LAWS10083 Company law Notes -The Corporate Capacity Authority of Company Agents, Study notes of Law

Download LAWS10083 Company law Notes -The Corporate Capacity Authority of Company Agents and more Study notes Law in PDF only on Docsity! Company Law Notes Week 4 The Corporate Capacity: Authority of Company Agents Promoters In the 19th Century, there were no restrictions on inviting the public to subscribe for shares in newly formed companies, and the caricature company promoter from that era is an individual of dubious repute whose profession it was to form bogus companies and foist them off to the general public, to the latter’s detriment and to his own profit- it is perhaps a tribute to the law that we definitely picture him as coming to a sticky end- per Lord MacNaghten in Gluckstein v Barnes. A grocer turning his business into a company could be a promoter, but the difference between a grocer and a professional promoter is of degree rather than kind. Both are well placed to take advantage of their position by obtaining a recompense grossly in excess of the true value of what they are selling. The word promoter would thus entail to cover a wide range of persons. Both the grocer and the professional promoter are promoters to the fullest extent that each undertakes to form a company with reference to a given project, and to set it going and… takes the necessary steps to accomplish that project- Twycross v Grant. A person who has taken a less dominant role may also be promoter, the expression may cover any individual or company that arranges for someone to become director, places shares or negotiates preliminary agreements. Nor does the person need to be involved in the original formation of the company, one who subsequently helps to arrange the floating off of its capital will be equally regarded as a promoter- Lagunus Nitrate Co v Lagunus Synidicate. Who constitutes as a promoter in any case is therefore a question of fact. The promoter’s role continues until the particular function of promotion comes to an end – Tywcross v Grant. Duties of promoters Current legislation is largely silent on the issue of promoters, merely imposing liability for untrue statements in listing particulars or prospectuses to which they are parties- FSMA 2000 s. 90. Legislation also protects against the risk that promoters will seek to offload their property to the company at inflated prices, by way of the Second Company Law Directive. But it is a rule that can be avoided by promoters ceasing to be members of the company prior to re-registration. Most of the main duties of promoters have been formed by case law- generally promoters are subject to the general laws on fraud, misrepresentation, negligence, unjust enrichment, and so on. It has now been found that promoters owe a fiduciary duty to the company, with all the duties of disclosure and accounting which that implies; in particular, promoters must not make profits out of the promotion without the fully informed approval of the company. The main difficulty with promoter’s fiduciary duties had been deciding how to effect proper disclosure to, and obtain approval from the company- the company being an artificial entity. Erlanger v New Sombrero Phosphate Co suggested that it was the promoter’s duty to ensure that the company had an independent board of directors and to make full disclosure in it. Lord Cairns said they have in their hands the creation and the moulding of a company, they have the power of defending how and when , and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation… I do not say that the owner of property may not promote and form a joint stock company and then sell his property to it, but I do say that if he does he is bound to take care that he sells it to the company through a medium of board of directors who can and do exercise an independent and intelligent transaction on the transaction. However, an entirely independent board would be too restrictive, especially due to the rise of one man companies since Salomon, and therefore it has never been doubted that disclosure to the rest of the members would be equally effective. In the Salomon case it was held that the liquidator of the company could not complain of the sale to it and no obvious over valuation of Salomon’s business, all members having acquiesced therein. But the promoter cannot escape liability by disclosing to a few cronies, who constitute the initial members, when it is the intention to float off the company to the public or to induce some other dupes to purchase the shares. This is emphasised in Gluckstein v Barnes, where Lord Halsbury said it is too absurd… to suggest that the disclosure to the parties to this transaction is a disclosure to the company. They were there by the terms of the agreement to do the work of the syndicate, that is to say, cheat the shareholders, and this forsooth is to be treated as a disclosure to the company, when they were really there to hoodwink the shareholders. The position there can be said to be that disclosure must be made to the company either by making it to an entirely independent board or to the existing and potential members as a whole. If the 1 st method is employed the promoter will be under no further liability to the company, albeit directors liable to subscribers if the info has not been passed to them, indeed if the promoter is a party to the invitation then he too will be liable to the subscribers. In the 2nd method, disclosure must be made in the prospectus in order to allow (potential) members to have full information about the transaction to which the promoter was acting as such. Gluckstein disclosure must be explicit, partial disclosures will not do. Remedies for breach of promoter’s duties The company may bring proceedings for the recovery of any secret profits the promoter has made or call for the rescission of contracts it has with the promoter, if the promoter breaches fiduciary duties it has towards the company. Promoters are not entitled to make a secret profit. A promoter is likely to derive profits from the sale of over priced property to a newly formed company, if a profit has been made on an ancilliary transaction this may be recovered too as illustrated in Gluckstein. In this case, a syndicate had been formed for the purpose of buying and reselling Olympia, owned by a company in liquidation. They first bought certain charges on the property and then bought the freehold interest for £140,000. They then promoted a company of which they were directors and to it they sold the freehold interest for £180,000 raised by a public issue of shares and debentures. In the prospectus the profit of £40,000 had been disclosed. In the mean time, the promoters had had the charges on the property repaid by the liquidator out of the original £140,000 sale price making a further profit of £20,000 (undisclosed in the prospectus though reference to a contract was made which would reveal the profit made). The company went into liquidation and it was held that the promoters must account to the company for the secret £20,000 profit. The same facts allow the company to sue the A problem with s.51 is that the section only bites when the contract purports to be made on bhelaf of a company which has not been formed. Both limbs must be satisfied. Thus where the parties thought that the company existed when it had been struck off the register the CA held that the contract did not purport to be made on behalf of the company of the same name which the parties hurriedly incorporated when they realised their mistake. The need for the company whose existence was not appreciated at the time when the contract was entered into and thus could not be a contract on behalf of the company Contronic case. There is no law in the UK that reflects on the issue of adoption or assumption of obligations of the pre-incorporation contracts. This can only be done by entering into a contract on similar terms. Even if the company does this, it will not reveal the promoters of any personal liability unless they are party to the new contract which expressly relieves them off liability under the pre-incorporation agreement. Corporate actions Decisions for and actions by the company have to be carried out by a natural person. These can be made by primary decision making bodies like the board or by the officers of the company or employees. Contractual rights and obligations Where the board or the shareholders act collectively they are acting for the company. They are not its agents. They will not be personally liable for any resulting contract which exists between the company and the third party. Contracting through the board: Where the board or shareholders collectively act, and contract with a third party there can be no doubt that the company is bound. but it could be that the board are acting ultra vires of the powers conferred on them by the members via the articles of association and as such do not act on behalf of the company and can be personally liable. Or it could be that the board have agreed to a contract where the company’s obligation include those that are outside the scope of the objects clause. But nowadays the company normally will have unlimited capacity – s31 (1) CA 2006. Even if the company choses to limit its capacity the restriction will not affect the validity of the contract as per s39. Constructive notice and the Turquand’s case: The answer to the Q whether the board was acting outside the powers vested to them by the constitution can be sought by looking at whether the third party knew or ought to have known that the board was acting outside their authority. If the third party knew that the board was acting outside of its powers then the transaction was not binding on the company unless the company chose to ratify it. The doctrine of constructive notice deprives the third party of the security for any such transaction = even though he had no actual knowledge of the board’s want of authority and no practical means of finding out, other than a detailed study of the company’s constitution. The rule developed was that anyone dealing with a company registered under the companies legislation was deemed to have notice of its public documents- Royal British Bank v Turquand. By treating the third parties as knowing that which they would have known had they read the articles, the courts deprived the third party of any claim to a reliance interest . In consequence, limitations of the board’s powers in the articles would mean that the contract would not be binding on the company unless it chose to ratify the transaction. The harshness of the rule was modified by the rule in Turquand’s case. This rule had the effect that in some cases, third parties could assume that the directors had the authority to act even if a fair reading of the articles might lead a third party to make further enquiries. In this case security for a loan had been given but articles stated that the directors could only borrow such sums as were authorised by shareholders at a general meeting. It was held that a third party reading the articles would infer that the company was not prohibited from borrowing but could do so if certain conditions were met. Finding that the authority might have been made complete by the passage of a resolution, he would have the right to infer the fact of a resolution authorising that which on the face of the document appeared to be legitimately done. The duty to make further enquiries is only removed for the third party who has actually read the articles. Mohoney v East Holyford Mining Co HL approved the Turquand doctrine. The bank honoured 2 company cheques signed by two of three named directors after having received from the co secretary a resolution granting the three directors to sign. The secretary nor the directors were properly appointed. . the bank was entitled to assume that the directors had been properly appointed. S28 5 of the 1985 CA also allows for this. However in Morris v Kansenn the section only applies where there has been a defective appointment and not where there has been no appointment at all. S161 of CA 2006 provides enhanced protection as a result- applying not only in the case of subsequently discovered defects in the appointment but also where the director is disqualified from holding office, has ceased to hold office, is not entitled to vote on the matter in question or the appointment was in breach of the requirement that appointments of directors be voted on individually. The turquand doctrine does not apply if the third party has been put on notice or on enquiry as to the lack of authority. In B Ligget Ltd v Barclays BankB Ligget Ltd v Barclays Bank where the third party bank had actual knowledge of the articles the question was whether the bank was entitled to assume that the appointment of the third director had been properly made. Such appointment required the consent of both existing directors. The letter informing the bank was signed by only one of the directors (L). M the other director had made it clear to the bank that it should not meet cheques not signed by him in line with the requirement s of signatories in the articles. The bank met cheques carrying the signature of L and the newly appointed third director. The relation of the bank with M put the bank on an enquiry to establish whether M had in fact consented to the appointment of the 3rd director, the bank was not entitled to assume such consent. Statutory protection for third parties dealing with the board: Despite the above rules, third parties still feel unsecure. S40 of the 2006 Act now deal with the impact of restrictions in the articles upon the authority of directors. It provides: in favour of a person dealing with a company in good faith, the powers of the directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitations under the company’s constitution.  In good faith- only good faith third parties will benefit from this section. Other provisions make it clear that bad faith is difficult to establish- s40(2) three tier set of protections to third parties- a person dealing with a company is not bound to enquire as to any limitation on the powers of directors to bind the company or authorise others to do so. The fact that the third party could have found out what was in the articles by making appropriate enquiries is treated as putting the third party in the bad faith category. It is presumed that the third party acts in good faith unless the contrary is proved. i.e. the burden of proof is on the company. The third party is not to be treated as acting in bad faith by reasons only of his knowing that the act is ultra vires  Dealing with the company- s.40 (2) denies this as a person deals with a company if he is party to the transaction or other act to which the company is a party.  Persons- s40 applies to persons dealing with the company in good faith. Can corporate insidrs benefit from the indoor management (turquands) rule . In Morris v Kanssen C seeking to rely on the turquand’s rule had the functions of director and as such the court held that he was under a duty to see that the articles are complied with thus being inconsistent to allow him to benefit from the rule. However in Hely Hutchison v Brayhead the exclusion was interpreted narrowly- a director was an insider only if the transaction with the company was so intimately connected with his position as director as to make it impossible forhim not to be treated as knowing of the limitations on the powers of the officers through whom he dealt with. S.41 holds that where the company enters into a transaction ultra vires of director powers and the other party to the transaction is a director of the company or a person connected with such director, the transaction far from being enforceable as against the company, is voidable at the instance of the company. Whether or not the transaction is avoided, the director and any party that authorised the transaction are liable to account to the company for any gains made and indemnify the company against any losses suffered. S40(4) shows when the transactions ceases to be voidable.  Directors- a person who deals with the company through its members in a general meeting obtains no benefit from s.40.  S.40 also includes the reolutions of the company, shareholder agreements  S.40(4) preserves the shareholder’s power to bring an action to restrain the company from doing an act to which the directors have committed the company in excess of their powers. Contracting through agents: The above rules apply to agents as well with modifications: first the primary rules of attribution aassume that the board or members collectively have the power to bind the company because they are its statutorily constituted bodies subject to limitations in the articles. Once one moves away from the board, the assumption that, leaving the articles on one side, the person purporting to act on behalf of the company has power to do so, can no longer be maintained. Does this person have powers to bind the company? In order to answer this we must turn to the general powers of attribution (rules that apply to individuals contracting via agents).