3) Ultra Vires Flashcards
The power of a company to enter into a transaction was limited in two ways
Capacity
Authority
Capacity
- To determine capacity was necessary to check the objects clause in the memorandum.
- If transaction was outside of the company’s powers = ultra vires = Void and unenforceable
- Even if ratified by shareholders
Asbury v Riche 1875
The company was not incorporated with the requisite capacity.
Authority
- Whether the individual who contracted on the company’s behalf was authorised to do so?
- If not transaction would be voidable at the instance of the company
Capacity Question under CA 2006
Less relevance as memorandum no longer contains an objects clause.
Under s31 CA 2006 a company’s objects are unrestricted
Doctrine of ultra vires
- Body acts outside of its powers.
- Doctrine deemed to apply to registered companies in order to protect creditors and shareholders.
- If a company was unable to achieve its stated object then it was vulnerable to being wound up by courts.
Re German Date Coffee Co 1882
- Facts
- Object was to acquire and exploit a German potent for producing coffee from dates.
- Failed to get a german patent but got a Swedish one.
- Company wound up since it did not achieve its stated aims
Problems ensuing from the doctrine of ultra vires
- Objects were not permitted to be altered.
- Registered companies often diversified and changed - creating problems.
- Doctrine of constructive notice, combined with the ultra vires rule - caused problems with third parties seeking to enforce.
Objects clause was initially not permitted to be altered
Later legislation allowed alteration in limited circumstances until 1991, when amendments made to the Companies Act 1985 came into effect,
Doctrine of constructive notice
Deems anyone dealing with registered companies to have notice of contents of public documents. `
Bell Houses Ltd v City Wall Properties 1966
Could use a “general commercial company” as a purpose.
Permitted under s3A CA1985.
Wide objects clause
Re Introductions Ltd v National Provincial Bank 1970
- Company was incorporated in ‘51
- Provided foreign visitors with accomm and entertainment
Diversified into pig breeding - Bank were unable to enforce a debenture as the company acted ultra vires
Following Re Introductions Ltd v National Provincial Bank
- Recommendations for reform of the law to protect third parties.
- Following the joining of the ECC
- European Community Company Law Harmonisation Directive - removed the doctrine of constructive notice.
European Community Company Law Harmonisation Directive -
- Removed doctrine of constructive notice concerning memo/articles
- Containeed a saving provision for ultra vires transactions when transaction dealt with in good faith
now incorporated as s 40 CA 2006
CA 1985 and further amendments of 1991
- Allowed companies to change their objects clause (s4)
- Companies permitted to have general commercial company clause (s3A)
Changes introduced by CA 2006
- s39(2) CA 2006 - removing doctrine of constructive notice in relation to memo and articles.
- s31 CA 2006 default position of unrestricted objects
Companies formed prior to CA 2006
Objects clauses are treated as if a provision of the articles (s28(1) CA 2006) continue to bind the company.
Unless altered by special resolution
* New articles adopted = objects clause removed
Constitutional restrictions on a company’s capacity have no bearing on…
Liability in tort or crime
Agent
An agent is appointed by a principle to act on their behalf, an agent contracts on the principal’s behalf and the contract will be entered into between the principal and the third party - not the agent
To validly represent the principal and bind the principal
Agent needs authority
Authority may be …
Actual (express or implied)
Deemed (by statute or under common law)
Actual authority
Agent has actually been conferred on them by the principal
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
Actual relationship = relationship between principal and agent created by consensual agreement
Usual contractual principles apply
Implied actual authority arises from …
- Appointment to a specific role
- course of dealing
Implied actual authority - from appointment
Appointment of Managing Director carries the power of the person to do all such acts necessary to manage the company.
including acts not expressly stated in the managing director’s contract
Smith v Butler 2012
- Court had to determine whether a MD had implied power to suspend Execitove chariperson.
- Implied powers of managing director
Implied actual authority from course of dealing
- Where a director or other agent continually enters into specific transactions and the board of directors either acquiesces or agrees
Actual authority - implied - via appointment - CASE
Smith v Butler 2012
Actual authority - implied - course of dealing - Case
Hely- Hutchinson v Brayhead Ltd 1968
Hely- Hutchinson v Brayhead Ltd 1968
CoA held that chairperson and CE of defendant company had implied authority from course of dealing due to entering into similar contracts without the board objecting
Deemed authority
Refers to the situation where an agent has no actual authority, yet can still bindthe principle
Three categories of deemed authority
1) Statutory deemed authority under s40 CA 2006
2) Deemed authority at common law - ostensible or “apparent” authority
3) Deemed authority at common law under the “indoor management” rule in Turquand’s case
Implied Authority - StatutoryUnder s 40 CA
Purpose: Protect third parties where there are restictions on the power of agents to bind a company.
Third parties who deal in good faith are entitled to assume that directors are free from limit
Even if articles require shareholder agreement.
Threshold for bad faith
Very high
s40(2)(b)
Ostensible Authority
Determined by looking at the relationship between the principle and the third party.
Authority of the agent as it appears to a third party.
Ostensible authority case
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
- Company formed to buy and resell a large estate.
- Four director and articles of the company required all four to constitute a quorum
- K acted as managing director in engaging team to get planning
- Company refused to pay the claimants fees arguing K had no authority to pay
- CoA upheld claim on basis of ostensible authority
Significance of quandIndoor management rule in Turquand’s case
lesser significance now due to s40 CA 2006
- Still applies in certain situatioins in particular where the third party has not dealt directly with the board, or a question of agency authorisation
Royal British Bank v Turquand
1856
- Bank brought a claim for the return of money owed by the company.
- Loan valid as constructive notice only shows that authorisation required - not that ontained.
Indoor management rules
Principle of Turquand is that outsiders are entitled to assume company’s internal procedures have been complied with
Rolled Steel Ltd v British Steel Corp
1986
Indoor managament rule will not apply when third party has notice of irregularity or is not acting in good faith
Indoor regularity rule does not apply when
- Third party has actual notice of irregularity or bad faith.
- Third party is an insider
Morris v Kanssen 1946
It does not apply where the third party is an insider such as a director who enters into a contract withthe company
Ratification
A company is able to ratify acts that are beyond the actual authority of its agents provided that the act is within the authority of the appropriate organ of the company who are look to ratify.
Ratification involves
Passing a resolution to approve the act and agree that a company will be bound by it
Ratification key case
New Falmouth Resorts Ltd v International Hotels Jamaica Ltd 2013
New Falmouth Resorts Ltd v International Hotels Jamaica Ltd 2013
- Agent had no actual or ostensible authority to enter transaction.
- No longer able to rely on the lack of authority of the agent.
- May be adopted and ratified of with a retrospective effect.
Pre incorporation contracts
The Contracts (Rights of Third Parties) Act 1999
* Allows third parties to enforce contracts where the contract expressly provides or term in contract confers a benefit on the third party, does not apply to pre-incorp contracts because these will impose obligations and not only benefit third partites.
Section 51 CA 2006
Promoters bear personal liability
* Makes pre-incorp contracts enforceable as personal contracts against persons purportedly on the company’s behalf (promoters)
Phonogram Ltd v Lane 1982
Necessary to determine whether there was an express agreement that the signatory would not be personally bound bythe contract
Cases that follow the interpretation s51 CA 2006
- Hepburn v Revenue and Customs Commissioners 2013
- Royal Mail Etates v Teesdale 2015
Hepburn v Revenue and Customs Commissioners 2013
Royal Mail Estates v Teesdale 2015
- Applying Phonogram v Lane
- Judge did not consider that the wording excluded the effect of s51 as it did nto expressly indicate intention to exclude the effect of s 51
neither of the parties was aware that the company had not been incorporated
Pre-incorporation contracts - ratification
A company cannot ratify a contract made before it came into existence.
Ratification is only possible for acts which a company could have authorised at the time
A company cannot ratify a contract made before it came into existence
Since the company did not exist at the time the contract was formed.
Could not have authorised an agent to act on its behalf so is not able to retrospectively authorise purported agents
Kelner v Baxter 1866
Kelner v Baxter
1866
As the company did not exist at the time the contract was formed.
Could not authorise an agent to act on its behalf - so cannot to so retrospectively
Natal Land Co & Colonization Ltd v Pauline Colliery and Development Syndicate Ltd 1904
Only way to obtain benefit of a contract made on its behalf before it came into existence novate the contract
Only way a company can obtain benefit of a contract made on its behalf before it came into existence
Novate the contract
Where a company is formed from a n existing shelf company
s51 does not apply
Because shelf company is already formed = a legal person
Oshkosh B’Gosh INc v Dan Marbbel Inc Ltd 1989
Individual in negotiation of a contract formed between a shelf company and third party before shelf company is renamed is not personally liable
Pre incorporation contracts - liability of the agent or promoter
Liable under the contract under s51 but also can enforce the contract
Braymist Ltd v Wise Finance Co Ltd
- Case involved a contract for the sale of land entered into by solicitors on behalf of a company.
- Developers changed their mind, solicitors sought to enforce the contract.
- Solicitor entitled to do so.
Usual rules of contract apply - misrepresentation about the identity of the party of the contract (the future company) induced the other party to enter the contract to it’s detriment
Other party can rescind the contract
Agents or promoters must beware entering into contracts on behalf of a company before it is incorporated
Likely to lead to them assuming personal liability for contracts, and being entitled to personal benefit
Liability in tort
Two ways that a company may be liable int tort
* Primary Liability
* Vicarious Liability
Primary Liability
Company itself committed the tort through the acts of an individual attributed to the company
Vicarious Liability
- Individual within the company personally liable.
- Company vicariously liable for that person’s act or omission
Individual and the company are jointly liable
Attribution of primary liability
- Comes from case law
- Courts identify the controlling mind of the Company,
= Attribution theory
Attribution Theory - difficulty
Requires a particular individual within a corporate organisational structure to be identified as the controlling or guiding mind
Attribution Theory - Key Cases
- Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd 1915
- Tesco Supermarkets Ltd v Nattrass 1972
- Meridian Global Funds Management Asia Ltd v Securities Commission 1995
- SFO v Barclays PLC and another 2018
Lennards Carrying Co Ltd v Asiatic Petroleum Co 1915
- Liability under the **Merchant Shipping Act 1894* - required fault.
- Necessary to identify an individual who was the “directing mind and will of the corporation”
- That person has the required fault and the can be attrinuted to the company
Tesco Supermarkets Ltd v Nattrass
- Tesco charged under Trade Descriptions Act 1968
- For advertising goods at reduced price and selling for full.
- Argued that it was the manager of a particular store, not the company.
Court found the manager was no tthe “guiding mind” therefore Tesco could not be liable for his actions
Lord Hoffmann opened up the possibility of finding liability based on assessment of the controllers of the company for the purposes of attribution rather than searching for the “guiding mind” of the company
Makes liability easier to establish
Meridian Global Funds Management Asia Ltd v Securitie Commission
1995
- Reall issue was who the “controllers” of the company for the purposes of attribution.
- Not about the “guiding minds”
- Controllers were found to be two senior managers, enabled attributions of the liability.
SFO v Barclays PLC and another 2018
FACTS
- Serious Fraud Office sought to bring charges against Barclays in connection with fraudulent fundraisings in response to the banking crisis.
- Considered whether the alleged criminal dishonesty of senior officers who misled boards and committees.
- Does this render Barclays criminally liable?
SFO v Barclays PLC and another 2018
HELD
- As they were acting dishonesty
- Individuals did not have the “full discretion” to act independently
- Could not have been directing mind, and will of a company to the role and responsibilities of the company.
*
Davis LJ
Acknowledged that the law set a high standard for all but small companies to be found liable.
“open to parliament to draft statutory offences with the position of corporations in mind”
Economic Crime and Corporate Transparency Act 2023
- In response to SFO v Barclays Gov reformed the identification principle
- So if “a senior manager of a body corporate or partnership acting within the actual or apparent scope”
Then company also guilty of offence - Only applies to economic, fraud and funding of terrorism
ECCTA 2023
Economic Crime and Corporate Transparency Act 2023
Only applies to economic crimes, fraud and funding of terrorism.
Government have stated a desire to extend this list to all criminal offences in due course
Criminal liability for companies difficult to establish even after
Meridian Globa Finds Management Asia Ltd v Securities Commission 1995
Zeebrugge P&O ferries (Dover) Ltd 1991
- 7 individuals within P&O were charged with gross negligence manslaughter
- Company charged with corporate manslaughter
- Case collapsed but set a precedent that a company many be charged with corporate manslaughter
Corporate Manslaughter and Corporate Homicide Act 2007
Enacted to establish the offence of corporate manslaughter
Corporate Manslaughter
- Offence committed by a company if the manner in which its activities are managed or organised by its senior management causes the death of a person and amounts to gross breach of the relevant duty of care owed to the person.
- Conduct fell far below what can reasonably be expected of the organisation in the circumstances
If found guilty then the company may be liable for a fine
First company convicted under Corporate Manslaughter and Corporate Homicide Act 2007
- Cotswold Geotechnical Holdings Ltd in 2011
- Company convicted and fined £385,000
- Death of an employee who entered an unsupported pit during the course of soil investigation work which collapsed
R v Cotswold Geotechnical Holdings Ltd 2011
- Cotswold Geotechnical Holdings Ltd in 2011
- Company convicted and fined £385,000
- Death of an employee who entered an unsupported pit during the course of soil investigation work which collapsed
