Chapter 6 - Legally Binding The Company

Question 1

What are the requirements for a company to be bound by a deed and where are the rules to be found?

Answer 1

The requirements for a company to be bound by a deed are set out in the Law of Property Act 1989 and the CA 2006 (s 44 and 46):

• an instrument shall not be a deed unless it :
  
  • makes clear that it is intended to be a deed
  • is validly executed as a deed

Question 2

How may a company execute a document?

Answer 2

Two methods:

• the company’s common seal is affixed to it
• it is expressed to be executed by the company, and is signed by either two authorised signatories, or a director in the presence of a witness.

Question 3

What does the CA 2006 state about a document that purports to be validly executed?

Answer 3

S 44 CA: a deed that purports to be validly executed is deemed to have been duly executed.

Question 4

Who can rely on CA 2006 s 44 (5)?

Answer 4

Only a purchaser in good faith for valuable consideration (s44(5)). I.e. not a volunteer or someone lacking good faith, or the company itself.

Question 5

Can s 44(5) be relied upon if the document is a forgery?

Answer 5

No, because the document is a nullity (Ruben v Great Fingall Consolidated)

Question 6

Is a registered company required to have a seal?

Answer 6

No company is required to have a seal (s 45 CA).

Question 7

Is a registered company that has a seal required to use it?

Answer 7

Even if a company has a seal, it is not necessary to use it (s 45 CA) UNLESS the articles require its use.

Question 8

What is the extent of the authority of the directors collectively to enter into contracts on behalf of the company under the model articles?

Answer 8

If there are no other provisions in the articles, the directors have the power to bind the company to any contracts.

Question 9

In what circumstances is s 40 CA relevant?

Answer 9

Where the directors of a company have exercised a power of the company outside their actual authority (i.e. if the articles prevent certain contracts without prior members approval). The director may be liable for breach of duty.

Question 10

What, precisely, is the consequence of a person being able to rely on s 40?

Answer 10

The power of the board to bind the company is deemed free of any limitation, and the person can therefore enforce the contract.

Question 11

Who may rely on s 40?

Answer 11

A person dealing with the company who is presumed to have good faith, and is not bound to enquire as to the limitations of the directors powers.

Question 12

When is a company bound by a contract?

Answer 12

If made under s 43 and 44:

• writing under it common seal, or
• writing expressed to be executed by the company and signed by either two authorised persons or a director and a witness.

Question 13

Which situations fall outside s 40?

Answer 13

• the company cannot rely on s40 (as it only operates in favour of the contractor
• if there is no good faith
• if the third party is not dealing with the company

Question 14

Which situations fall outside s 40?

Answer 14

• the company cannot rely on s40 (as it only operates in favour of the contractor
• if there is no good faith
• if the third party is not dealing with the company

Question 15

What were the facts in Royal British Bank v Turquand?

Answer 15

Directors entered into a bond without authority. It was held that the bank was entitled to assume that the required resolution had been passed, and so the contract was binding.

This is also know as the “indoor management rule”.

Question 16

What is the indoor management rule?

Answer 16

The rule in Turquand, that a third party may assume that the internal procedures which provide the board with the authority to act may been gone through.

Question 17

Is Turquand’s case still relevant today? If so, when?

Answer 17

Yes, but only when the third party has not been informed that internal procedure has not been followed.

Question 18

When will an individual have the power to bind the company to a contract?

Answer 18

If the allocated management responsibilities of a role involve the person so as acting to legally bind the company, then they will be an agent with actual authority to bind the company.

Question 19

What is actual authority?

Answer 19

A consensual agreement between the company and the agent, where the company consents to the agent exercising their legal powers.

(As described in Freeman Lockyer vs Buckhurst Park Properties)

Question 20

What are the two types of actual authority?

Answer 20

Express and implied.

Question 21

What is the leading case on implied actual authority?

Answer 21

Hely Hutchinson v Brayhead Ltd: Richards had been entering into contracts. He was found to have implied actual authority based on the behaviour of the parties, as there had been no sanction from the board over many months.

Question 22

What is the difference between actual and apparent authority?

Answer 22

Actual authority operates between the company and the agent, while apparent authority operates between the company and the third party.

Question 23

What are the conditions that need to be satisfied to establish the existence of apparent authority?

Answer 23

From Freeman Lockyer v Buckhurst Park Properties:

• that a representation that an agent had authority to enter on behalf of the company into a contract was made to the contractor
• that this representation was made by someone with actual authority
• that the contractor was induced by this representation to enter into the contract.