Contracting with the Company
- EIC v Phipps 2004:
Transaction was invalid
Shareholders sought to rely on s 40 Companies Act 2006
Shareholders cannot rely on s 40
- Directors may be able to rely on s 40, but if they do, s
41 applies
- A contract made by an agent is binding on the company if the agent was authorised by the board
- Actual authority can be express or implied
- Express: the director or agent is told to make a contract
- Implied: it can arise from the position given to the director or agent
- Smith v Butler 2012:
- Hely-Hutchinson v Brayhead:
- Apparent authority: This arises when the company has represented to a third party that the agent has authority to make the contract
- This representation must be made by the company
- Representations: appointing someone to a position that would usually carry the authority to make the kinds of contracts in question
- Freeman and Lockyer v Buckhurst Properties:
- If the third party knows that the agent doesn't have authority, they can't rely on apparent authority
- Where a third party knows that a contract is contrary to a company's commercial interests, it will be very difficult for the third party to claim that they thought the agent had authority to make it
- No apparent authority where they knew; shut their eyes to it; or the contract was so harmful to the company that it would not be done by someone with authority
- If the third party who genuinely doesn't realise there was something wrong with the authority because of negligence or stupidity, they may be able to rely on apparent authority
The Rule in Turquand's Case
Old common law rule that pre-dates s 40 Companies Act 2006 and its earlier sections. This is Turquand's Case 1856. The company borrowed money and acted contrary to the company's constitution because they didn't get permission to borrow. Were they bound to the loan contract? If s 40 applied, it wouldn't matter that it breached the constitution as long as they acted in good faith. The court held a person acting in good faith could assume that all internal procedures that had to be followed, had been followed. They didn't have to check in a general board meeting. Constructive notice hasn't been abolished but it is irrelevant. Even though they've never looked at the constitution, anyone dealing with the company is deemed to know what the provisions are. The bank was deemed to know this but it didn't matter; they didn't need to check whether permission had been granted - it was still binding. s 40 does the same job; Turquand's Case only applies if it is a restriction on a non-director's powers, as s 40 applies to directors.
General meeting > Board of Directors > Directors > Managers > Employees... And external individuals... All may make decisions about the company, so long as they have authority.