25. Ultra vires transactions Flashcards
- Ultra vires transactions
General overview
[25.01] The ultra vires doctrine was problematic as it struck down many contracts made by the company with third parties on grounds of the technicalities arising from the judicial interpretation of the objects clauses in the memorandum and articles.
Abolition of ultra vires doctrine
[25.02] Section 25 has abolished the doctrine as regards any transaction entered into by a third party with the company. Hence, a company’s lack of capacity cannot justify its refusal to complete a property transaction: Bee See & Tay v Ong Hun Seang [1997] 2 SLR 193, CA. Neither can the third party get out of the contract by pleading that the transaction was ultra vires the company: Pamaron Holdings Sdn Bhd v Ganda Holdings Bhd [1988] 3 MLJ 346, HC. Section 25 abolished the absolute effect of the ultra vires doctrine save for the residual effects stated in subsection (2)
“just and equitable”
[25.03] The court has powers, if it considers it just and equitable, to set aside or restrain the performance of the unauthorised act, conveyance or transfer. Furthermore, the court may allow compensation for loss or damage arising from its exercise of such powers to the company or to other parties to the contract, provided that anticipated profits may not be awarded by the courts for such loss or damage. For meaning of “anticipated profits” from bills and promissory notes purchased by banks
Contracts binding on the company
[25.04] With the abolition of the ultra vires doctrine, a company has full capacity to enter into any contract with third parties. With the exception of contracts executed under the company’s seal, most contracts are made on behalf of the company by its directors, senior employees or employees and other agents authorised on its behalf to do so (collectively referred to as “agent”). Hence, the law of agency comes into play to decide which contracts are binding on the company and which are not. Generally, the authority of the agent can be classified as (a) actual (express or implied) authority; and (b) ostensible or apparent authority.
Express actual authority
- oral or in writing , valid n binding
- This may take many forms:
(a) authority may be conferred upon a particular agent by the company’s constitution, e.g. reg 95 of the Companies (Model Constitutions) Regulations 2015 which came into operation on January 3, 2016 provides that the board may delegate any of its powers to a managing director;
(b) the company’s agent, e.g. the chief executive officer, may appoint sub-agents such as his deputy or heads of various business divisions to enter into negotiations with third parties with a view to contract on behalf of the company;
(c) private instruments like debentures entered into by the company with a bank would often provide that a receiver and manager appointed thereunder shall be an agent of the company; and
(d) by a statute, e.g. s 57(4) of the Criminal Procedure Code (Cap 68) provides that the managing director of a company is authorised to appoint a person to represent the company if it is charged with an offence
[25.05] Express actual authority is conferred upon an agent by the company either orally or in writing. This may take many forms: (a) authority may be conferred upon a particular agent by the company’s constitution, e.g. reg 95 of the Companies (Model Constitutions) Regulations 2015 which came into operation on January 3, 2016 provides that the board may delegate any of its powers to a managing director; (b) the company’s agent, e.g. the chief executive officer, may appoint Miki sub-agents such as his deputy or heads of various business divisions to enter into negotiations with third parties with a view to contract on behalf of the company; (c) private instruments like debentures entered into by the company with a bank would often provide that a receiver and manager appointed thereunder shall be an agent of the company; and (d) by a statute, e.g. s 57(4) of the Criminal Procedure Code (Cap 68) provides that the managing director of a company is authorised to appoint a person to represent the company if it is charged with an offence. Section 227I of the Act provides that the judicial manager is deemed to be an agent of the company. A contract entered into by an agent with express actual authority is valid and binding on the company. Note: certified extracts of a board’s resolution did not confer express authority on a finance manager to enter into substantial loan facilities with a bank, and the company was therefore not liable on the loan agreements fraudulently signed by the manager
Implied and actual authority
[25.06] This is authority implied by the circumstances of the case, e.g. an agent expressly authorised to carry out certain acts such as hiring a chief financial officer shall be authorised to do all things incidental to the fulfilment of that task: Pole v Leask (1860) 28 Beav 562 . Secondly, it may also arise by the acquiescence of his superiors: see SPP Ltd v Chew Beng Gim [1993] 3 SLR 393, CA where two nominee directors signed personal guarantees in respect of hire-purchase financing obtained by the company at the behest of the managing director who gave them the green light to sign, implicitly assuring them that they would be indemnified by the company. When sued on their personal guarantees, they sought an indemnity from the company which was upheld by the Court of Appeal on grounds that the managing director was the “moving spirit” behind the company. Where the board of directors appoint one of the members to an executive position, they impliedly authorise him to do all such things that fall within the usual scope of that office: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, Ch D; [1967] 3 All ER 98, CA . The grant of actual authority to a director is subject to it being exercised honestly and in the interests of the company: Hopkins v TL Dallas Group Ltd [2004] EWHC 1379 ; Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421. Implied authority often arises where the board by its conduct over many months had acquiesced in the de facto director acting as the chief executive officer and committing the company to contracts without the necessity of sanction from the board: Hely-Hutchinson v Brayhead Ltd (above). A remisier of a stockbroking firm has implied authority arising from the remisier agreement with the stockbroking firm to collect from and deliver to the client on behalf of the stockbroking firm certificates in respect of shares bought or sold or to be kept as security for any margin account or for registration: Chien Chung Ming v Kay Hian and Co Pte & Anor [1991] 2 SLR(R) 882; [1991] SGHC 174, HC ; followed Lloyd (Pauper) v Grace, Smith & Co [1912] AC 716 ; Powell v Wontner & Renwick (a firm) (1962) 106 Sol Jo 197. A committee constituted for executive remuneration purposes with no terms of reference pertaining to powers to renew directorships specified in the constituting resolution was not delegated such powers, and the committee did not have power to sign renewal of employment letters for directors except with the approval of the board
Usual authority
[25.07] This form of authority is classified as implied actual authority and arises from the authority that often accompanies the particular office or from trade and industry usages. It was held that a branch manager of a multinational insurance company had no “usual” authority to represent to a bank that a subordinate employee had authority to execute undertakings to pay moneys to the bank: British Bank of the Middle East v Sun Life Assurance Co of Canada (UK) Ltd [1983] BCLC 78, HL ; cf First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCLC 1409, CA . The secretary of a company has usual authority to bind the company in matters concerned with administration, e.g. he hired cars for the company’s business, but in fact fraudulently used them for his own purposes. The company is bound to the contracts of hire. Ruben v Great Fingall Consolidated [1906] AC 439, HL where the court had viewed the company secretary as a mere servant without any authority to represent the company at all.
Ostensible or apparent authority to
[25.08] The classic case is Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, CA , where the four directors of a company left the day-to-day management of a property development company to one of the directors, K. After the initial plan to resell the land had fallen through, K decided to develop the land and engaged a firm of architects and surveyors to apply for planning permission. The Court of Appeal held that the company was bound to the contract with the architects on the ground of ostensible authority. Ostensible or apparent authority operates on the principle of estoppel in that the company having held out or represented the agent to have authority to act in the transaction cannot be heard to renege on that representation when the third party acted on that representation and contracted with the agent. The “holding out” or representation often arises from the conduct of the board in allowing the agent to act in the management and conduct of part of the business of the company. Even where the articles of a company provided that a guarantee had to be executed by two directors, and a single director executed the guarantee in favour of the plaintiff, the court held that other provisions in the articles empowered the board to delegate the power of executing guarantees to a single director. The company was bound by the guarantee: British Thomson-Houston Co v Federated European Bank Ltd [1932] 2 KB 176 . Where the contract is not one where persons occupying the position in relation to the company’s business which the third party knew that the agent occupied, would normally be authorised to enter into on behalf of the company, the company was not bound by the contract: Houghton & Co v Nothard, Lowe & Wills Ltd [1927] 1 KB 246, CA ; Kreditbank Cassel GMbh v Schenkers Ltd [1927] 1 KB 826 ; Rama Corp Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147; [1952] 1 All ER 554 (concerning a contract negotiated by a single non-executive director); where the vice president (transportation) and chartering manager was known not to have any general authority to enter into a three-year charter party and he could not, in the absence of any representation by the principal as to his authority, reasonably be believed to have specific authority to notify the other contracting party that the principal’s consent had been obtained and thereafter to complete the agreement [25.09] The ostensible authority given by the company to third parties does not end even by the “sacking” of the agent unless and until the termination of authority is communicated to them specifically: AMB Generali Holdings AG v Manches [2005] EWCA Civ 1237 . An act of an agent within the scope of his actual or apparent authority did not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interest: Chien Chung Ming v Kay Hian and Co Pte & Anor [1991] 2 SLR(R) 882; [1991] SGHC 174, HC ; followed Lloyd (Pauper) v Grace, Smith & Co (above); Powell v Wontner & Renwick (a firm) (1962) 106 Sol Jo 197. Trustees of an employee pension scheme which had entrusted the day-to-day administration of the scheme to the company is bound by a representation made by the company’s employee who was in charge of the scheme to a new employee that his pension from his previous employer will be transferred to the company’s pension scheme: Kelly & Ors v Fraser [2013] 1 AC 450, PC . An employee with keys to the premises belonging to the principal did not create in him an ostensible authority to approve a lease signed on behalf of the principal
Directors acted improperly
[25.10] Apparent authority can only be relied on by a third party who does not know that the agent has no actual authority to sign the “poison pill” agreement. In the same vein, if a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent’s principal (i.e. the company), it would be very difficult for the person to assert with any credibility that he believed the agent did have the actual authority to sign the agreement: Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28; [2004] BCLC 570; [2004] 1 WLR 1846, HL ; Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, CA . When a director was aware that he did not have the authority to sign a directorship renewal letter but proceeded with the issue of the same, and the director whose directorship was thus purportedly renewed accepted the same, in the hope that it would be accepted by the board as a fait accompli, both directors were not acting bona fide in the interests of the company
Third parties’ knowledge or negligence
[25.11] The basic principle in agency law is that the third party cannot rely on the agent’s ostensible authority if there are circumstances where the third party know or ought to know that the agent lacks actual authority. Such knowledge is often referred to as constructive knowledge and “Nelsonian” knowledge. For example, if the circumstances of the transaction is somehow abnormal or suspicious, the third party has an obligation to enquire whether the transaction is outside the agent’s authority: Hopkins v TL Dallas Group Ltd [2004] EWHC 1379. Section 25A has abolished the doctrine of constructive knowledge of constitutional documents or other documents by a person dealing with the company that are registered with the ACRA. Hence, a third party is not affected by constructive knowledge of any restriction or limitation in the powers of the directors, employees or agents to enter into contracts on behalf of the company. The Court of Appeal held that when the third-party bank’s regional advisor had asked for the agent’s express authority to enter into the guarantee, it showed that he knew that the agent was not clothed with authority as chairman. He could not rely on the agent’s ostensible authority to sign the guarantee: Dart Sum Timber (Pte) Ltd v Bank of Canton Ltd [1981–1982] SLR(R) 376; [1982] SGCA 2, CA. However, a notice in the Gazette notifying the compulsory liquidation of a company did not affect its right to waive a forfeiture of the lease as the court held that the company should not be deemed to have notice of the Gazette
[25.12] Where the third-party bank had colluded with the company’s chief financial officer to enter into an unauthorised foreign exchange hedging agreement, triable issues of law were raised: Jurong Shipyard Pte Ltd v BNP Paribas [2008] 4 SLR(R) 33; [2008] SGHC 86, HC. Where the third-party bank willingly took the risk of the agent’s forgery and accepted the directors’ signatures on certified extracts of the board’s resolution without inquiry and verification, no ostensible authority can arise from the circumstances
Forged documents
[25.13] An agreement with the forged signature of the principal was not binding on her and was a pure nullity, because a principal could not give authority, actual or ostensible, to an agent to commit forgery: Cavenagh Investment Pte Ltd v Kaushik Rajiv [2013] 2 SLR 543; [2013] SGHC 45, HC. An agent who acted without authority was liable to the third party for breach of warranty of authority and had to indemnify the third party for his loss
Pleadings
[25.14] The particulars of an agent’s ostensible authority have to be specifically pleaded in the statement of claim
Ratification
- A contract that was made by an agent on behalf of the company without authority may be ratified subsequently by the company to become a binding contract. Contract not binding till it’s ratified by board
[25.15] A contract that was made by an agent on behalf of the company without authority may be ratified subsequently by the company to become a binding contract. If an agent had contracted subject to ratification by his principal, there would be no concluded contract until ratification had been obtained, for when the other party to the contract had intimation of the limitation of the agent’s authority, neither party could be bound until ratification had been duly intimated to the other party to the contract: Warehousing & Forwarding Co of East Africa Ltd v Jafferali & Sons Ltd [1964] 1 AC 1, PC. Silence or inactivity could amount to ratification only if it, when interpreted in the context and circumstances, was of a nature which unequivocally signified an assent to the unauthorised transaction
