Cotman v. Brougham

Factual and Procedural Background

Company B was incorporated on 6 April 1910 under the Companies (Consolidation) Act 1908. Later that year it agreed to sub-underwrite 20,000 shares in Company A, a company being promoted by Company C. As a result of the agreement Company B was allotted 17,200 shares, which it subsequently transferred to Company C. All three companies ultimately went into liquidation. In the winding-up of Company A, its liquidator placed Company C on the “A” list of contributories and Company B on the “B” list in respect of unpaid share capital. Acting through its own liquidator, Company B sought removal from that list on the ground that the underwriting and allotment were ultra vires—i.e. outside its corporate powers. The application was dismissed in the courts below, and Company B appealed.

Legal Issues Presented

1. Whether section 17 of the Companies (Consolidation) Act 1908 renders conclusive the registrar’s certificate of incorporation so that, for the purposes of the present dispute, Company B’s memorandum of association must be treated as valid and compliant with section 3.
2. Whether, on the true construction of that memorandum, the underwriting and purchase of Company A’s shares were within (intra vires) or beyond (ultra vires) Company B’s corporate powers.

Arguments of the Parties

Appellant's Arguments (Liquidator of Company B)

• The impugned transactions were beyond Company B’s corporate powers; accordingly, Company B should not be liable as a contributory in Company A’s liquidation.
• The memorandum’s sweeping catalogue of “objects” failed to “state the objects of the company” within the meaning of section 3 of the 1908 Act and therefore could not legitimise the transaction.
• In determining vires the Court should consider whether, at the date of the transaction, Company B’s “substratum” had failed and whether it could then have been wound up on that ground.

Respondent's Arguments (Liquidator of Company A)

• Section 17 makes the registrar’s certificate conclusive; the Court must therefore proceed on the footing that the memorandum is valid as registered.
• The memorandum expressly authorised the promotion of other companies and the acquisition, holding, and disposal of their shares; underwriting Company A’s shares was squarely within those objects.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The judgment of the House was delivered principally by Judge Finlay, with Judges Atkinson, Parker, and Wrenbury concurring.

1. Conclusive effect of section 17. Section 17 declares that the registrar’s certificate of incorporation is conclusive evidence that all statutory requirements precedent to registration have been satisfied. Consequently, whatever doubts may exist as to the propriety of a broadly-worded memorandum, the courts must accept Company B’s memorandum as valid for all purposes in these proceedings.
2. Construction of the memorandum. Clause 3 of the memorandum listed thirty separate heads of objects, including: (a) the promotion, formation, and financing of other companies and the acquisition and disposal of their securities; and (b) the purchase or other acquisition of shares “capable of being profitably held or dealt in.” A concluding clause provided that no listed object was to be limited or restricted by reference to any other. Reading these provisions together, the Court held that underwriting and acquiring shares in another company were plainly authorised. Judge Parker rejected counsel’s suggestion that one must first identify the company’s “main” object or test whether its substratum had failed; those inquiries were relevant, if at all, only on a petition to wind up the company, not when determining corporate capacity vis-à-vis outsiders.
3. Policy observations. Judges Finlay and Wrenbury criticised the modern practice of drafting memoranda with an unlimited catalogue of objects, noting that such drafting frustrates the statutory purpose of informing shareholders and third parties of a company’s true field of activity. They suggested that Parliament might consider statutory reform, but emphasised that, under the existing law, the courts are bound by the conclusiveness of the registrar’s certificate.

Holding and Implications

Appeal dismissed. Company B remains on the “B” list of contributories in Company A’s liquidation and must pay the costs of the appeal.

The decision reinforces two principles of company law: (1) the registrar’s certificate of incorporation is conclusive as to compliance with statutory requirements, insulating a memorandum from later challenge in collateral proceedings; and (2) where a memorandum contains widely-framed object clauses, the courts will interpret them according to their ordinary meaning, with the result that transactions falling within their literal scope are intra vires. Although the judges voiced concern about the drafting practice, no new legal rule was created; the ruling primarily affects the immediate parties while signalling to legislators the need for possible reform.