Ashbury Railway Carriage & Iron Co v Riche

Facts

• The company's objects clause permitted it to make, sell, and deal in railway carriages and wagons.
• The directors entered into a contract to finance the construction of a railway line in Belgium.
• The shareholders initially ratified the contract but later sought to repudiate it.
• Riche sued for breach of contract.

Issue

1. Whether a company can enter into a contract for purposes outside its stated objects, and whether such a contract can be ratified by the shareholders.

Held

• The House of Lords held that the contract was ultra vires the company and therefore void. The memorandum of association defines the limits of the company's capacity. Acts beyond those limits are not merely irregular (which could be ratified) but are substantively void. Even unanimous shareholder ratification cannot validate an ultra vires act because the shareholders themselves cannot expand the company's capacity beyond what Parliament permitted through the memorandum.

Ratio Decidendi

The objects clause in the memorandum of association defines the boundaries of a company's contractual capacity. Any act falling outside those boundaries is ultra vires: not merely voidable but void ab initio. Such acts cannot be ratified by the shareholders because the limitation on capacity is imposed by statute for the protection of subscribers and creditors, not merely by the internal constitution of the company. The doctrine ensures that persons investing in a company know the purposes to which their capital may be applied.