Company 13: Dealing with outsiders: ultra vires and other attribution issues – Flashcards
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However, as the registered company opened up corporate status to ordinary businesses, a particular problem arose. These registered companies were also required to have specific purposes (objects) in their memorandum but were much more likely to change the nature of their business over time.
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both a problem for companies who legitimately wished to change the nature of their business and for outsiders who were dealing with the company and were in danger of having unenforceable contracts because the company was acting outside its powers. Over time the courts became somewhat flexible about the issue but eventually statutory intervention was needed to solve the remaining problems.
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objects clause problem Two key issues
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1. in the nineteenth century it was impossible to change a company's objects clause. This was modified somewhat in the twentieth century, but until 1989 the objects clause could only be changed in very limited circumstances. 2. the doctrine of constructive notice could combine with the ultra vires UV rule to leave outsiders with unenforceable contracts.
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doctrine of constructive notice
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applies to public documents. A Co's memorandum and articles of AS are public documents which are provided as part of registration process and constructive notice deems anyone dealing with registered Cos to have notice of contents of its public documents. As a result an outsider dealing with a Co is deemed to have knowledge of its objects clause and has therefore entered into unenforceable K with that knowledge.
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In late nineteenth century Cts adopted a fairly strict interpretation of UV rule. In Ashbury Carriage Co v Riche (1875)
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If a Co acted beyond objects stated in statute or in its memorandum of AS such acts were void. Over course of twentieth century Cts retreated from this strict position, allowing Cos to carry out Txs reasonably incidental to objects of Co and eventually accepting very wide objects clauses as being valid - either a list of all possible commercial activities or a stm that Co could carry out any commercial venture it wished. problems still remained. Re Jon Beauforte Re Introductions Ltd v National Provincial Bank accommodation and entertainment becomes pig breeding business, could not enforce debenture on liquidation
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Re Introductions Ltd v National Provincial Bank (1970)
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case concerned a Co incorporated in 1951, around time of Festival of Britain, with specific object of providing foreign visitors with accommodation and entertainment. After Festival was over Co diversified and eventually devoted itself solely to pig breeding, which original framers of objects had not considered . Co had granted National Provincial Bank a debenture (see Chapter 7) to secure a substantial overdraft which had accumulated prior to its eventual insolvent liquidation. Co was held to have acted UV and therefore Tx was void and bank could not enforce debenture or even claim as a normal creditor in liquidation
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Re German Date Coffee Co [1882] the company was solvent and the majority of shareholders wanted it to continue. However two shareholders petitioned for a winding up on the grounds that its objects had failed.
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represents harshest interpretation of UV doctrine and perhaps illustrates best danger UV posed to Cos. In this case Co's object was to acquire and develop a German patent for producing coffee from dates. Co failed to get German patent but obtained a Swedish 1 instead. Despite fact Co had a thriving business based on Swedish patent it was wound up by Ct because it could not achieve its strictly stated object.
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reform: Changes following EC membership UK joined the European Community and as part of its obligations on entry it introduced legislation reforming ultra vires in s.9(1) of the European Communities Act 1972 removed the doctrine of constructive notice where it concerned the memorandum and articles of association. saving provision for UV where the transaction was dealt with by the directors and the 3P was acting in good faith. While this reform narrowed the extent of the ultra vires rule it still left the potential for problems to arise. 1989 further reforms were introduced which allowed the memorandum to be easily changed and for the company to have a general wide objects clause (ss.4 and 3A CA 1985). s 35 thus became the main saving provision for outsiders in classic ultra vires situations. It stated:
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(1) The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum.
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Under the CA 1985 the memorandum formed part of the company's constitution. Now however, s.8 of the CA 2006
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reduced the memorandum of association to a more limited function. basic information and key declarations to the public which state that subscribers wish to form the company and agree to become members taking at least one share each. The subscribers to the memorandum are those who agree to take some shares or share in the company, thus becoming its first members. If the application to the Registrar is successful the subscribers become the first members of the company and the proposed directors become its first directors.
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To eliminate any remaining problems with the objects clause the CLRSG...
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proposed that companies be formed with unlimited capacity. The CA 2006 partly implements the recommended approach. Companies registered under the 2006 Act have unrestricted objects unless a company chooses to have an objects clause stating what it is empowered to do (s.31 CA 2006). If a company does chose to have an objects clause, and for companies formed under the previous Principal Acts in 1948 and 1985 with an objects clause (unless these companies now remove their objects clause (s.31(2) CA 2006)), the objects clause forms part of the articles of association (s.28 CA 2006).
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most Cos currently in existence were formed under Principal Cos Acts that required an objects clause, this change will only really affect Cos newly incorporated under CA 2006. For Cos already in existence with an objects clause, that clause still operates to restrict them and will now become part of their articles of AS (s.28 CA 2006). In recognition of fact a large number of Cos will still have an objects clause, s.35 CA 1985 has been replaced by an almost exact replica in s.39 CA 2006 which states:
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(1) The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution As a result of the reform process, what were traditional ultra vires actions became a question of whether the required internal authority to transact was given to those who transacted with the outsider.
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Internal authority When examining issues of internal corporate authority, agency principles and specific statutory provisions will usually determine the outcome. Normal principles of agency provide
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a principal will be bound by a contract entered into on his behalf by his agent if that agent acted within either the actual scope of the authority given by the principal before the contract or the apparent or ostensible scope of his authority. The principal may also ratify a contract entered into without authority
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Companies, because of their complexity, pose certain problems for agency principles.
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While specific authority is conferred on the board to run the company, once the authority goes below board level actual authority in complex organisation can be difficult to locate conclusively. authority to carry out some functions may not be specifically conferred but rather is implicit
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authorisation can be given through apparent or ostensible authority
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This arises when no actual authority is conferred, yet the company allows someone to hold themselves out as having that authority - for example, allowing someone to act as managing director even though they have never been appointed (see, for example, Freeman
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Freeman
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while he had never been appointed as managing DIR actions were within his ostensible authority and board had been aware of his conduct and had acquiesced in it. Diplock LJ FAC for Co to be bound 1. representation of same type of K made by agent 2. made by a person(s) who has 'actual' authority to manage business of Co, either generally or in respect of those matters to which K relates; 3. Kor was induced to enter K (relied on representation) 4. in articles of AS, Co not deprived enter into that type of K
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constitution will specify a procedure that has to be carried out before authority is conferred. For example, it is common for directors to have to seek approval of the general meeting for large loans. Again the doctrine of constructive notice could potentially be problematic here. Royal British Bank v Turquand (1856) an action was brought for the return of money borrowed by the company. argued that it was not required to pay back, manager who negotiated the loan should have been authorised by a resolution of the general meeting to borrow but he had no such authorisation. As a result of constructive notice the bank was deemed to know this.
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held that the public documents only revealed that a resolution was required, not whether the resolution had been passed. The bank had no knowledge that the resolution had not been passed and thus it did not appear on the face of the public documents that the borrowing was invalid. Outsiders are therefore entitled to assume that the internal procedures have been complied with. This is known as the indoor management rule. Codified as s39-41
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Act 1989 introduced ss.35A and 35B into the CA 1985. Both these sections concern the issue of internal authority. Section 35A states: The section had the effect of protecting outsiders who deal either directly with the board or those authorised to bind the company. It is worth noting that the section set the standard of bad faith fairly high as sub-s.2(b) specifically allowed third parties to have knowledge that the transaction was irregular. As a result it implied that active dishonesty might be required in order to qualify as bad faith, EIC Services Ltd v Phipps [2004]
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(1) In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution. (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 shall not 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 company's constitution; and (c) a person shall be presumed to have acted in good faith unless the contrary is proved. NOTE: presumption in (c) sets standard high
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section also contained a similar provision to s.35 allowing shareholders to prevent an imminent irregular transaction and protected insiders who deal with the company, which the indoor management rule did not. However, s.322A CA 1985 was also introduced as an amendment to the CA 1985 by the CA 1989 and s.35A was subject to it.
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section provided that a transaction between the company and a director or a person connected to him (family etc.) which exceeded the powers of the board was voidable at the instance of the company.
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s 35B CA 1985 also attempted to deal with the issue of constructive notice. It states:
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[a] party to a transaction with the company is not bound to enquire as to whether it is permitted by the company's memorandum or as to any limitation on the powers of the board of directors to bind the company or authorise others to do so. was intended to act in tandem with s.711A CA 1985 to abolish the concept of constructive notice for corporations. However, s.711A has never been implemented and so only s.35B deals with constructive notice (s.40 CA 2006
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With regard to internal authority the CA 2006 makes little change to previous law simply replicating the provisions of ss.35A and 35B CA 1985 in one new s (s.40 CA 2006).
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Indoor management rule
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Have the reforms described above solved the ultra vires problem for companies?
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statutory reforms have the combined effect of making it easier for companies to change their objects and of providing saving provisions for outsiders. This means that there are very few remaining ultra vires problems. Most of the criticism of the reforms has focused on the complexity of the solutions provided for what seems a relatively simple problem. The CLRSG in its Final Report (July 2001) (para 9.10) recognised this and recommended that any company formed under a new companies act should have unlimited capacity whether or not it chooses to have an objects clause. This was partly implemented in the CA 2006.
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a. How did the 1989 reforms attempt to deal with the remaining ultra vires problems? b. Describe the different types of authority that can be conferred by a company. c. Explain how the indoor management rule works. d. Describe the latest reforms in this area.
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review
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Summary The issue of ultra vires
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in the context of companies, while once a significant danger, has largely been dealt with by statutory reform. Further reform as a result of the work of the CLRSG has followed in due course in the CA 2006. The area remains an important one in the context of company law as it offers a very good illustration of how authority is conferred on the company and legitimately exercised by its agents who deal with the outside world.
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Vicarious liability in tort At first the courts considered that a T was an ultra vires act in that a company could never be authorised by its objects clause to commit a T. However, in Campbell v Paddington [1911]
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was accepted that companies could commit Ts and the courts have subsequently applied the principle of vicarious liability to the company as employer. As a result a company can be vicariously liable in T for the acts of its employees, even though they may not be specifically authorised to carry out the act that leads to the T but are nevertheless acting within the scope of their employment. attribution through vicarious liability in the context of a T involves no fault on the part of the company: it is simply legally responsible for the acts of another. Where a fault qualification or intention is required by law, attribution of liability becomes more complex. As a result, vicarious liability will not attribute criminal liability for the act of an employee. Where fault or intention is needed the courts began to develop a complex attribution concept known as the alter ego† or 'organic' theory of the company.
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'organic' theory One of the first examples of this concept occurred in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] the fault requirement arose in relation to a particular s of the Merchant Shipping Act 1894. Viscount Haldane LC set out an 'organic' theory of the corporation in order to deal with the fault issue. He considered that:
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a corporation is an abstraction. It has no mind or will 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... somebody who is not merely an agent or servant 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.
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'Respondeat superior' (Latin)
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'the superior is responsible'. This is the doctrine that an employer is responsible for things done by his or her employees as part of their employment
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Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] consequence Cf tesco Meridian global
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if one individual can be identified who can be said to be essentially the company's alter ego and that individual has the required fault, then the fault of that individual will be attributed to the company. The attribution of responsibility here is very different than through vicarious liability in T, where the company is responsible for the actions of another. The individual's fault here is attributed to the company because the law treats the individual and the company as the same person.
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central problem with the alter ego theory
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required the identification of a single individual in what was often a complex corporate organisational structure. This was often not possible unless a very small company was at issue. The theory has been particularly problematic in attributing criminal responsibility to companies, especially when attempting to determine the company's mens rea or guilty mind.
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Tesco Supermarkets Ltd v Nattrass [1971] Tesco charged with an offence under the Trade Descriptions Act 1968. They had advertised goods at a reduced price but sold them at a higher price. In order to avoid conviction Tesco had to show that they had put in place a proper control system. Tesco argued that they had and that the manager of the store had been at fault. The court considered whether the manager was acting as an organ of the company.
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[a] living person has a mind which can have knowledge or intention or be N and he has hands to carry out his intentions. A Co has none of these; it must act through living persons, though not always 1 or same person. Then person who acts is not speaking or acting for Co. He is acting as Co not acting as a servant, representative, agent or delegate. He is an embodiment of Co In this case the manager who was at fault was not the guiding mind (was the head office) and therefore Tesco could not be liable for his action. Subsequently the application of the organic theory has effectively acted as an immunity from criminal prosecution for large complex corporate organisations where it is impossible to identify a single individual responsible for the company's action.
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courts have moved away from viewing fault or intention attribution for companies in this narrow way. In the Privy Council decision in Meridian Global Funds Management Asia Ltd v Securities Commission [1995]
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Hoffmann considered that the organic theory provided a misleading analysis. The real issue was: who were the controllers of the company for the purposes of attribution? This was compatible with the maintenance of the Salomon principle and had the advantage of being able to attribute liability to the company for the actions of individuals lower down the organisational structure. In the Meridian case the controllers were found to be two senior managers. Lord Hoffmann's approach has subsequently been applied with some success in McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000]
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McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000]
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knowledge of the company's site managers of a VAT fraud was enough to attribute liability to the company for the fraud.
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Crown Dilmun v Sutton [2004] There was no arrangement between the principal and Mr Sutton (a director) which entitled him to consider bona fide whether or not to take the Opportunity. The Opportunity came his way as director and he was bound to exploit it for the principal's benefit. There was no agreement whereby Mr Sutton was entitled to take the Opportunity and disclose it retrospectively. Mr Sutton could not have had a genuine bona fide belief that the principal would not have been interested in the Opportunity. Mr Sutton decided to take the Opportunity for himself in breach of his fiduciary duties. The Opportunity was in part passed onto the Second Defendant whose director Ms Hamilton became aware (and was reckless regarding the fact) that Mr Sutton was in breach of fiduciary duty. Mr Sutton, as managing director, acknowledged that he owed fiduciary duties "Cooley principle 1". In his contract there was an obligation to keep information secret during and after his employment and to discuss opportunities that came his way (satisfying "Cooley principle" 2). "Cooley principle" 3 was satisfied by the finding that there was no disclosure to or acceptance by the principal. Principle 4 was satisfied by the decision in the case. Justice Peter Smith described the responsibilities of a fiduciary: " . . not to make any decision to take opportunities which came his way whilst [in a fiduciary position]" . . and " . . not to take opportunities which arose that might put him in conflict with his duties to the [principal]" . . and " . . a duty to exploit every opportunity that he became aware of for the [principal's] benefit" . . . He noted " . . the only exception is if they permit him to take such opportunities after.......full and frank disclosure and they have given..... consent." . .
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Information and property In Crown Smith J looked at whether information is property since views conflict; Boardman v Phipps . He found that information was obtained in confidence and that information was used to enable the second defendant to acquire property. That property was the subsequent agreement. Liability where profit is obtained by a third party In Crown the Second Defendant was liable to account since knowledge of breach of fiduciary duty was imputed; El Ajou v Dollar land holdings [1994] but alone insufficient.
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Morris v Bank of India [2005] CA was concerned with whether the knowledge of Mr S amant, a senior manager of the Bank of India, of the fraud carried out by BCCI was enough to fix the Bank of India with liability for fraudulent trading under s 213 of the Insolvency Act 1986. This was, obviously, a situation in which a construction of the statutory provision was appropriate and the Court held that the wording and policy behind the legislation was such that it would be wrong to limit attribution only to the knowledge of members of the board. It was necessary to examine the facts of each case to determine whether the knowledge of an " agent " should be attributed for the purposes of the s, but typical factors to take into account were: -
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(1) The seniority of the individual in the hierarchy of the company; (2) His significance and freedom to act in the context of the particular transaction; (3) The degree to which the board was informed and put on enquiry. . Mr Samant was very senior, he was given a free hand to negotiate the relevant transactions, and the board did not properly question him, des pite the suspicious nature of the transactions. Consequently, his knowledge was attributed to the Bank
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Corporate responsibility for injury and death
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application of the organic theory where crimes of violence are at issue still remains a particularly difficult problem. Such crimes happen mainly in the workplace but occasionally enter the public domain through major transport disasters like the Zeebrugge ferry tragedy (the sinking of the 'Herald of Free Enterprise'). Larger more complex corporate organisations can never be attributed with the required mens rea as identification of an alter ego is impossible in such complex delegated structures (see P
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P
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Judicial review of the coroner's inquest persuaded the Director of Public Prosecutions to bring manslaughter charges against P
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Government proposed the creation of a specific offence of corporate manslaughter (Reforming the Law on Involuntary Manslaughter: The Government's Proposals (May 2000). The new offence of corporate manslaughter has been now introduced in the Corporate Manslaughter and Corporate Homicide Act 2007 which came into force on 6 April 2008.
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offence of corporate manslaughter is based around 'management failure' of the company or its parent, leading to the cause of death. Thus if the way the company is managed fails to protect the health and safety of those employed in or affected by the company's activities and the manner in which its management fails is far below the standards that would be reasonably expected of a company in such circumstances it will be guilty of the offence.
