25B. Power of directors to bind company Flashcards
25B. Power of directors to bind company
General overview
[25B.01] In contrast with s 25 (which validates contracts made with the company that are in excess of its capacity), the new s 25B validates contracts made by the company’s directors or persons authorised by such directors with third parties who deal in good faith with them in cases where the directors or persons authorised by them have exceeded their powers. However, it is to be noted that the provision is only a deeming provision, and the company may still set up the defence of lack of or excess of authority on the part of its directors or persons authorised to enter into the contract or transaction.
[25B.02] Act No 36 of 2014 introduced a new s 25B which provides that in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution. Basically, s 25B is modelled on s 40 of the Companies Act 2006 (UK) which gives effect to Article 9 of the First EC Directive No 68/151/EEC. Members of a company who contracted with the company for bonus shares were held to fall within the meaning of “person dealing with a company”
Not bound to enquire
[25B.03] Subsection (2) provides that the third party dealing with the company in good faith shall not be bound to enquire into any limitation on the powers of the directors to bind the company or authorise others to do so. Subsection (3) provides a non-exclusive definition of limitations on the directors’ powers such as those arising from a resolution of the company or of any class of shareholders, or from any agreement between the members of the company or of any class of shareholders.
“enquire”
[25B.04] When s 25B is read with s 25A, it seems that the third party is not affected by constructive notice of any limitation in the constitution or any documents registered with ACRA or available for inspection at the company’s registered office. It is unlikely that s 25B protects a third party who is fixed with actual notice of the limitation in the directors’ powers
“good faith”
[25B.05] A third party is deemed to act in good faith unless the contrary is proved under s 40 of the Companies Act 2006 (UK): TCB Ltd v Gray [1986] Ch 621, Ch D ; affirmed by the Court of Appeal in [1987] Ch 458. A person acts in good faith if he acts genuinely and honestly in the circumstances of the case. If the person has actual notice of the limitation in the directors’ powers, he cannot rely on s 40: Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] 1 BCLC 1; [1984] 1 All ER 628. Section 35A, which is the predecessor to s 40 does not protect a person who failed to inquire about matters in circumstances in which he should have done so (the third party was not dealing with the entire board. He needs to establish whether the board has authorised the dealing): Wresham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237, CA . Does s 35A apply when the person who dealt with the third party is not a director at all?
“Indoor management” rule
- person dealing with a company is entitled to assume, in the absence of circumstances putting him on inquiry, that all matters of internal management and procedure have been duly complied with
[25B.06] This rule which is often called Turquand’s rule established that a person dealing with a company is entitled to assume, in the absence of circumstances putting him on inquiry, that all matters of internal management and procedure have been duly complied with: Royal British Bank v Turquand (1856) 6 E & B 327 ; applied in Ezzen Heights Sdn Bhd v Ikhlas Abadi Sdn Bhd (Soh Yuh Mian, intervener) [2011] 4 MLJ 17, CA ; Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93, CA . A third party is entitled to assume that the directors and the secretary had been properly appointed according to the memorandum and articles: Mahony v East Holyford Mining Co (1875) LR 869, HL. A third party is entitled to rely on the rule in respect of acts done by a general manager who appeared to be part of senior management even though he is not a member of the board: Mahfuz bin Hashim v Koperasi Pekebun Kecil Daerah Segamat & Ors [2005] 3 MLJ 726, HC. A guarantor whose liabilities were discharged under a guarantee by a letter from a senior general manager who was part of a committee with authority to discharge guarantees was allowed to rely on the “indoor management” rule: Tan Ah Tong v Perwira Habib Bank (M) Bhd [1998] 3 MLJ 778, CA. A deed of assignment of trademark was legally valid when signed by a sole signatory who was the alter ego and driving force in the management despite the absence of the affixing of the common seal in the presence of two witnesses in accordance with the defendant’s resolution: Oriental & Motolite Marketing Corp v Syarikat Asia Bateri Sdn Bhd [2012] 5 MLJ 87, HC.
[25B.07] Actual notice of the irregularity in question, or where the third party has been put on inquiry, will exclude application of the “indoor management” rule: Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, CA . A person cannot rely on Turquand’s rule when he was directly in negotiations with the company in respect of the transaction in question and he was aware that the other 50% shareholder had not consented to the transaction: Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor [2015] 11 MLJ 604, HC. Turquand’s rule was applied in Development Bank of Singapore Ltd v Bok Chee Seng Construction Pte Ltd [2002] 2 SLR(R) 693; [2002] SGCA 37, CA , where a bank was not held liable for honouring cheques paid in accordance with the instructions of a new resolution passed by the company; referred to by Judith Prakash J in SAL Industrial Leasing Ltd v Hydtrolmech Automation Services Pte Ltd & Ors [1997] 3 SLR(R) 676; [1997] SGHC 298, HC. The “indoor management” rule only applies where the agent has ostensible authority to enter into the contract with the third party. It cannot override a lack of ostensible authority on the part of the agent: Yongnam Development Pte Ltd v Springleaves Tower Ltd & Anor [2004] 1 SLR(R) 348; [2003] SGHC 301, HC. The rule cannot be invoked if the outsider relying on the rule knows or ought to have known that there is an irregularity: Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors [1998] 1 MLJ 465, FC ; followed Royal British Bank v Turquand [1856] 119 ER 886 ; County of Gloucester Bank v Rudry Merthyr Steam and House Coal Colliery Co [1895] 1 Ch 629 ; Browne v La Trinidad (1887) 37 Ch D 1 ; South London Greyhound Racecourses Ltd v Wake [1931] 1 Ch 496 not followed. Where the circumstances are such that a reasonable man would be suspicious of the agent’s authority, the contracting party must make reasonable inquiries. And, if such inquiries would have revealed the agent’s lack of authority, the contracting party cannot rely on the “indoor management” rule: Malaysian Resources Corp Bhd v Juranas Sdn Bhd [2002] 3 MLJ 169, HC.
[25B.08] The rule does not apply where forgery is involved: Ooi Meng Khin v Amanah Scotts Properties (KL) Sdn Bhd [2014] 6 MLJ 488, CA ; Kerajaan Malaysia v RHB Insurance Bhd [2014] 11 MLJ 541, HC.
[25B.09] The rule is an irrebuttable presumption which applies in favour of a bona fide purchaser for value without notice of any irregularity: Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors (above); applied in Hubah Sdn Bhd & Ors v Koperasi Pusaka (Penampang) Bhd [2013] 5 MLJ 761, CA in respect of a co-operative society. Generally, it is for the party relying on the rule to prove that he is within the indoor management rule.
Executory contracts
[25B.10] Subsection (4) empowers a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors. On the other hand, executed contracts have to be performed: s 25B(4).
Actions or proceedings against directors
[25B.11] Subsection (5) provides that s 25B shall not affect the liability of directors or any other person arising out of the exceeding of their powers. Section 25B(5) preserves the company’s and the liquidator’s rights to sue the director(s) who exceeded their powers for breach of duty as a director. The question of directors exceeding their powers depends on normal principles of agency as well as the proper purpose doctrine: Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, CA . Such proceedings against directors for exceeding their powers are often brought by the company or the liquidators under the rubric of a breach of directors’ duty of exercising their powers for a proper purpose. Directors must exercise their discretion bona fide and for proper purposes in what they consider – not what the court considers – is in the interest of the company, and not for any collateral purpose: Re Smith and Fawcett [1942] Ch 304, CA ; applied in TYC Investment Pte Ltd & Ors v Tay Yun Chwan Henry & Anor [2014] 4 SLR 1149; [2014] SGHC 192, HC. Directors may not issue shares for the sole purpose of creating voting power to carry out a proposed alteration in the articles: Punt v Symons & Co Ltd [1903] 2 Ch 506, Ch D ; see Hogg v Cramphorn Ltd [1967] Ch 254, Ch D ; and Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, PC , for an improper exercise of the directors’ powers; cf Mills v Mills (1938) 60 CLR 150, HC where directors who were also shareholders holding ordinary shares may vote in their own interest rather than the interest of the company. The test is “what is fair between different classes of shareholders”: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, HC , which held that the allotment of shares would be invalidated if the impermissible purpose was causative, in the sense, that but for its presence, “the power would not have been exercised”.
[25B.12] Directors who voted on remuneration that was so out of proportion to any possible value attributable to a directorship did not genuinely exercise their powers, and the remuneration was a dressed-up gift to a shareholder out of capital: Re Halt Garage (1964) Ltd [1982] 3 All ER 1016, Ch D ; Yong Kheng Leong & Anor v Panweld Trading Pte Ltd & Anor [2013] 1 SLR 173; [2012] SGCA 59, CA. Shareholders may not by a resolution passed at general meeting interfere with the directors’ powers to continue with an action against them: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, CA . The powers of directors signing a “poison pill” agreement intended to thwart a hostile takeover of a public company and s 35A of the Companies Act 1985 (UK) was discussed in Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28; [2004] BCLC 570; [2004] 1 WLR 1846, HL . The failure to exercise an independent discretion and the mere doing of what it was thought a third party wanted could not amount to the bona fide exercise of the discretion required of a director: Rajabali Jumabhoy & Ors v Ameerali R Jumabhoy & Ors [1997] 2 SLR(R) 296; [1997] SGHC 168, HC. A director who refused to register the beneficiaries of a trust as members of the company on grounds that to do so might jeopardise the status of the company as a private company did not exercise his powers improperly: HSBC (Malaysia) Trustee Bhd & Ors v Soon Cheong Pte Ltd [2007] 1 SLR(R) 65; [2006] SGHC 193, HC. Any impropriety on the directors’ part could be waived by a majority of the votes of the shareholders at the general meeting of the company: Bamford & Anor v Bamford & Ors [1969] 2 WLR 1107, CA . See further cases under directors’ duties, under s 157 and s 157A.
