AUTHORITY OF DIRECTORS TO BIND THE COMPANY 1

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AUTHORITY OF DIRECTORS TO BIND THE COMPANY 1

• What is the extent of the agents authority to
  bind the company?
• Has the agent acted correctly in using this
  authority? I.e. have they complied with all
  relevant rules/restrictions?

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AUTHORITY OF DIRECTORS TO BIND THE COMPANY 2

• What is the extent of the agents actual and
  apparent authority?
• The Rule in Royal British Bank v Turquand and
  s. 35A Companies Act 1985

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ACTUAL AUTHORITY 1
An actual authority is a legal relationship
between principal and agent created by a
consensual agreement to which they alone are
parties. Diplock L.J. in Freeman Lockyer v
Buckhurst Park Properties (Mangal) Ltd.
Look agent 007 this is just between you and the
company. OK?
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ACTUAL AUTHORITY 2
Express Authority Board gives the agent express
authority over a certain area or in a certain
transaction
We are giving you authority to hire all the staff
you need for the job.
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ACTUAL AUTHORITY 3
Implied Actual Authority Hely-Hutchinson v
Brayhead Ltd.
Chairman
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ACTUAL AUTHORITY 4
Implied Actual Authority
Brayheads will guarantee your loans to Perdio
Chairman
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APPARENT AUTHORITY 1
An apparent or ostensible authority 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 a contract.
Diplock L.J. in Freeman Lockyer v Buckhurst
Park Properties (Mangal) Ltd
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APPARENT AUTHORITY 2
Look Mr. Freeman, essentially what the Board is
telling you is that I have authority to represent
the company for this contract!
Kapoor
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APPARENT AUTHORITY 3

• A representation of the agents authority must
  have been made to the third party
• Made by a person with actual authority to manage
  the business of the company either generally or
  in respect of the matters covered by the contract
• Third party must have relied on the representation

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APPARENT AUTHORITY 4

• Criterion Properties Plc v Stratford UK
  Properties LLC in House of Lords
• If a person dealing with an agent knows that the
  agent does not have actual authority to conclude
  the contract or transaction in question, the
  person cannot rely on apparent authority.
  Apparent authority can only be relied on by
  someone who does not know that the agent has no
  actual authority. And if a person dealing with an
  agent knows or has reason to believe that the
  contract or transaction is contrary to the
  commercial interests of the agent's principal, it
  is likely to be very difficult for the person to
  assert with any credibility that he believed the
  agent did have actual authority. Lack of such a
  belief would be fatal to a claim that the agent
  had apparent authority. Per Lord Scott Of
  Foscote

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ACTUAL V APPARENT AUTHORITY
Actual authority subject to limitations in
articles etc
COMPANY
AGENT/DIRECTOR
THIRD PARTY
Apparent authority subject to terms of
representation about agents authority
AGENT/DIRECTOR
COMPANY
THIRD PARTY
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AUTHORITY CHART
                         
BOARD OF DIRECTORS
Action Ratified by board or general
meeting Enforceable
No Authority Given to agent Unenforceable
Actual Authority
Apparent Authority
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BOARD OF DIRECTORS
No Authority Given to agent Unenforceable
Actual Authority
Apparent Authority
Action Ratified by board or general
meeting Enforceable
Express Authority Enforceable
Implied Appointment to a specific post
Specific Appointment
Usual Authority
Outside Usual Authority Unenforceable
Within Usual Authority Enforceable
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BOARD OF DIRECTORS
No Authority Given to agent Unenforceable
Actual Authority
Apparent Authority
Action Ratified by board or general
meeting Enforceable
Specific Appointment  
Specific Contract
Usual Authority
Outside Usual Authority Unenforceable
Within Usual Authority Enforceable
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Rule in Royal British Bank v Turquand
Third parties need not enquire into the
regularity of the internal proceedings of a
company and may assume that all has been done
regularly.
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Power of Directors to Bind the Company 1
40 Power of directors to bind the company (1) In
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 companys
constitution. .
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Smith v Henniker Major
Majority view In many circumstances a director
can be a person dealing with a company, but not
where his own actions were responsible for the
breach of the articles of association
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Power of Directors to Bind the Company 2
(2) For this purpose (a) a person deals with a
company if he is a party to any transaction or
other act to which the company is a party, (b) a
person dealing with a company (i) is not bound
to enquire as to any limitation on the powers of
the directors to bind the company or authorise
others to do so, (ii) is presumed to have acted
in good faith unless the contrary is proved,
and (iii) is not to be regarded as acting in bad
faith by reason only of his knowing that an act
is beyond the powers of the directors under the
companys constitution.
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Power of Directors to Bind the Company 3
(3) The references above to limitations on the
directors powers under the companys
constitution include limitations deriving (a)
from a resolution of the company or of any class
of shareholders, or (b) from any agreement
between the members of the company or of any
class of shareholders.
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Power of Directors to Bind the Company 4
(4) This section does not affect any right of a
member of the company to bring proceedings to
restrain the doing of an action that is beyond
the powers of the directors. But no such
proceedings lie in respect of an act to be done
in fulfilment of a legal obligation arising from
a previous act of the company. (5) This section
does not affect any liability incurred by the
directors, or any other person, by reason of the
directors exceeding their powers. (6) This
section has effect subject to section 41
(transactions with directors or their
associates), and section 42 (companies that are
charities).
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Section 322A
41 Constitutional limitations transactions
involving directors or their associates (1) This
section applies to a transaction if or to the
extent that its validity depends on section 40
(power of directors deemed to be free of
limitations under companys constitution in
favour of person dealing with company in good
faith). Nothing in this section shall be read as
excluding the operation of any other enactment or
rule of law by virtue of which the transaction
may be called in question or any liability to the
company may arise.
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Section 41
(2) Where (a) a company enters into such a
transaction, and (b) the parties to the
transaction include (i) a director of the
company or of its holding company, or (ii) a
person connected with any such director, the
transaction is voidable at the instance of the
company.
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Section 41
(3) Whether or not it is avoided, any such party
to the transaction as is mentioned in subsection
(2)(b)(i) or (ii), and any director of the
company who authorised the transaction, is
liable (a) to account to the company for any
gain he has made directly or indirectly by the
transaction, and (b) to indemnify the company for
any loss or damage resulting from the transaction.
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Section 41
(4) The transaction ceases to be voidable if (a)
restitution of any money or other asset which was
the subject matter of the transaction is no
longer possible, or (b) the company is
indemnified for any loss or damage resulting from
the transaction, or (c) rights acquired bona fide
for value and without actual notice of the
directors exceeding their powers by a person who
is not party to the transaction would be affected
by the avoidance, or (d) the transaction is
affirmed by the company.
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Section 41
(5) A person other than a director of the company
is not liable under subsection (3) if he shows
that at the time the transaction was entered into
he did not know that the directors were exceeding
their powers. (6) Nothing in the preceding
provisions of this section affects the rights of
any party to the transaction not within
subsection (2)(b)(i) or (ii). But the court may,
on the application of the company or any such
party, make an order affirming, severing or
setting aside the transaction on such terms as
appear to the court to be just. (7) In this
section (a) transaction includes any act
and (b) the reference to a person connected with
a director has the same meaning as in Part 10
(company directors).
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Power of Directors to Bind the Company 4
Turquand and section 40 overlap in many cases but
there are still areas where Turquand can still
apply- Where other organs than the board are
concerned e.g. general meeting, possibly company
secretary Where there are no directors Mahoney v
East Holyford Mining Co.
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Defences Available to the Company 1
1) That the plaintiff is an insider Morris v
Kanssen 2) That the plaintiff is not in good
faith Rolled Steel Products (Holdings) Ltd v
British Steel Corporation Criterion Properties
Plc v Stratford UK Properties LLC (actual
reference is to apparent authority but the
reasoning ought to be the same for this defence)
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Defences Available to the Company 2
3) That the plaintiff is put on inquiry
Houghton v Nothard Lowe Wills, Kreditbank
Cassel G.m.b.H. v Schenkers Ltd. 4) Forgeries
Ruben v Great Fingall Consolidated
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Defective Appointments
s. 161 Validity of acts of directors (1) The acts
of a person acting as a director are valid
notwithstanding that it is afterwards
discovered (a) that there was a defect in his
appointment (b) that he was disqualified from
holding office (c) that he had ceased to hold
office (d) that he was not entitled to vote on
the matter in question. (2) This applies even if
the resolution for his appointment is void under
section 160 (appointment of directors of public
company to be voted on individually). Morris v
Kanssen - section does not apply if there was no
appointment at all.