COMPANY LAW LECTURE 6

THE CONSTITUTION OF THE COMPANY: DEALING WITH OUTSIDERS

Corporate Acts
 Companies can only act through individuals acting on their behalf
 For attribution issues (determining rights and liabilities of the company) then, we
need to look at whose acts and what acts can be attributed to the company in order
to create a contract between the company a third party
 In this regards, issues of corporate capacity and principles of attribution become
important

How do Companies Act?

 Company organs
o Shareholders in general meeting
o Board of directors
 Agents of the company
o Directors in their individual capacities (not as a board)
o Officers and employees
 Formal acts are very rarely disputed

Objects Clause (historically)

 A provision in a company’s constitution stating the purpose and range of activities
for which the company is carried on

Corporate capacity to enter into contracts

 Assume that company has been validly incorporated
 First issue: company’s capacity to enter into contracts
 In former times, contracts between company and external parties could not be
enforced if articles did not authorize contracts of that type: ultra vires doctrine
o UV was protective of shareholders and creditors because they might have
extended funds to company on the basis that it engaged only in the stated
activities
 Doctrine of constructive notice deemed external parties to know when the objects
restricted company activity
Ultra Vires Doctrine
 The business capacity of the company is set out in the objects clauses of its
constitution and any contract entered into involving business which does not fall
under the objects, is outside the company’s capacity or ultra vires the company and
void
 Complaints of UV could be made by a member or a creditor of the company
 19th century companies legislation required companies to specify the objects of the
company
 This drew from concession theory

Problems with the Ultra Vires Doctrine

 Company couldn’t, or could only under limited circumstances, change objects clause
 If a company changed its business and operated outside the scope of its objects
clause, it could leave third parties with unenforceable contracts
 Doctrine of Constructive Notice

Ultra Vires Case Law

 If a company incorporated by or under statute acted beyond its objects clause such
acts were void as beyond the company’s capacity even if ratified by all members
o Ashbury Carriage Company v Riche 1875
 A company can enter into transactions which are fairly regarded as incidental or
consequential to its objects
o A-G v Great Eastern Rly 1880
 If a company cannot achieve its objects clause, it will be wound up even if it has a
thriving business
o Re German Date Coffee Co 1882

The evolution of drafting objects clauses

 List a large number of activities the company could carry on
 Wide objects clauses concluded with: to carry on any other trade or business which
can, in the opinion of the board of directors, be advantageously carried on in
connection or as ancillary with the general business…
 In the 1980s: to undertake and carry out all such obligations and transactions as an
individual capitalist may lawfully undertake and carry out
 Still problems arose:
o Re Jon Beauforte (London) Ltd. 1953
o Re Introductions Ltd. v National Provincial Bank 1970
 Benefit of the company? Not a question of corporate capacity
o Hutton v West Cork Rly Co 1883
o Parke v Daily News Ltd 1962

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Reforming the Ultra Vires Doctrine under CA 2006
 CA 2006, s 31, a company has unrestricted objects unless specifically stated
 Objects clause already in existence now form part of the companies’ articles of
association (s28)
 Moreover, restrictions upon capacity to contract with external parties are now
ameliorated. CA 2006 s 39 provides:
o The validity of an act done by a co shall not be called into question on the
ground of lack of capacity by reason of anything in the co’s constitution
o But, if the transaction is outside the objects, this will be relevant to whether
directors have breached their duty to observe constitutional limits (CA 2006,
s171)

How does a company contract?

 CA 2006 s 43 confers positive powers upon company to enter into contracts
o A contract may be made
 By a company, by writing under its common seal, or
 On behalf of a company, by a person acting under its authority,
express or implied
 This refers to an important distinction: a contract can be entered into directly by
company or through its agents
 Direct contracting is by an organ of the company-general meeting or board of
directors
o Model Articles give primary responsibility for operation of company to the
board, not to general meeting
o The board itself would be likely to enter directly into a contract for major
deals only
 Direct contracting through delegated power from the board is more common

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A question of authority
 Objects Clauses if available won’t limit capacity of company
 Question then is whether those representing the company had the necessary
authority
 As a provision in company’s constitution:
o Limitation on authority of board of directors to bind company…
o Will give rise to internal liability of directors/agents

Protection for Third Parties

 Under common law, third parties can rely on actual authority of agents or apparent
authority provided he hasn’t been put on inquiry and failed to inquire
 Indoor Management Rule
 Statutory Protection under s 40 CA 2006

Contracting through agents

 When a company enters into a contract through an agent there is a three party
relationship involving
o Principal (the co)
o Agent (director/employee/accountant etc) and
o External counterparty
 A person becomes an agent of another when given authority. We speak here of a
narrow conferral of authority to do something for and on behalf of the company

Agent authority
 Third parties no longer need to be concerned about restrictions in a company’s
objects clause, but may need to be concerned about the authority of those with
whom they deal on behalf of the company
 A company is bound by the transactions of its agents if:
o The agent has (express or implied) actual authority, or
o The agent has apparent (ostensible) authority, or
o There is subsequent ratification
 No contract between the company and a third party in the absence of
authority or ratification

Indirect contracting

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Types of authority
 Express actual authority: Explicitly conferred, derived from memorandum, articles of
association, board resolutions, other types of written or spoken communication
o i.e. Articles state that the CEO may enter into loan agreements up to a certain
amount
 Implied actual authority: Inferred from the conduct of the parties and the
circumstances of the case, often arises from the position that an individual holds
o i.e. Appointment as managing director/CEO impliedly authorizes him to do all
things that fall within the usual scope of that position
 Apparent authority: The authority of an agent as it appears to others, arises when
agent is held out by someone with actual authority to carry out the transaction

Express Actual Authority

 Arises where there is agreement between principal and agent, latter consents to act
o But in corporate practice, parties might not be overly concerned with legal
rules and don’t really think about procedure for granting authority
 Moreover, there is no actual authority where
o Company was acting outside its objects (CA 2006, s 171)
o Agent was acting contrary to company’s interests (CA 2006, s 172)

Implied Actual Authority

 Comes with appointment of a person to a position with authority to enter into
contracts on behalf of company

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 o It is difficult for company to deny that the position-holder has implied actual
authority to enter into contracts and company might be estopped from
denying this
 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
o Diplock LJ said: An implied actual authority is a legal relationship between
principal and agent by a consensual agreement to which they alone are
parties. Its scope is to be ascertained by applying ordinary principles of
construction of contracts, including any proper implications from the express
words used, the usages of the trade, or the course of business between the
parties
 Hely-Hutchinson v Brayhead Ltd 1968
o Denning MR stated: Richards had no express authority to enter into these
contracts. He had been duly appointed chairman but that office didn’t carry
with it authority to enter into these contracts without the sanction of the
board. The necessary inference that Richards also had actual authority, such
authority being implied from the circumstance that the board had acquiesced
in his acting as their chief executive and committing the co to contracts
without the necessity of sanction from the board.

Ratification
 What happens when an agent has no actual authority but purports to enter into a
contract on company’s behalf? Can company ever be bound?
 There is no problem where company ratifies the contract by:
o A formal vote by directors in favour of accepting liability for a transaction (on
the assumption that there has been no breach of director’s duty. CA 2006, s
239 (requiring resolution of members to ratify director’s misdeeds
o An implied acceptance of liability such as where directors resolve that a bill
be paid

Apparent (or ostensible) authority

 What if there is no actual authority and no ratification? Can company still be bound
by acts of the agent?
 Apparent (or ostensible) authority might extend existing authority or create new
authority
 The agent’s ostensible authority is the authority he is represented by the principal to
the third party as having
 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Lts 1964
o Diplock LJ’s 3 conditions for apparent authority
 A representation that the agent had authority to enter on behalf of
the company into a contract of the kind sought to be enforced was
made to the contractor (3P)

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  Such representation was made by a person or persons who had actual
authority to manage the business of the company either generally or
in respect of those matters to which the contract relates
 The contractor (3P) was induced by such representation to enter into
the contract, that is, that he in fact relied upon it
 No authority of any sort is generated by mere assertion by the agent to the third
party that the agent is authorized, no matter how credible the assertion
 Appointment of a person to a particular role can constitute a representation to
outsiders that the person has all the authority that usually goes with that role. The
appointment serves as a representation to the third party.
 They are relevant when the third party wishes to rely on ostensible authority, then
the third party must be able to assert that there was reliance and that it was
reasonable

Constructive notice and protection for outsiders

 The foregoing discussion has looked at the actual process of appointing persons as
agents and their authority
 But there is a potential problem for outsiders wanting to hold companies to
contracts. Articles will specify:
o How officers are to be appointed
o How power is to be delegated or authority is conferred
o How contracts are to be agreed
 The problem arises when these processes are not complied with. This was made real
by doctrine of constructive notice. Because the corporate constitution is a public
document, the law assumed that it had been read by those dealing with company
and that they understood its requirements.
 Rule in Turquand’s case (indoor management rule) was formulated to deal with the
problem of constructive notice

Indoor Management Rule and protection for 3Ps

 Arises from Royal British Bank v Turquand
o Persons dealing with a company are not obliged to inquire into the internal
proceedings of a company but can assume that all acts of internal
management have been properly carried out
 The company’s indoor affairs are the company’s problem
 Outsiders are entitled to assume that the internal procedures have been complied
with. This is often called the indoor management rule.

Statutory protection for outsiders

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  CA 2006 contains provisions which assist an external party in enforcing a contract
made with company when company wishes to disclaim it, they shift risk of
contracting from the external party back to the company itself
 CA 2006 s 40: Power of directors to bind the company
o In favour of a person dealing with a company in good faith, the power of the
directors to bind the company, or authorize others to do so, is deemed to be
free of any limitation under the company’s constitution
o For this purpose
 A person deals with a company if he is a party to any transaction or
other act to which the company is a party
 A person dealing with a company
 Is not bound to enquire as to any limitation on the powers of
the directors to bind the company or authorize others to do so
 Is presumed to have acted in good faith unless the contrary is
proved
 Is not to be regarded as acting in bad faith by reason only of
his knowing that an act is beyond the powers of the directors
under the company’s constitution
o The references above to limitation on the directors’ powers under the
company’s constitution include limitation deriving
 From a resolution of the company or any class of shareholders
 From any agreement between the members of the company or of any
class of shareholders
o This section doesn’t affect any right of a member of the company to bring
proceedings to restrain the doing of an action that is beyond the powers of
the directors. But no such proceedings lie in respect of an act to be done in
fulfillment of a legal obligation arising from a previous act of the company
o This section doesn’t affect any liability incurred by the directors, or any other
person, by reason of the directors’ exceeding their powers
 This means that
o Third parties can assume that directors have authority to enter into
transaction or contract
o Only third parties, not directors or shareholders can rely on s40
o Presumption of good faith in dealings by third party
o Even if third party knows of limitation in directors’ authority, still seen as
acting in good faith
o For bad faith, must show knowledge of, or being put on inquiry as to
improper purpose on part of directors or some collusion by third party in
breach of directors’ duties
 What if the purported agent is not an agent at all, but a third party who purports to
bind the company? There is no dealing with the company
o What powers does that person have to bind the company? If the answer is
none, the question of whether a restriction in the articles takes away the
power which a person would otherwise have, simply doesn’t arise. To take an

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 extreme example, if a complete imposter, with no connection with the
company, purports to contract on its behalf, the company will not be bound
by the contract, whether or not there is a provision in the articles saying that
imposters have no authority to act on the company’s behalf.

Shareholders’ redress
 Under s 40(4), shareholders may obtain an injunction to restrain the doing of an act
which is beyond the powers of the directors
o They cannot bring an injunction to restrain the execution of an executory
contract
 Can also bring an action against directors alleging that they are in breach of s171a to
act in accordance with the constitution
o The directors are liable for breach of duties under s171 (s40)

Ultra Vires and Internal Liability

 Directors who fail to abide by the objects clause of a company can face liability under
s171 CA 2006
o A director of a company must act in accordance with the company’s
constitution
 Agents can face personal liability if they enter into contracts which they didn’t have
the authority to enter into

Validity of acts of directors

 S 161 CA 2006
o The acts of a person acting as a director are valid notwithstanding that it is
afterwards discovered
 That there was a defect in his appointment
 That he was disqualified from holding office
 That he had ceased to hold office
 That he wasn’t entitled to vote on the matter in question

A contract is binding when

 The co has the capacity to enter into the contract, or that capacity can be assumed
(CA 2006, s 39)
 The director (or other agent) has the necessary authority: that is, either actual
authority to transact the deal, or can be deemed to have that authority using CA
2006, s 40, or has ostensible authority. And if the impediment to successfully
demonstrating the particular form of authority is an issue of internal co procedure,
then the indoor management rule allows the third party to assume that the internal
procedures are regular, and

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  The necessary formalities have been complied with (writing, etc.)
 The usual contractual requirements of offer, acceptance, consideration, etc are met

Tort Liability
 Companies can be liable for torts (Campbell v Paddington) either vicariously or
directly
 Theories of liability
o Directing mind theory (alter ego)
 If a person could be found who was the companies’ directing mind,
liability can be attributed to the company
 Corporate liability requires the finding of an individual with the
necessary fault
 Lennard’s Carrying Co Ltd. v Asiatic Petroleum Co Ltd
 Tesco Supermarkets v Nattrass
 Meridian Global Funds Management Asia Ltd v Securities Commission 1995
o Involved 2 employees who used company funds to purchase a 49% stake in a
listed company without disclosing this as required under the Securities Act
o Issue was whether the knowledge of the employees should be attributed to
Meridian
o Lord Hoffman held that to determine liability one should look to whether the
particular rule requires that the knowledge that an act has been done or the
state of mind which it was done should be attributed to the company

Criminal liability
 Corporate Manslaughter and Corporate Homicide Act 2007
o Corporate liability for manslaughter if the way the company is managed fails
to protect the health and safety of those employed in and the manner in
which its management fails is far below the standards that would be
reasonably expected of a company in such circumstances
o First company found liable was in 2012 R v Cotsworld Geotechnical Holdings

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