So also in the case of the Phosphate of Lime Company (1) the question was, whether that had been done by the sanction of the company which clearly might have been done by a resolution passed by the company. Those cases have no application whatever to the present case. The present case stands upon the power, not of the directors alone, but of the whole company as settled by the Act of Parliament.
(1) Spackman v. Evans, Law Rep. 3 H. L. 171; Evans v. Smallcombe,Ibid. 249; Houldsworth v. Evans, Ibid. 263.
(2) Law Rep. 7 C. P. 43.
My Lords, for the reasons which I have thus endeavoured to express, I submit to your Lordships and move your Lordships that the judgment in the present case should be reversed, and judgment entered for the Defendants.
LORD CHELMSFORD:-
My Lords, the question upon this appeal is whether the Plaintiffs in Error are liable upon a contract entered into with the Defendants in Error, or whether that contract being ultra vires it can be enforced against them.
The Plaintiffs in Error are a limited company incorporated under the Companies Act, 1862, by which any seven or more persons associated for any lawful purpose, may, by subscribing their names to a memorandum of association, form an incorporated company with or without limited liability. The 8th section of the Act prescribes what the memorandum of association shall contain, amongst other things, “the objects for which the proposed company is to be established.” And by the 12th section, power is given to modify the memorandum of association in certain particulars, “but” (the section adds) “save as aforesaid, no alteration shall be made by any company in the conditions contained in its memorandum of association.”
The memorandum of association by which the Ashbury Company was incorporated, described its objects with great particularity, the only part of it, however, to which attention need be directed is that which states that one of the objects of the company was to carry on the business of mechanical engineers and general contractors.” The learned counsel for the Defendants in Error sought to give a very wide meaning to the words “general contractors;” but he admitted that they required some limitation, contending, however, that they extended at least to to the business of constructing railways. It appears to me that the generality of the expression is limited by its association with the previous words, “mechanical engineers,” and that it ought to be confined to contracts connected with that business. In common parlance a mechanical engineer is distinguished from a civil engineer, his business being, not to construct railways, but to manufacture machinery of every description. The interpretation of the language of the memorandum of association urged on the part of the Defendant in Error, even if accepted, will not in my opinion, assist him in the determination of the case in his favour:- [His Lordship here gave a summary of the facts of the case, see ante, p. 654.]
(1) Law Rep. 7 C. P. 43.
As the result of these several contracts, the counsel for the Defendants in Error contended that the Plaintiffs in Error were the real contractors for the construction of the Belgian line; that the sociètè anonyme was in fact the Ashbury Company under another name, and was only formed to enable the company to obtain the power of constructing the railway, which by the Belgian law they could not otherwise accomplish. But the facts appear to me to furnish no ground for such an argument. There is no doubt that the directors of the Ashbury Company were desirous of possessing the power to make the line, and for that purpose they purchased the concession and paid £26,000 of the moneys of the company in part of the purchase-money, and in agreeing to form the sociètè anonyme, undoubtedly intended to have a control over their proceedings, but the stipulation as to their having the nomination of a certain number of directors and commissioners is a proof that they alone did not form the sociètè anonyme. And the obligation entered into with Messrs. Riche, to procure for them the contract for the construction of the line, proves that the Ashbury directors and shareholders were not the sociètè itself, or they would have given that sociètè the contract, and would not have bound themselves to procure it.
The company therefore, was only in this position. Some of the directors formed part of a sociètè empowered to make a railway, and to enter into a contract for its construction. Who, in this state of things, were the contractors for actually making the railway? Clearly no other than Messrs. Riche, who entered into the contract with the sociètè anonyme to make it. Mr. Benjamin said that Messrs. Riche were the sub-contractors with the Ashbury Company, and that upon the principle “qui facit per alium facit per se,” that company was the real contractor. But it is a misapprehension to assume the contract of Messrs. Riche to construct the line to have been with the Ashbury Company Messrs. Riche did not contract with that company but with the sociètè anonyme. And, as to the maxim founded upon it, it would very much astonish a railway company which had procured an engineer to enter into a contract for the construction of the line, to learn that the company had thereby constituted itself the contractor for doing the work, and had thereby become liable for damage that might occur through negligence in its execution upon the principle of respondeat superior.
The position of the Ashbury Company in relation to the contracts is nothing more than this. The directors had purchased the concession for the Belgian railway, and paid a sum of £26,000 of the moneys of the company to the concessionaries, and afterwards entered into an agreement with the real contractors for making the railway, to supply them with funds to carry out the undertaking. Is this an object for which the company was incorporated by the memorandum of association? Great stress was laid in the argument for the Defendant in Error upon the opinion of Mr. Justice Blackburn, whose judgments are always entitled to respect. He considers the contract entered into by the company with Messrs. Riche not to be ultra vires upon the ground (1) that “at common law a corporation could bind itself to do anything to which a natural person could bind himself, and to deal with its property as a natural person might deal with his own.” “And that if a general power of contracting is an incident to a corporation, which it requires an indication of intention in the Legislature to take away, he saw no such indication in the Act. It would be different” (he added) “if negative words had been used, and it had been said that the company should not do any other acts than those necessary for the purpose for which it is formed.”
(1) Law Rep. 9 Ex. 263.
Now, the incorporation of a company with limited liability is entirely a creature of the statute. It was necessary, not only for the protection of those who might join such companies, but also of persons who might enter into contracts with them, that the privilege of creating them should only be obtained upon certain conditions which should be made known to the public. The Legislature, therefore, required that the objects for which the proposed company was to be established should be contained in the memorandum of association, which, when signed and registered, is to establish the incorporated company.
Whether, if there had been nothing in the Act, except this clause, as to the formation of companies, they would not have been restrained from entering into contracts for other objects than those contained in the memorandum of association is a question which it is unnecessary to consider, because there is a clause which imposes that restriction in the most express terms.
Mr. Justice Blackburn observed that he saw no indication in the statute to take away the general power of contracting incident to corporations; but he afterwards, in mentioning the 12th section, said “it provides in express negative words that ‘save as aforesaid’ no alteration shall be made in the conditions contained in the memorandum of association.” I do not know how stronger words than these could be used to prohibit a company formed under the statute from entering into any contract for any object beyond those mentioned in the memorandum of association.
Among the articles of association of the company, as my noble and learned friend has observed, there is one (the 4th) that an extension of the company’s business beyond or for other than the objects or purposes expressed or implied in the memorandum of association shall take place only in pursuance of a special resolution. This article is entirely nugatory. I agree in what was held by my noble and learned friend, Lord Selborne, in Dent’s Case (1), that, under the 12th section of the Act, articles of association professing to confer authority to modify the memorandum beyond the limited extent allowed by the Act, are simply void.
(1) Law Rep. 8 Ch. App. 776.
The real description of the contract entered into by the company is, an engagement to supply the contractors for the construction of a foreign railway with the funds necessary to enable them to execute their contract. This is clearly not within any of the objects described in the memorandum of association, and the contract was ultra vires, and therefore not voidable merely, but absolutely void. The learned counsel for the Defendant in Error, after arguing against the conclusion that the contract was ultra vires, contended that the contract having been in part performed, and the money of the company having been paid in respect of it, the shareholders, in order to have the benefit of their money, so misapplied, had a right to abstain from objecting to the contract, which might then be enforced against the directors. Because, he said, the Companies Act, though it prohibits the contract being entered into, does not say, if the directors have made such a prohibited contract, what the shareholders may do with it. And he enforced his argument by urging the distinction between an illegal act and an act which it is beyond the power of the directors to do, a distinction which may be exemplified by the difference between the objects for which the company is established, contained in the memorandum of association, and the regulations for the management of the company in the articles of association.
This argument is really directed to the question whether the contract was capable of being ratified by the shareholders, the consideration of which will introduce another question, whether it was in point of fact ratified.
I have already observed that the contract entered into by the company with Messrs. Riche was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act, was absolutely void.
It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association.
The cases of Spackman v. Evans (1), Evans v. Smallcombe (2), and Houldsworth v. Evans (3), which were cited in argument for the purpose of shewing that the ratification, by the whole body of shareholders, of an arrangement which it was not competent to the directors originally to make, gave it validity, do not reach the present case. The act of the directors there was not prohibited by statute, but was merely not warranted by the deed of settlement of the company. If the contract entered into by the directors in the present case had been beyond the powers given to them by the articles of association, not being contrary to the objects contained in the memorandum of association, it might have been previously authorized or subsequently ratified by the whole body of shareholders.
But, assuming that the consent of the shareholders would, in this case, have had the effect of giving life to a still-born contract, in point of fact no such consent was ever given. A ratification of the contract could only have been established by proof of the acquiescence of each and every shareholder with full knowledge of the character of the act of the directors. It was argued on the part of the Defendant in Error that, each shareholder having had notice of meetings of the company at which arrangements were made with respect to the mode of dealing with the contract, and having had the means of knowledge as to the transaction, if he chose to absent himself from the meeting he must be bound by the resolutions of the shareholders present. But I apprehend that, as Lord Cranworth said in Houldsworth v. Evans (4): “In joint stock companies absent shareholders should never be bound to do anything more than to assume that the directors are doing their duty.” He adds: “Except in cases where they are informed that, although the directors have not intended to defraud the company, yet, exercising powers not legally conferred upon them, they have gone beyond what they ought to do.” I confess it seems to me that, in every case of ratification by shareholders of an act ultra vires of directors, there ought to be, not a mere presumption of assent, from notice of the unauthorized act and absence from a meeting called to legalise it, but proof of the actual assent of each shareholder.
(1) Law Rep. 3 H. L. 171.
(2) Ibid. 263.
(3) Law Rep. 3 H. L. 249.
(4) Ibid. 276.
But however this may be, the present case is widely different from the one supposed. The absent shareholders never had any notice of the object of the meetings. The circular convening the meeting for the 14th of May, 1867, is relied upon as a sufficient notification to every shareholder of what was proposed to be done at the meeting. The notice which was given was this:- The meeting was called, amongst other things, “To receive, consider, and if so determined, to adopt any report or recommendation which may be made by the committee appointed at the extraordinary meeting of the company held on the 1st of May instant, to confer with the directors with the view to an agreement being arrived at on matters in dispute.” Now, what information could this convey of the object of the meeting? Mr. Justice Blackburn said: “The balance-sheet which accompanied this circular shewed a loss, and the directors’ report, also accompanying it, declared that there was no dividend. These are matters intelligible to, and likely to rouse attention in, the dullest and most careless of shareholders. I certainly feel justified in saying that there is a primâ facie case that every shareholder knew what it was proposed to do.” I agree with the learned Judge that there was quite sufficient to rouse attention, which is a very different thing from conveying knowledge. And with great respect I think the presumption which he draws, which I understand him to mean by saying there is a primâ facie case, that every shareholder knew what it was proposed to do, is scarcely justified. But supposing such a presumption may fairly arise from the facts connected with the convening of this meeting, I think it would not be sufficient in this case, because, in order to imply the assent of an absent shareholder to the proceedings of a meeting called to ratify acts of directors which are ultra vires, it is not sufficient to presume that he had knowledge of the object for which the meeting was called, but actual knowledge must be brought home to him; and even then it may be questionable whether absence from the meeting afterwards necessarily raises the implication of assent.
It is unnecessary to consider what would be the effect of such a state of things, because I am clearly of opinion that in this case the absent shareholders had no knowledge conveyed to them by the proposed business of the meeting, and that means of knowledge, or the presumption of knowledge, is not sufficient to raise an implication of assent. And therefore, if the contract of the directors with Messrs. Riche had been capable of ratification there is no proof that it was ever ratified.
I agree that the judgment of the Exchequer Chamber ought to be reversed.
LORD HATHERLEY:-
My Lords, I am of the same opinion. I must confess it appears to me that the case is really reduced to one of a very simple character, and the question amounts merely to this – What is the true construction of the Act of Parliament with reference to the memorandum of association, and the powers conferred upon companies associated upon the limited principle, subject to that memorandum?
As regards the first question of fact (which is introduced independently of the question of law), namely, whether or not the agreement in question upon which the suit has been actually commenced by Messrs. Riche, be one within the memorandum of association, it appears to me to be scarcely capable of argument; and I say this with the more confidence, because every counsel with whom the directors have advised, and every Judge before whom the suit has come, have all concurred unanimously in the opinion, that as far as regards that question of fact, or rather that mixed question of fact and law, it is certainly not an agreement within the memorandum of association. How it could possibly be brought within any of the terms contained in that memorandum, even with the aid of the ingenious arguments that we have heard at the Bar, it is very difficult to conceive; because it was admitted by those upon whom the burden was thrown of shewing that the memorandum of association would cover it, that the words “general contractors” must have some limit.
It could not be contended, Mr. Benjamin did not contend, that under the words “general contractors” the company would be at liberty to contract for anything in the world, such as, for instance, fire or marine insurance. That expression must be limited in some degree at least by the words that precede it, and if so limited in any degree, it would be difficult to conceive how it could cover a contract which was not a contract to carry on the work of a mechanical engineer, which was not for supplying rolling stock and the like, which was not even for the making of the railway, but to intrust that to Messrs. Riche Brothers, who were to be not simply subordinate agents, but immediate contractors for the execution of the work. The contract did at one time contain one single clause as to the furnishing of rolling stock by the Ashbury Company, but that clause was afterwards altered, because it was discovered that the Belgian Government was unwilling to make certain concessions with reference to duty on the importation of machinery, on which remission of duty the Ashbury Company had calculated as a great source of profit to be derived from undertaking that part of the contract. I need say no more with reference to whether or not the contract in question, which is a contract to furnish another company altogether, the Sociètè Anonyme of Brussels, with money from time to time, in order to carry into effect the works of the railway, is to be considered a contract within the scope of the memorandum of association of the Ashbury Company.
The only other point in the case, independent of the Act of Parliament, is the question of ratification. I confess I concur with the opinion which has already been expressed by your Lordships, that there is not anything amounting to confirmation, if it were necessary to decide that point. I do not dwell upon it, because I do not think it is necessary to determine the point – but as at present advised, certainly, after looking through all that has taken place in these transactions, I find nothing by which an absent shareholder had fair and full notice of what was contemplated to be done behind his back at the general meeting; and it appears to me that nothing took place which would bind an absent shareholder to suppose, or conjecture, that anything more was going to be done at the general meeting, than that general meeting would have the power to do under the provisions of the Act.
But I do not think we have arrived at that point, because I am of opinion, like my noble and learned friends who have preceded me, that no amount of ratification or confirmation by individual shareholders could give validity to the contract in question. That depends upon the Act of Parliament, which is the real point in the case. When you consider that this Act of Parliament was passed with the view of enabling persons to carry on business on principles which were, up to that time, wholly unknown in the general conduct of mercantile affairs in this country; when you consider that the general principle of partnership was, that every person entering into any partnership whatsoever, thereby subjected, before this description of legislation had been entered upon, th whole of his property, whatever it might be, to the demands of his creditors, it is impossible not to feel that when these legislative enactments, which gave power to depart from that principle upon certain conditions to be expressed in the Act of Parliament, by which companies could be framed with that view, came to be made, it was necessary that the public, that is the persons dealing with a limited company, should be protected, as well as that the shareholders themselves should be protected.
Accordingly, your Lordships will find throughout the whole of the Act of Parliament, as has been already pointed out by the Lord Chancellor, a plain and marked distinction drawn between the interest of the shareholders inter se and the interest which the public have in seeing that the terms of the Act of Parliament by which the privilege of limited liability was conceded, were to be construed in such a manner as to protect the public in dealing with companies of this description. The mode of protection adopted seems to have been this:- The Legislature said, “You may meet together and form yourselves into a company, but in doing that you must tell all those who may be disposed to deal with you the objects for which you have been associated. Those who are dealing with you will trust to that memorandum of association, and they will see that you have the power of carrying on business in such a manner as it specifies, to be limited, however, by the extent of the shares, that is to say, the money you may contribute for the purpose of carrying on that business. You must state the amount of the capital which you are about to invest in it, and you must state the objects for which you are associated, so that the persons dealing with you will know that they are dealing with persons who can only devote their means to a given class of objects, and who are prohibited from devoting their means to any other purpose.” Throughout the Act that purpose is apparent. With regard to the amount of capital, which is one point that I have referred to, the Act did give a special power of variation. But with regard to the memorandum of association, that is carefully protected by the 12th section. It is variation, a certain limited power of alteration being given to you, no such power shall you have as to the objects specified in the memorandum of association.
That being so, my Lords, one turns to the views expressed by the learned Judges, who, concurring with Mr. Justice Blackburn, have decided that the contract which has been entered into in this case is one by which the company has been bound. Turning to the reasons upon which they have based that opinion, one finds them very clearly expressed (as his judgments always are very clearly expressed) in the judgment of Mr. Justice Blackburn. His view appears to be this:- True it is that the objects to which the common seal was applied in this case by the corporation may not be such as the directors could justify to their shareholders; but then the corporation was called into being; and when the corporation was called into being you had an entity which could act by its common seal, just as any physical entity, that is to say, a human being, (as distinguished from an entity created by an Act of Parliament, in the shape of a corporation), might act through his contract. Having created that body, that entity, you cannot say the contract is void, whatsoever may be the consequences which may ensue to the persons who are affected by the action of the directors in affixing the common seal. Whatever act they may have to complain of, you cannot say that the act is void as against the persons who claim the benefit of that common seal, the power of affixing which you conferred upon them by making them a corporation.
Then he cites passages from old authorities, to shew that when once you have given being to such a body as this, you must be taken to have given to it all the consequences of its being called into existence, unless by express negative words you have restricted the operation of the acts of the being you have so created. And, my Lords, he cites for that purpose a passage,
which has been referred to several times, from Lord Coke, namely, “It is a maxim” (he says) “in the common law, that a statute made in the affirmative, without any negative expressed or implied, doth not take away the common law.” He quotes also another passage following it, from Plowden: “Affirmative words may no doubt be used so as to imply a negative.” Now, I think when these two propositions are taken together and applied to the objects of this present Act of Parliament, it must be clearly seen not only that the entity, this corporation, called into existence for the purpose of trading with limited liability, enjoys, by affirmative words, the objects for which it was called into being, those objects which are specified in the memorandum of association; but here you also find express negative words, providing that, “save as aforesaid, no alteration shall be made in the conditions contained in the memorandum of association.” That is a distinct limitation by way of negative of the powers or authorities which you have conferred upon this entity. You say: We confer upon this corporate body the power of acting according to the memorandum, but we also say that that memorandum shall never be changed. I think it is far too nice a refinement to say that that is not equivalent to saying in so many words, “The objects of the memorandum are your objects, and no other ever shall or can be your objects.”
Now, if it were not for the refinement that is drawn in the distinction which, as I understand it, is the distinction applied to this case by Mr. Justice Blackburn, we should have that learned Judge with us in our opinion. But he appears to me to make a distinction by saying, “Here is this company formed for the purpose expressed in the memorandum of association.” That is in the affirmative; and I do not say you shall never act for any other purpose, or with any other end, or that any action which you do with any other end shall be void. All that the Legislature has said, as he states it, is this: You shall be gathered together; and, according to the 10th section, the memorandum shall contain the objects with which the proposed company shall be established. That is in the 10th section; that is affirmative; and then the only other words, he thinks, are these expressly negative words as to your changing the memorandum, namely, that you shall never change that memorandum. But he does not consider that, as I understand it, to be an express negative to your doing anything inconsistent with that memorandum. I confess, my Lords, that is a refinement that I am not disposed to adopt.
With regard to the object which the Legislature had in view, I think that the Legislature had in view distinctly the object of protecting outside dealers and contractors with this limited company, from the funds of the company being applied, or from a contract being entered into by the company, for any other object whatsoever than those specified in the memorandum of association, which the Legislature thought should remain forever unchanged. It is quite true, as was said in the argument, that those same gentlemen who signed the memorandum might, the next hour if they liked, go into another room and frame a new object of business besides those specified in the memorandum of association they had already agreed to. I only say in answer to that, they might sign a fresh memorandum and form a new company. The same seven gentlemen may form half-a-dozen companies if they think proper, and half-a-dozen memoranda of association may be executed for that purpose. But each would be a perfectly new company in that case, and neither as regards their shareholders, nor still more as regards the general body of the public, have they the power and authority under the Act of Parliament of combining together as a corporation with limited liability, to carry on business for any other purpose whatever than that specified in the memorandum of association.
Now, my Lords, we listened to an ingenious argument by Mr. Benjamin, and certainly I followed it with great interest, in which, feeling the pressure of the case in reference to the act which has been done, he endeavoured to put this before us, Fieri non debuit sed factum valet. He said: “Suppose I have to concede” – as he must concede, of course (he argued first one point and then the other, and having finished his argument on the point as to whether or not this contract was intra vires of the company, he proceeded to this) – “that the original contract was invalid, still the subsequent arrangements by which the shareholders endeavoured to make the best they could of the difficult situation in which their directors have placed them, might be taken to be valid.” That may have been done, as he said, not for the purpose in any way of evading the Act of Parliament, but rather the contrary, to bring things back to such a state and condition as the law would allow, and to make the best of what had been the misfortune of the company. I apprehend, my Lords, that no such principle can be adopted as that, the directors having committed an unlawful act, and then taken the proper course, as it appears to me, in proposing, as they did, by the instrument of the 24th of December, 1867, to take the whole burden and responsibility upon themselves, the very proper act which they then did, could give any validity whatsoever to that supposed contract.
My Lords, I have said all I have to say with reference to the supposed ratification. Holding, in the first place, that nothing could be done by the whole company to confirm the contract, I certainly should not be disposed to attach the weight, which was attached in the argument, to the deed of the 24th of December, 1867, which I have already mentioned as a confirmation, merely from the circumstance that there is a provision in that deed that the company shall do all in its power to hand over, or assist in handing over, to those who took, as they ought to take, the burden upon themselves (namely, the directors) of restoring the funds of the company and placing all in statu quo. They say, nothing in this deed contained shall for a moment justify you in the assertion that we are at all confirming or assenting to that contract. I say, therefore, that any such construction of the deed would seem to become scarcely capable of being soundly supported in argument, although it occurred to me, while it was being argued, that it might rest upon some such foundation as the decisions upon those instruments in which a trustee named in a deed, and desirous of disclaiming, has been ill-advised enough, instead of disclaiming simpliciter, to convey the trust property to others, in which case he has been held liable; because it has been said, “You could not convey it without having it once in you, and you could only take it subject to the trust.”
I supposed at first that that sort of argument might possibly be adduced in support of such a view as this.
But it really could have no effect upon this ground: I apprehend that the true construction of that deed is this, that the deed provides that whatsoever rights they might have acquired in consequence of the directors dealing with his property, or in consequence of strangers dealing with them attempting to take advantage of the contract, knowing that the moneys of the company had been employed in a manner which was ultra vires – that those rights should not be enforced – when a stranger has taken the money of the company which ought to have been applied in one way, knowing it ought to be so applied, and applied it in another way; that money is ear-marked for the original purpose, and can be followed as against that stranger with any advantages that he may have derived in consequence of the improper contract which has been made. That being the case, I should read that instrument, if it had to be construed at all, as an admission on their part that, repudiating and rejecting altogether that contract, if they had any right whatever of that description which I have mentioned, namely, a right of following their own money when it is misapplied into that which has been procured by means of its misapplication, – if any such rights they had, they would not exercise them.
Perhaps, however, it is unnecessary for me to enter into that point, considering that I hold, as I certainly do, upon this contract, that it was one which no body of shareholders had power to ratify, or could if they were to meet together possibly ratify, it being by the 12th section illegal and void, as being contrary to the purpose for which, and for which only, power and authority was given by the Legislature, and any other purpose being one which the Legislature has, according to my view of the case, by the clauses that I have referred to, expressly and distinctly prohibited.
LORD O’HAGAN:-
My Lords, I am clearly of the same opinion. The case, which has been argued with great ability on both sides, depends for its result on the answers to three questions. First, were the contracts we have to deal with ultra vires of the directors? Secondly, if they were, was it possible to ratify them through the action of the shareholders? Thirdly, were they, in fact, so ratified? The facts having been made very familiar to your Lordships by my noble and learned friends who have preceded me, I shall content myself with briefly indicating the conclusion to which I have arrived.
On the first question, I think, notwithstanding the very ingenious reasoning of the counsel for the Defendant in Error, that the contracts in controversy were clearly ultra vires of the directors of the company. Indeed, this was the view of the directors themselves, and of their legal advisers; and I do not find that any of the learned Judges in the Court of Exchequer or the Court of Exchequer Chamber refused to adopt it. I cannot agree with the contention that the memorandum of association is not to be interpreted according to the ordinary rules of construction; and, so construed, it seems to me quite plain that the words “general contractors” cannot be held to indicate the possession, by the persons so described, of unlimited authority to enter into any sort of contract. Considering the description of the company contained in the first paragraph of the memorandum, and the immediate context which identifies them with “mechanical engineers,” and points distinctly to the boundaries of their action, I have no doubt that their powers were confined to the making and completion of contracts connected with mechanical engineering, and the various objects, the selling or lending railway carriages, railway plant and rolling stock, and the purchases ancillary to and necessary for their proper business, which are specified in the 3rd clause of the memorandum before and after its employment of the description “mechanical engineers and general contractors.”
The rule “noscitur a sociis” was never more clearly applicable, and its reasonable application was never more clearly necessary if we would give any practical effect to the memorandum in connection with the Act under which it was framed. That Act gave certain privileges and imposed certain conditions, and one of them was, that the memorandum of association should specify the objects of men seeking to trade with limited liability, for the manifest purpose that those objects should be clear and definite, and known precisely to all who might have dealings with the company. But if, in a case like this, it were competent for persons making and registering such a memorandum to segregate particular words, as “contractor” and “merchant,” and insist that their generality should be confined not by the declared purposes of the formation of the company, not by the conterminous phraseology, nor even by the manifest reason of the thing, the purpose of the Act would be defeated, and the favour given by it would be enjoyed without fulfilment of the condition properly imposed for the public benefit. To hold that in such a case, and with such a memorandum, a company describing itself as the Railway Carriage and Iron Company should be at liberty to contract for the clothing of the army, or to trade in diamonds from Natal, would seem to me to nullify the statute alike in its policy and in its terms.
Having therefore no doubt that the action of this company was ultra vires, I confess I have as little that there was no valid ratification of the impeached contracts. Again, we must keep in mind the purpose of the legislation with which we are dealing. It was, as I have said, to give a privilege upon a condition; and the privilege was to be enjoyed upon the terms and with the limitations indicated in the memorandum of association. That memorandum, when put on record, was to be, for contractors, for creditors, and for all the world, a reliable description of the exact character, purposes, and powers of the company described in it. And the admission of an authority in shareholders to warrant anything inconsistent with that character, antagonistic to those purposes, and beyond those powers (and in this case it was so undoubtedly), would seem to encourage evasion of the statute to abrogate the condition, whilst continuing the privilege, and so to give the benefit without the burthen. By the memorandum the general community is to judge of the association; but how can that be so if shareholders, proposing to bind a corporation by resolutions, perhaps effective between the shareholders themselves, altogether ignore that memorandum, and authorize dealings quite beyond the scope of its contemplation? It is plain that if the ratification for which the Defendant in Error contends, could validly affirm the contracts on which he relies, there is no amount of divergence from the original object of the company which might not have been approved, no extension of the limits prescribed by the memorandum which might not have been effected by a simple resolution of all the shareholders. And if this be so, I cannot think that a conclusion pregnant with consequences so very serious, can properly be sustained. It is not warranted by the statute, which equally condemns it by negative and affirmative provisions; and any such ratification if relied on, being in clear contravention of the purpose and the letter of the law, should in my opinion be held void and illegal.
This disposes of the second question and concludes the case, but it is right to say on the third point that, whatever may be the possibility or impossibility of legal ratification, I do not think any ratification was in fact accomplished by the shareholders. Assuming the contracts to have been ultra vires, we must cast on the Defendant in Error the onus of shewing that they were validly ratified; and it appears to me that he has wholly failed to do so. In the cases decided in this House to which we have had frequent reference, the assent of all the shareholders was assumed to be essential to a ratification; and we may take it as conceded that such an assent, expressly or by implication, from actual presence, or at a meeting, or authority implicitly or directly given, must be proved, even if, when so proved, it would be effectual to ratify an otherwise invalid arrangement. In this case no such proof is forthcoming. The documents and records clearly shew that all the shareholders were not present at any meeting transacting business important for your Lordships’ consideration; and it was admitted that they were not by Mr. Benjamin in his equally able and candid argument. The absent shareholders could not be bound by what was done at these meetings, unless they gave authority for it, and there is no allegation of express authority, and no ground of any kind for implying authority.
It seems quite just to say that absent shareholders are not to assume any intention of illegality, or any design on the part of the directors to transcend their legal powers. At least to found any implication of assent to the carrying out of such an intention or design, we must have evidence that notice of it was communicated. And in the case before us I fail to find any such notice. In the circulars calling the meetings there was plainly none, nor do I think there was any in the accounts and balance sheets of such a character as to put the shareholders, necessarily, on inquiry, or place them in the alternative of attending and protesting against possible irregularities, or being bound by them whatever they might be. A passage from the judgment of Mr. Justice Willes, in the case of the Phosphate of Lime Company v. Green (1), appears to me to be very sound and apposite in this case: “The principle by which a person, on whose behalf an act is done without his authority, may ratify and adopt it, is as old as any proposition known to the law. But it is subject to one condition in order to make it binding; it must be either with full knowledge of the character of the act to be adopted, or with intention to adopt it, at all events, and under whatever circumstances.” Now in this case, as I have said, the burthen of proof of ratification lies on the Respondent; and I find none to satisfy me, either that the absent shareholders had, in the language of Mr. Justice Willes, “full knowledge of the character of the acts to be adopted or the intention to adopt them, at all events, and under whatever circumstances,” or indeed to adopt them at all.
On all the points arising in the case, I am therefore, my Lords, clearly of opinion that the Plaintiffs in Error are right, and that the appeal should be allowed.
LORD SELBORNE:-
My Lords, the action in this case is brought upon a contract not directly or indirectly to execute any words, but to find capital for a foreign railway company, in exchange for shares and bonds of that company. Such a contract, in my opinion, was not authorized by the memorandum of association of the Ashbury Company. All your Lordships, and all the Judges in the Courts below, appear to be, so far, agreed.
But this, in my judgment, is really decisive of the whole case. I only repeat what Lord Cranworth, in Hawkes v. Eastern Counties Railway Company (2) (when moving the judgment of this House), stated to be settled law, when I say that a statutory corporation, created by Act of Parliament for a particular purpose, is limited, as to all its powers, by the purposes of its incorporation as defined in that Act. The present and all other companies incorporated by virtue of the Companies Act of 1862 appear to me to be statutory corporations within this principle. The memorandum of association is under that Act their fundamental, and (except in certain specified particulars) their unalterable law; and they are incorporated only for the objects and purposes expressed in that memorandum. The object and policy of those provisions of the statute which prescribe the conditions to be expressed in the memorandum, and make these conditions (except in certain points) unalterable, would be liable to be defeated if a contract under the common seal, which on the face of it transgresses the fundamental law, were not held to be void, and ultra vires of the company, as well as beyond the powers delegated to its directors or administrators. It was so held in the case of the East Anglian Railway Company (1), and in the other cases upon Railway Acts, which cases were approved by this House in Hawkes’ Case (2), and I am unable to see any distinction for this purpose between statutory corporations under Railway Acts, and statutory corporations under the Joint Stock Companies Act of 1862.
(1) Law Rep. 7 C. P. 56.
(2) 5 H. L. C. 331.
The view of the three Judges who in the Court of Exchequer Chamber were for affirmance, was (as I understand it) that all contracts whatever (not expressly or by necessary implication prohibited), are, primâ facie, within the powers of all these companies merely because they are corporations, but that, inasmuch as the common seal must be affixed to their deeds by some agents having a delegated power, and as the general powers delegated to the directors and general meetings are only for the purposes expressed in the memorandum and articles of association, their agency to seal a contract going beyond those purposes cannot be presumed, unless it is made manifest by proof of the consent of every individual shareholder. With this view I cannot agree. I think that contracts for objects and purposes foreign to, or inconsistent with, the memorandum of association are ultra vires of the corporation itself. And it seems to me far more accurate to say that the inability of such companies to make such contracts rests on an original limitation and circumscription of their powers by the law, and for the purposes of their incorporation, than that it depends upon some express or implied prohibition, making acts unlawful which otherwise they would have had a legal capacity to do.
This being so, it necessarily follows (as indeed seems to me to have been conceded in Mr. Justice Blackburn’s judgment) that, where there could be no mandate, there cannot be any ratification; and that the assent of all the shareholders can make no difference when a stranger to the corporation is suing the company itself in its corporate name, upon a contract under the common seal. No agreement of shareholders can make that a contract of the corporation which the law says cannot and shall not be so.
(1) 11 C. B. 775; 21 L. J. (C.P.) 23.
(2) 5 H. L. C. 331.
If, however, this contract (though contrary to the law of the association, and not within the powers either of the directors or of a general meeting) could have been susceptible of confirmation or ratification by the universal consent of all the shareholders, I should have been of opinion that there was here no evidence whatever to go to a jury of any such confirmation or ratification.
What was relied upon consists entirely of resolutions passed at certain general meetings of the shareholders, and a deed executed pursuant to those resolutions. But (assuming these to be acts which might properly have been construed as acts of adoption or ratification) there is no evidence that they were ever communicated to any shareholder who was not present at those meetings, either by notice beforehand, or afterwards. The notices under which these meetings were convened contained nothing from which any shareholder could be led to suppose that it was in contemplation to enter into or adopt, on the part of the company, any contract or arrangement in excess of the ordinary powers of the company, as represented by the shareholders assembled at a duly constituted general meeting. There is no obligation upon any shareholder receiving such notices, either to attend the meetings or to make inquiries as to what is proposed to be done at them, in order to protect himself from being bound by acts or contracts ultra vires of any general meeting. He will, of course, be bound by all that the general meetings can do, as to the matters mentioned in the notices, within their powers; but he cannot, in his absence and without his knowledge, be taken to consent that they shall bind him by any resolutions or acts in excess of those powers, whether such acts or resolutions do or do not relate to the particular business for the transaction of which those meetings were called together.
As to the construction placed by the majority of the Judges upon the resolutions and deed, which in this case they held to establish ratification, I only wish to guard myself against being supposed to assent to the proposition that a deed executed between the directors and their shareholders, which was not meant to be, and which, as between the parties to it, was not, a ratification by the company of the agency of the directors in transactions otherwise unauthorized, and which was never acted upon so as to alter or affect the position of the Messrs. Riche, could operate in their favour as a ratification of that agency.
Judgment of the Court of Exchequer Chamber reversed, and judgment entered for Defendants.
Lords’ Journals, 8th June, 1875.
