Dealing with Outsiders (Ultra Vires, etc) Flashcards
Ashbury Carriage Company v Riche [1875] LR 7 HL 653
Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653 is a UK company law case, which concerned the objects clause of a company’s memorandum of association.
Its importance as case law has been diminished as a result of the Companies Act 2006 s 31, which allows for unlimited objects for which a company may be carried on. Furthermore, any limits a company does have in its objects clause have no effect whatsoever for people outside a company (s 39 CA 2006), except as a general issue of authority of the company’s agents.
Facts
Incorporated under the Companies Act 1862, the Ashbury Railway Carriage and Iron Company Ltd’s memorandum, clause 3, stated that its objects were “to make and sell, or lend on hire, railway-carriages…” and clause 4 stated that activities beyond this needed a special resolution. But the company agreed to give Riche and his brother a loan to build a railway from Antwerp to Tournai in Belgium.[1] Later, the company repudiated the agreement. Riche sued, and the company pleaded that the action was ultra vires.
Judgment
Exchequer Court
The judges of the exchequer chamber being equally divided, the decision of the court below was affirmed.
Blackburn J said:
If I thought it was at common law an incident to a corporation that its capacity should be limited by the instrument creating it, I should agree that the capacity of a company incorporated under the act of 1862 was limited to the object in the memorandum of association. But if I am right in the opinion which I have already expressed, that the general power of contracting is an incident to a corporation which it requires an indication of intention in the legislature to take away, I see no such indication here. If the question was whether the legislature had conferred on a corporation, created under this act, capacity to enter into contracts beyond the provisions of the deed, there could be only one answer. The legislature did not confer such capacity. But if the question be, as I apprehend it is, whether the legislature have indicated an intention to take away the power of contracting which at common law would be incident to a body corporate, and not merely to limit the authority of the managing body and the majority of the shareholders to bind the minority, but also to prohibit and make illegal contracts made by the body corporate, in such a manner that they would be binding on the body if incorporated at common law, I think the answer should be the other way.[2] of House Lords The House of Lords, agreeing with the three dissentient judges in the Exchequer Chamber, pronounced the effect of the Companies Act to be the opposite of that indicated by Mr Justice Blackburn. It held that if a company pursues objects beyond the scope of the memorandum of association, the company's actions are ultra vires and void. Lord Cairns LC said, It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter, having regard to this memorandum of association, into a contract of this description. The contract in my judgment could not have been ratified by the unanimous assent of the whole corporation.[2]
Re Jon Beauforte (London) Ltd [1953] Ch 131
In Re Jon Beauforte (London) Ltd case, (1953) 1 Ch 131 case, an insolvent company’s objects were to manufacture dresses but the company was manufacturing veneered panels. The knowledge of this development was with the creditors.
Re Introductions Ltd v National Provincial Bank [1970] Ch 199
An objects clause is a provision in a company’s constitution stating the purpose and range of activities for which the company is carried on. In UK company law, until reforms enacted in the Companies Act 1989 and the Companies Act 2006, an objects clause circumscribed the capacity, or power, of a company to act. To avoid problems, long and unwieldy ‘catch-all’ objects clauses were often drafted to include as much potential activity as possible, and thus avoid dealings being found to be ultra vires:[1] the legal position was that any contract entered into beyond the power, or ultra vires, would be deemed void ab initio.
The legal problems concerning objects clauses are now largely historical artifacts. Newly registered companies no longer have to register objects under the Companies Act 2006 section 31, and that even if they do, the ultra vires doctrine has been abolished against third parties under section 39. A clause is only relevant in an action against a director for breach of duty under section 171 for failure to observe the limits of their constitutional power.
Historical development
Objects clauses were first seen in chartered corporations. Before the Industrial Revolution and the lifting on restrictions for private individuals to start companies,[2] corporations were granted concessions from the state to operate a trade.[3] The concession theory held that the state gave all power to companies. If companies acted outside the power granted, such actions were necessarily contrary to the public interest, null and void. The fact that people contracting with a corporation may be thoroughly disappointed and suffer loss was legitimated on the basis that every member of the public could see the law defining the corporation’s capacity. Ignorantia juris non excusat.
Relevant cases
Ashbury Railway Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 653 Attorney General v Great Eastern Railway Co (1880) 5 App Cas 473, companies have the power to do things reasonably incidental to their objects. Care must be taken to distinguish cases where directors abused their authority, but had not acted beyond the company's capacity. Bell Houses v City Wall Properties [1966] 2 QB 656, objects clauses can give directors full discretion Re Introductions Ltd [1970] Ch 199, pig breeding was not within the company’s objects. A money lender knew that the purpose of the loan was for pig breeding. Held, it was unable to enforce the loan. Furthermore, though there was an object for the company to borrow money, this object was construed as not being a substantive and separate object. Rolled Steel Products (Holdings) Ltd v British Steel Corp [1985] Ch 246, criticised Re Introductions Ltd for not holding that the directors had not merely abused their power. Hutton v West Cork Railway Co (1883) 23 Ch D 654, gifts must be ‘for the benefit of the company’ Evans v Brunner, Mond & Co Ltd [1921] 1 Ch 359 Re Lee Behrens [1932] 2 Ch 46 (S&W 148) confusion of ‘implied powers’ and ‘directors’ duties’ Re Horsley v Weight [1982] 3 All ER 1045 Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62
Royal British Bank v Turquand [1856] 6 E & B 327
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This “indoor management rule” or the “Rule in Turquand’s Case” is applicable in most of the common law world. It originally mitigated the harshness of the constructive notice doctrine, and in the UK it is now supplemented by the Companies Act 2006 sections 39-41.
Facts
Mr Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow up to an amount authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.
Judgment
Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered with Companies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable. The bond was valid because there was no requirement to look into the company’s internal workings. This is the indoor management rule, that the company’s indoor affairs are the company’s problem. Jervis CJ gave the judgment of the Court.
I am of opinion that the judgment of the Court of Queen's Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. My impression is (though I will not state it as a fixed opinion) that the resolution set forth in the replication [332] goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorized to be borrowed: and the replication shews a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special Non est factum, does not raise any objection to this advance as against the Company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done.
Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.
Significance
The rule in Turquand’s case was not accepted as being firmly entrenched in law until it was endorsed by the House of Lords. In Mahony v East Holyford Mining Co[1] Lord Hatherly phrased the law thus:
When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externally are not to be affected by irregularities which may take place in the internal management of the company.
So, in Mahoney, where the company’s articles provided that cheques should be signed by any two of the three named directors and by the secretary, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques.
The position in English law is now superseded by section 40[citation needed] of the Companies Act 2006,[2] but the Rule in Turquand’s Case is still applied throughout many common law jurisdictions in the Commonwealth. According to the Turquand rule, each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.
However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company’s public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider’s duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or non-compliance with an internal requirement can be ascertained from the company’s public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Companies House (in the United Kingdom), and is deemed to be public information.
Campbell v Paddington [1911] 1 KB 869
Campbell v. Paddington Corporation [1911-1 KB 869]
December 01, 2020
Campbell v. Paddington Corporation [1911-1 KB 869]
Background: In that case the plaintiff was in possession of a house in London from the windows of which there was an uninterrupted view of part of a certain main thoroughfare along which it was announced that a public procession was to pass.
Reason to approach the Court of Law: The plaintiff rented out certain seats on the first and second floors of the house in order to see the procession. The defendants, a Metropolitan Borough in pursuance of a resolution of their Council to that effect caused a stand to be erected as regards a certain highway in which the plaintiff’s house was situated to enable the members of the Council and their friends to view the procession. On account of this obstruction, the prospective lessees refused to come to observe the procession from the plaintiff’s house. The plaintiff filed a suit for recovery of damages.
Decision Held: It was held in that case that the Metropolitan Borough was not entitled to erect a stand as it was not compatible for the purpose for which it was meant. The stand erected by the borough was held to be a nuisance and the plaintiff was found to be entitled to recover the profit which but for the defendants’ act she might have made by letting seats as damages. On the basis of this authority.
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 is a famous decision by the House of Lords on the ability to impose liability upon a corporation. The decision expands upon the earlier decision in Salomon v Salomon & Co. [1897] AC 22 and first introduced the “alter ego” theory of corporate liability.[1]
Facts
A ship owned by Lennard’s Carrying Co was transporting some goods on a voyage from Novorossiysk to the Asiatic Petroleum Company, a joint venture of the Shell and Royal Dutch oil companies. The ship sank and the cargo was lost. The judge found that the director, Mr Lennard, did know or should have known about defects in the ship, which led its boiler to catch fire, and ultimately sink the ship. There was an exemption from liability in section 502 of the Merchant Shipping Act 1894, stating that a ship owner would not be liable for losses if an event happened without ‘actual fault or privity’. Asiatic Petroleum Co Ltd sued Mr Lennard’s company for negligence under the Act. At issue was whether the guilty acts of a director would be imposed upon the corporation. Lennard’s Carrying Co Ltd argued that it was not liable and could be exempt under section 502.
Judgment
The House of Lords held that liability could be imposed on a corporation for the acts of the directors because there is a rebuttable presumption the directors are the controlling minds of the company. Here Mr Lennard did not rebut the presumption. Viscount Haldane explained the “directing mind” principle of corporate liability:
...a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. .... It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself. It is not enough that the fault should be the fault of a servant in order to exonerate the owner, the fault must also be one which is not the fault of the owner, or a fault to which the owner is privy; and I take the view that when anybody sets up that section to excuse himself from the normal consequences of the maxim respondeat superior the burden lies upon him to do so.
In considering the case of Mr Lennard himself he stated:
...whatever is not known about Mr. Lennard's position, this is known for certain, Mr. Lennard took the active part in the management of this ship on behalf of the owners, and Mr. Lennard, as I have said, was registered as the person designated for this purpose in the ship's register. Mr. Lennard therefore was the natural person to come on behalf of the owners and give full evidence not only about the events of which I have spoken, and which related to the seaworthiness of the ship, but about his own position and as to whether or not he was the life and soul of the company. For if Mr. Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself...
Significance
Prior to this case the primary means of imposing liability on a corporation was through vicarious liability, but that applied only to employees of the company, which excluded the directors. After the Lennard case, the alter ego theory has become the most powerful method of imposing liability on a corporation. It has proved to be particularly effective for imposing criminal liability.
Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 QB 480
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 is a UK company law case, concerning the enforceability of obligations against a company.
Facts
Mr Freeman and Mr Lockyer sued Buckhurst Park Ltd and its director, Shiv Kumar Kapoor, for unpaid fees for their architecture work on developing the ‘Buckhurst Park Estate’ in Sunninghill, Berkshire. The company’s articles said that all four directors of the company (another Mr Hoon, who was never there, and two nominees) were needed to constitute a quorum. Originally the company planned to simply buy and resell the land, but that fell through. Kapoor had acted alone (as if he were a managing director) in engaging the architects, without proper authority. The company argued it was not bound by the agreement.
Judge Herbert at Westminster County Court held the company was bound, and the company appealed.
Judgment
Diplock LJ held the judge was right and the company was bound to pay Freeman and Lockyer for their architecture work.[1] He noted that if actual authority is conferred by the board without a formal resolution, this renders the board liable for a fine.[2] If a person has no actual authority to act on a company’s behalf, then a contract can still be enforced if an agent had authority to enter contracts of a different but similar kind, the person granting that authority itself had authority, the contracting party was induced by these representations to enter the agreement and the company had the capacity to act.[3] All those conditions were fulfilled on the facts, because (1) the board knew about Kapoor’s general activities and permitted him to engage in these kinds of activities; such conduct represented his authority to contract for these kinds of things (2) the articles conferred full power to the board (3) Freeman and Lockyer were induced to contract by these ‘representations’ and (4) the company had capacity.
An "actual" authority is a legal relationship between 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. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the "actual" authority, it does create contractual rights and liabilities between the principal and the contractor. It may be that this rule relating to "undisclosed principals," which is peculiar to English law, can be rationalized as avoiding circuity of action, for the principal could in equity compel the agent to lend his name in an action to enforce the contract against the contractor, and would at common law be liable to indemnify the agent in respect of the performance of the obligations assumed by the agent under the contract.
An "apparent" or "ostensible" authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.
In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual" authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the agent, that is, warranty of authority.
The representation which creates "apparent" authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually "actual" authority to enter into.
In applying the law as I have endeavored to summarise it to the case where the principal is not a natural person, but a fictitious person, namely, a corporation, two further factors arising from the legal characteristics of a corporation have to be borne in mind. The first is that the capacity of a corporation is limited by its constitution, that is, in the case of a company incorporated under the Companies Act, by its memorandum and articles of association; the second is that a corporation cannot do any act, and that includes making a representation, except through its agent.
Under the doctrine of ultra vires the limitation of the capacity of a corporation by its constitution to do any acts is absolute. This affects the rules as to the "apparent" authority of an agent of a corporation in two ways. First, no representation can operate to estop the corporation from denying the authority of the agent to do on behalf of the corporation an act which the corporation is not permitted by its constitution to do itself. Secondly, since the conferring of actual authority upon an agent is itself an act of the corporation, the capacity to do which is regulated by its constitution, the corporation cannot be estopped from denying that it has conferred upon a particular agent authority to do acts which by its constitution, it is incapable of delegating to that particular agent.
To recognize that these are direct consequences of the doctrine of ultra vires is, I think, preferable to saying that a contractor who enters into a contract with a corporation has constructive notice of its constitution, for the expression "constructive notice" tends to disguise that constructive notice is not a positive, but a negative doctrine, like that of estoppel of which it forms a part. It operates to prevent the contractor from saying that he did not know that the constitution of the corporation rendered a particular act or a particular delegation of authority ultra vires the corporation. It does not entitle him to say that he relied upon some unusual provision in the constitution of the corporation if he did not in fact so rely.
The second characteristic of a corporation, namely, that unlike a natural person it can only make a representation through an agent, has the consequence that in order to create an estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his "apparent" authority must be made by some person or persons who have "actual" authority from the corporation to make the representation. Such "actual" authority may be conferred by the constitution of the corporation itself, as, for example, in the case of a company, upon the board of directors, or it may be conferred by those who under its constitution have the powers of management upon some other person to whom the constitution permits them to delegate authority to make representations of this kind. It follows that where the agent upon whose "apparent" authority the contractor relies has no "actual" authority from the corporation to enter into a particular kind of contract with the contractor on behalf of the corporation, the contractor cannot rely upon the agent's own representation as to his actual authority. He can rely only upon a representation by a person or persons who have actual authority to manage or conduct that part of the business of the corporation to which the contract relates.
The commonest form of representation by a principal creating an "apparent" authority of an agent is by conduct, namely, by permitting the agent to act in the management or conduct of the principal's business. Thus, if in the case of a company the board of directors who have "actual" authority under the memorandum and articles of association to manage the company's business permit the agent to act in the management or conduct of the company's business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorized to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business. The making of such a representation is itself an act of management of the company's business. Prima facie it falls within the "actual" authority of the board of directors, and unless the memorandum or articles of the company either make such a contract ultra vires the company or prohibit the delegation of such authority to the agent, the company is estopped from denying to anyone who has entered into a contract with the agent in reliance upon such "apparent" authority that the agent had authority to contract on behalf of the company.
If the foregoing analysis of the relevant law is correct, it can be summarized by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. It must be shown:
(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
(2) that such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and
(4) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
The confusion which, I venture to think, has sometimes crept into the cases is in my view due to a failure to distinguish between these four separate conditions, and in particular to keep steadfastly in mind (a) that the only "actual" authority which is relevant is that of the persons making the representation relied upon, and (b) that the memorandum and articles of association of the company are always relevant (whether they are in fact known to the contractor or not) to the questions (i) whether condition (2) is fulfilled, and (ii) whether condition (4) is fulfilled, and (but only if they are in fact known to the contractor) may be relevant (iii) as part of the representation on which the contractor relied...
In the present case the findings of fact by the county court judge are sufficient to satisfy the four conditions, and thus to establish that Kapoor had "apparent" authority to enter into contracts on behalf of the company for their services in connection with the sale of the company's property, including the obtaining of development permission with respect to its use. The judge found that the board knew that Kapoor had throughout been acting as managing director in employing agents and taking other steps to find a purchaser. They permitted him to do so, and by such conduct represented that he had authority to enter into contracts of a kind which a managing director or an executive director responsible for finding a purchaser would in the normal course be authorized to enter into on behalf of the company. Condition (1) was thus fulfilled. The articles of association conferred full powers of management on the board. Condition (2) was thus fulfilled. The plaintiffs, finding Kapoor acting in relation to the company's property as he was authorized by the board to act, were induced to believe that he was authorized by the company to enter into contracts on behalf of the company for their services in connection with the sale of the company's property, including the obtaining of development permission with respect to its use. Condition (3) was thus fulfilled. The articles of association, which contained powers for the board to delegate any of the functions of management to a managing director or to a single director, did not deprive the company of capacity to delegate authority to Kapoor, a director, to enter into contracts of that kind on behalf of the company. Condition (4) was thus fulfilled.
Tesco Supermarkets Ltd v Nattrass [1971] 2 All ER 127
Tesco Supermarkets Ltd. v. Nattrass [1971] UKHL 1 is a leading decision of the House of Lords on the “directing mind” theory of corporate liability.
This is a leading case on the Trade Descriptions Act 1968 section 24(1), where Tesco relied upon the defence of the ‘act or omission of another person’ i.e. their store manager, to show that they had taken all reasonable precautions and all due diligence.
Facts
Tesco was offering a discount on washing powder which was advertised on posters displayed in stores. Once they ran out of the lower priced product the stores began to replace it with the regularly priced stock. The manager failed to take the signs down and a customer was charged at the higher price. Tesco was charged under the Trade Descriptions Act 1968 for falsely advertising the price of washing powder. In its defence Tesco argued that the company had taken all reasonable precautions and all due diligence, and that the conduct of the manager could not attach liability to the corporation.
Judgment
The House of Lords accepted the defence and found that the manager was not a part of the “directing mind” of the corporation and therefore his conduct was not attributable to the corporation. The corporation had done all it could to enforce the rules regarding advertising.
Lord Reid held that, in order for liability to attach to the actions of a person, it must be the case that “The person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.”
In the House of Lords Tesco was successful with their defence showing that,
a store manager was classed as ‘another person’, and, a system of delegating responsibility to that person was performance of due diligence, not avoidance of it
The store manager was not the directing mind and will of the company - the company had done all it could to avoid committing an offence and the offence was the fault of another person (an employee). The company was acquitted.
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] UKPC 5 is a New Zealand company law case, also relevant for UK company law, decided by the Privy Council. The common-law principles will have influence in jurisdictions with similar laws.
Facts
Meridian was part of a syndicate bidding to take over NZ company, Euro National Corp Ltd. Mr Koo and Mr Ng, working for Meridian, bought 49% of Euro’s shares. But Meridian failed to disclose to the Securities Commission of New Zealand that they had become a ‘substantial security holder’ of over 5% because Koo and Ng wanted to hide the transaction from their superiors. The Commission imposed fines against Koo, Ng and the Meridian. The company argued it was not liable because it had not known about it.
Heron J held Meridian knew it was a substantial property holder, because as employees the knowledge of Koo and Ng was attributable to the company. The NZ Court of Appeal held that Koo’s knowledge should be attributable because he was the ‘directing mind and will’ of the company. Meridian argued that was only the board, not Koo.
Advice
Lord Hoffman for the Privy Council advised that ‘there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called ‘the rules of attribution’. There can be rules in the constitution or rules implied (e.g. shareholders acting unanimously are the company, Multinational Gas). Otherwise, the principles of agency apply, and the company acts through its servants and agents.
9. These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort. 10. It is worth pausing at this stage to make what may seem an obvious point. Any statement about what a company has or has not done, or can or cannot do, is necessarily a reference to the rules of attribution (primary and general) as they apply to that company. Judges sometimes say that a company "as such" cannot do anything; it must act by servants or agents. This may seem an unexceptionable, even banal remark. And of course the meaning is usually perfectly clear. But a reference to a company "as such" might suggest that there is something out there called the company of which one can meaningfully say that it can or cannot do something. There is in fact no such thing as the company as such, no ding an sich, only the applicable rules. To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company. 11. The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself", as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company? 12. One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by a resolution of the board or a unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy. [...] 23. ...the fact that a company’s employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule...
Sample examination questions
Question 1 The objects clause of Robin Ltd states that the company is to carry on a
business as a supplier of diving equipment. Additionally the company’s borrowing
is limited to a maximum of £100,000 by a clause in the memorandum. Ranjid
has recently been appointed the managing director of Robin Ltd. His contract of
employment states that ‘the managing director of Robin Ltd is empowered to the
full and usual extent of a managing director’. Ranjid immediately plans to expand
the business to include the provision of diving lessons. This involves the hiring of
three diving instructors and the purchase of a premises worth £200,000, which will
be funded through a bank loan. Ranjid also plans to donate £50,000 to the Save the
Coral Reef Foundation, a registered charity.
Sean is one of the major shareholders in Robin Ltd and although he approved the
appointment of Ranjid he is very concerned by the plans of the new managing
director.
Sean comes to you for advice. Advise him concerning the issues raised in this
question.
Question 2 The objects clause of Ram Ltd provides that:
a. The business of the company shall be the construction of churches and all other
forms of religious accommodation.
b. The company may make whatever borrowings and charge whatever of its assets
as the directors may consider desirable.
Although never formally appointed managing director, Brian, to the knowledge
and with the full agreement of his co-directors, Bernice and Camilla, carries out the
day-to-day management of Ram Ltd. Brian, acting on behalf of Ram Ltd, agreed that
the company would manufacture and supply 5,000 deck chairs for the Brighton
Local Authority beachfront. To finance this operation he borrowed £50,000 from
Y Bank plc to enable Ram to purchase the machinery to carry out this agreement.
The loan was evidenced by a debenture which was signed on Ram’s behalf by Brian
and Bernice. Owing to serious mismanagement the company incurred considerable
losses and with only 1,000 deck chairs completed was found to be hopelessly
insolvent and put into compulsory liquidation.
Advise the liquidator.
Advice on answering the questions
Question 1 Address the issue of whether the giving of diving lessons is ultra vires. If it
is, would the statutory provisions save any transaction that was outside the objects?
Does Ranjid have the authority to authorise the bank loan? If he does not but goes
ahead anyway, will the company be bound? If he hires the instructors are their
employment contracts enforceable?
Is the donation to charity outside the company’s powers or is it just a matter of
whether Ranjid is authorised to do this?
Are there any breach of duty issues?
Question 2 Start with the objects issue – is the borrowing ultra vires?
Apply the facts to the statutory provisions – is the transaction saved in the bank’s
favour?
Are Brian and the other directors in breach of duty by authorising an ultra vires act?
Examine the internal authority issues – Brian’s appointment. Apply Freeman & Lockyer v
Buckhurst Park Properties Ltd [1964] 2 QB 480.
Is the signing of the debenture by Brian and Bernice enough to comply with Part (b) of
the objects clause?
