4. Legally binding the company

Question 1

What are the three ways in which a company can enter into contracts.

Answer 1

s. 43 and s.44 stipulates how a company into contracts:
- by affixing common seal to a document
- by a person who has authority (express or implied) to contract on behalf of the company
- by complying with the rules

Question 2

What is a “common seal”?

Answer 2

A stamp that can be used to sign or “execute” a document

Question 3

Who is authorised signatory for the purpose of executing a document on behalf of the company

Answer 3

Every director is an authorised signatory, or company secretary

Question 4

What forms company constitution?

Answer 4

Articles

Resolutions and agreements affecting the co’s constitution

Question 5

Is a company required to register a set of articles on incorporation?

Answer 5

A Co is not required to register its own set of articles when it submits its application for incorporation

Question 6

How can the articles be amended?

Answer 6

A Co may amend its articles either by passing a special resolution or if all members agree, s21, unless they are entrenched.

Question 7

What does s33(1) of the CA2006 state?

Answer 7

Under s. 33 CA 2006 the articles form a contract between the members and each other and between the individual members and the company.

A s.33(1) of the CA2006 provides “that the provisions of a company constitution bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions”. I.e.:

CONSTITUTION OF A COMPANY FORMS A CONTRACT (statutory contract)THAT IMPOSESES OBLIGATIONS ON:

• the co when dealing with members
• the members dealing with a company
• the members dealing with each other

Question 8

Can all the terms of the constitution be enforced by the company or member?

Answer 8

No, members cannot sue to enforce outsider rights (rights granted to them in their capacity other than a member).

Question 9

What is an objects clause?

Answer 9

A clause in Co’s articles which states the objects or purposes for which the company was set up. Co incorporated under CA2006 are not required to have objects clause, but may if they wish so.

Question 10

What does s.39 of the CA state?

Answer 10

Company acting outside constitution is acting ultra vires.

Contract is unenforceable if the parties have no capacity to enter into it. If it does, the contract may be void under common law because it is beyond the powers of the relevant organisation (ultra vires doctrine).

S.39 provides that the “validity of an act done by the company itself shall not be called into question on the ground of lack of capacity by reason of anything in the co constitution. Accordingly, a contract entered by a co cannot be invalidated on the ground that the contract is outside the scope of the co’s contractual capacity. In simple terms, validity cannot be questioned if the compny had no capacity.

IN favour of a person dealing with the company in good faith, the power of directors is deemed to be free of any limitations. Previously objects clause in memo of association set out any objects, it is abolished under CA2006.

s.40 overrides limitations set out in constitution on the powers of the board to bind the co.

Question 11

What does the case of Allen v Gold Reefs of Africa provided for company law in relation to alteration of AA?

Answer 11

Allen v Gold Reefs of West Africa Ltd [1900] concerns the validity of the alteration made to the company’s articles of association.

In short, ARTICLES MUST BE ‘BONA FIDE’ FOR THE BENEFIT OF THE COMPANY AS A WHOLE.

The power of the company to alter its articles is subject to the general principles of law and equity. Thus, they require the bona fide application of the power, namely, for the benefit of the company as a whole.

However, if the alteration is inconsistent with an independent contract between the company and a particular shareholder, then the company cannot rely on the alteration as a defence to a breach of contract.

In the present case, it made no difference that the claimant was the only member of the company affected by the alteration. The latter action still remained valid.

Question 12

What are the particulars of Eley case?

Answer 12

• Members enter into contract with company and other members through Articles.
• The terms of contracts are contained within Articles
• The effect is to bind the members to the company
• But the articles do not created a contract between the co and third parties

eg. case of Eley

Question 13

Limit on the content of the Articles

Answer 13

Peveril Gold Mines
Articles may not override mandatory laws such as the right of a member to petition the court to wind up the company

Allen v Gold Reefs
A must be “bona fide for the benefit of the company as whole

Bushell b Faith
Weighted voting rights may operate to undermine the mandatory nature of statutory provision

Question 14

In which circumstances the Articles may not be altered?

Answer 14

If they are entrenched (s22)

Otherwise may be altered by special resolution (s.21)

Southern Foundries v Shirlaw
A contract clause not to amend the AA will not be specifically enforced against a Co, but the Co may be liable in damages if it alters the AA in breach of contract

Question 15

Can a member sue to enforce the A where there has been an internal irregularity?

Answer 15

No, but it is unclear what amounts to internal management matter and what amounts to personal right

Can one member enforce the constitution against another?
Case of Grant v Uk Switchback co

Pender v Lushington
Yes, but caution re decision may confined to quasi-partnership cases

Question 16

When is a Co bound by a deed?

Answer 16

A company will only be bound by a deed if the doc is clear on its face that it is intended as a deed and is validly executed as a deed.

If a deed purports to be validly executed, it is deemed validly executed in relation to a purchaser in good faith

A document is validly executed as a deed by a company if:
– either (i) the common seal is affixed; or (ii) the document is expressed to be executed by the company and is signed by two authorised signatories,
or by a director in the presence of a witness who attests the signature (CA 2006, s. 44); and;
– it is delivered as a deed (CA 2006, s. 46).

Question 17

What authorities of persons to bind the company are known?

Answer 17

Actual authority
Express actual authority
Implied actual authority - Hely-Hutchinson case
Apparent authority - Freeman Lockyear

Question 18

What are the limits on the content of Articles?

Answer 18

Re Peveril Gold Mines
- AA may not override mandatory laws such as the right of a member to petition court

Allen v Gold Reeves
- AA must be bona fide for the benefit of the company as a whole

Bushell v Faith
- Weighted voting rights may operate to undermine the mandatory nature of statutory provisions.

Question 19

Can a member sue to enforce outsider rights in the Articles?

Answer 19

• Eley v Positive Government Security Life Assurance Co (1876)
  Eley could not rely on or enforce the Articles which were ‘a matter between the directors and shareholders, and not between them and the plaintiff.’
• Browne v La Trinidad (1887)
  Browne was a member of the company, but could not enforce the right to be a director, even in his capacity as a member, as it was a matter ‘not connected with the holding of shares’.
• Beattie v E & F Beattie Ltd [1938] – says no but the opinion is obiter
  could not invoke the article and insist on arbitration as this was not a dispute between the company and himself as a member. Privity.
• Salmon v Quinn & Axtens Ltd [1909] – says yes
  House of Lords permitted a member to enforce a veto given to him in the Articles in his capacity as managing director

Question 20

Can a member sue to enforce the Articles where there has been an internal irregularity?

Answer 20

Grant v UK Switchback Railways Company (1888)

• says no but it is unclear what amounts to an internal management matter and what amounts to a personal right.

Pender v Lushington (1877)

• Can one member enforce the constitution against another member? (Rayfield v Hands [1960] says yes, but cautions that the decision may be confined to quasi-partnership cases.

Question 21

What is the effect of s.40 and what situations are outside the scope of s.40?

Answer 21

Section 40(2)(b) does not absolve a person from any duty to enquire as to authority when the circumstances put him or her on inquiry (Wrexham AFC v Crucialmove Ltd [2008]).
Good faith is rebuttably presumed, knowledge of lack of authority is not automatically bad faith and a person is not bound to enquire about authority, (s. 40(2)(b)).

Situations outside the scope
The scope of s. 40 is moot: it is unclear whether s. 40(1) should be interpreted to deem the power of any individual to be free of any limitation under the constitution or only the power of the directors collectively and any person to whom they purport to expressly grant authority.
The common law position and the rule in Turquand’s case provided that if the board has no authority to act, a contract does not bind the company or the third party (Quintex Ltd (No 2) [1990]).
Board authority may be actual or apparent and the constructive notice of public documents doctrine is mitigated by the indoor management rule (Royal British Bank v Turquand [1856]).
If a third party has actual notice that the required procedure has not been gone through or has been put on inquiry, they cannot rely on the indoor management rule (Wrexham AFC v Crucialmove Ltd [2008]).

Question 22

Types of authority of persons to bind the company

and related cases

Answer 22

Actual authority
Express actual authority
Implied actual authority - Hely-Hutchinson v Brayhead Ltd (No authority to enter contracts on Co’s behalf. However, the board by their conduct acquiesced that)
Apparent authority - Freeman Lockyer v Buckhurst Park Properties (Mangal) Ltd

Question 23

What is a relationship of agency?

Answer 23

A relationship of agency arises where one person (the principal) appoints another (the agent) to engage in or act on
behalf of the principal. This act is usually to bring about a contract between the principal and a third party.

Question 24

What is actual authority?

Answer 24

In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA), Diplock LJ defined actual
authority as:
‘a legal relationship between the principal and agent created 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.’

Question 25

How does express actual authority differ from implied actual authority?

Answer 25

Express actual authority refers to authority that has been expressly conferred upon the agent (for example, by the
articles). Implied actual authority is authority that has been conferred upon the agent as a result of the conduct of the
parties (such as by appointing the agent to a particular position) or the relationship between them.

Question 26

When will an agent have apparent authority?

Answer 26

In order to establish that an agent has apparent authority, three requirements will need to be satisfied, namely:
• there must be a representation;
• this representation must be relied on; and
• the person relying on the representation must alter their position in reliance on that representation.

Question 27

What does s. 40(1) of the CA 2006 state?

Answer 27

Section 40(1) provides that ‘[i]n 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’

Question 28

Who can rely on s. 40?

Answer 28

Section 40 can only be relied on by persons dealing with the company. It cannot be used by the company itself. In order to rely on s. 40, the person dealing with the company must also deal with the company in good faith.

Question 29

What does the ‘indoor management’ rule state?

Answer 29

The ‘indoor management rule’ states that when persons deal with the company, they can assume that the company’s internal rules (such as its articles) have been complied with.