Transactions with Outsiders Flashcards
What does the term ‘transactions with outsiders’ refer to in company law?
Transactions with outsiders refer to contracts or obligations a company enters into with external entities, such as suppliers, banks, or customers, governed by principles ensuring these are valid and binding.
What was the ultra vires doctrine in its classical form?
It restricted companies to act only within their stated objectives in the objects clause of their memorandum. Contracts beyond this scope were void, as seen in Ashbury Railway Carriage & Iron Co v Riche (1875).
What did the doctrine of constructive notice entail?
It presumed that outsiders dealing with a company were aware of its public documents, such as the objects clause, limiting their ability to claim ignorance of restrictions.
How did the case A-G v Great Eastern Rly (1880) influence the ultra vires doctrine?
It introduced judicial flexibility, allowing companies to perform acts ‘incidental or consequential’ to their objects, mitigating the rigidity of the ultra vires doctrine.
How does Section 31 of the Companies Act 2006 reform the ultra vires doctrine?
It eliminates the need for an objects clause, granting companies full legal capacity unless explicitly restricted by their articles.
What is the significance of Section 39 of the Companies Act 2006?
It ensures that acts beyond a company’s objects clause are valid and binding, removing the ultra vires doctrine’s historical voidability.
What does Section 40 of the Companies Act 2006 establish?
It protects third parties dealing in good faith with a company, ensuring that directors’ limitations in the constitution do not invalidate transactions.
What presumption does Section 40 provide for third parties?
It presumes third parties act in good faith unless evidence proves otherwise, simplifying contractual dealings.
What is ‘actual authority’ in agency law?
Actual authority is expressly granted to an agent by the company’s governing body, allowing them to act on its behalf.
What is ‘apparent authority’ in agency law?
Apparent authority arises when a company’s conduct or statements lead third parties to reasonably believe an agent has authority, even if not formally granted.
What was established in Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)?
A company is bound by the actions of an agent with apparent authority, even if the agent was never formally appointed.
How did Hely-Hutchinson v Brayhead Ltd (1968) expand the concept of authority?
It held that authority could be implied based on an individual’s role and conduct within the company.
What is the ‘indoor management rule’?
Stemming from Royal British Bank v Turquand (1856), it allows outsiders to assume a company’s internal procedures have been followed unless they are aware of irregularities.
What are the limitations of the indoor management rule?
It does not protect outsiders who have actual knowledge of irregularities or are insiders with reasons to suspect such issues.
How did the Companies Act 2006 address the doctrine of constructive notice?
It reduced its impact, ensuring third parties are not presumed to be aware of internal company restrictions unless explicitly notified.
What is Section 41 of the Companies Act 2006 about?
It governs transactions involving directors or connected persons, allowing companies to void transactions involving conflicts of interest.
How does Section 42 of the Companies Act 2006 apply to charitable companies?
It imposes additional restrictions to ensure transactions align with the charity’s purposes and regulatory obligations.
What principle was reinforced in Rolled Steel Ltd v British Steel Corp (1986)?
Ultra vires acts can bind companies in third-party dealings, but directors can be liable for failing to follow internal rules.
What was the harsh outcome of Re Jon Beauforte (London) Ltd (1953)?
Contracts beyond the objects clause were held unenforceable, demonstrating the rigidity of the ultra vires doctrine pre-reforms.
How does Section 40 affect directors who breach internal limits?
While third-party transactions remain binding, directors can be held personally liable for breaching internal rules.
What is the significance of the good faith presumption under Section 40?
It protects third parties from being penalized for limitations they could not have reasonably known, fostering trust in corporate transactions.
How does the Companies Act 2006 balance third-party protection with director accountability?
It validates transactions in good faith but holds directors personally liable for breaching internal governance rules.
How does Section 39 enhance commercial flexibility?
By ensuring the validity of corporate acts regardless of their alignment with the objects clause, enhancing legal certainty for third parties.
How did the CA 2006 improve confidence in commercial dealings with companies?
By reducing reliance on the ultra vires doctrine, constructive notice, and promoting good faith protection under Sections 39–40.
What are ‘connected persons’ in the context of Section 41?
Directors’ close associates or family members involved in transactions with the company, requiring scrutiny to prevent conflicts of interest.
What role does the Turquand rule play in commercial law?
It provides reassurance to third parties by allowing them to presume that internal company procedures have been properly followed.
What constitutes bad faith under Section 40?
Knowledge of irregularities, intentional avoidance of due diligence, or active collusion with company insiders to breach internal rules.
Why was the ultra vires doctrine seen as problematic for businesses?
It invalidated contracts that exceeded a company’s stated objects, creating uncertainty and risk for third-party dealings.
How does Section 42 ensure charity compliance?
By restricting transactions that conflict with a charity’s objectives or breach its regulatory obligations.
What lesson does Freeman & Lockyer v Buckhurst Park Properties Ltd (1964) teach about apparent authority?
Companies must avoid creating circumstances where agents appear authorized unless they are formally empowered, or the company will be bound by their actions.
What did the case Royal British Bank v Turquand (1856) establish for third parties?
It established the indoor management rule, which protects outsiders relying on the apparent validity of a company’s internal procedures, unless they are aware of irregularities.
What are the key reforms introduced by Section 31 of the Companies Act 2006?
It removes the need for an objects clause in most companies, granting them unrestricted capacity to act unless explicitly limited by their articles.
How does Section 39 differ from traditional ultra vires doctrine?
It ensures that acts beyond a company’s objects clause remain valid and binding, protecting third-party transactions from being invalidated.
What principle did Hely-Hutchinson v Brayhead Ltd (1968) reinforce?
Authority can be implied from an individual’s role or conduct within the company, binding the company to their actions under apparent authority.
How does the Companies Act 2006 handle transactions involving directors under Section 41?
It allows companies to void transactions with directors or connected persons if they involve unauthorized conflicts of interest or breach fiduciary duties.
What protection does Section 40 provide to third parties dealing with directors?
It ensures that directors’ internal limitations do not invalidate transactions, provided the third party acts in good faith.
What are the practical implications of the good faith presumption in Section 40?
It streamlines transactions by allowing third parties to rely on the validity of agreements without needing to verify directors’ compliance with internal rules.
What does the doctrine of apparent authority protect?
It protects third parties who reasonably believe an agent has authority to act on behalf of the company based on the company’s conduct or representations.
Why was Re Jon Beauforte (London) Ltd (1953) significant in illustrating the flaws of the ultra vires doctrine?
It showed the harsh consequences of the ultra vires doctrine when a contract was voided because the company acted outside its stated objects, despite benefiting the company.
How do Sections 39 and 40 of the CA 2006 enhance commercial certainty?
They validate transactions even if they exceed a company’s objects clause, and protect third parties acting in good faith from the effects of internal company rules.
