Allcom's constitution states; "The Company's borrowings shall not be allowed to exceed ï¿½1 million without the authorisation of the general meeting." This issue is linked in with the other article that states "The quorum for meetings of the board of directors shall be five." In this case four of the directors have decided to borrow money from the company's bank, which would take their borrowings over the ï¿½1million threshold. However the banks lawyers have read the companies articles and have reported on them.
31812 specifies the need to adhere to quorum in meetings, although the Act13 is directed to the company's members. Allcom has adopted this quorum requirement for the board of directors meetings. The directors have not met this quorum; they have breached their duty to exercise reasonable care, skill and diligence.14 This section can be quite broadly interpreted and so does encompass their breach of duties. Berg states "A director must exercise his powers honestly and for their proper purpose, and in accordance with the company's constitution and decisions taken lawfully under it."15 The directors should have been very careful to meet the requirements of the articles whilst conducting the meeting. Leading from this they passed a resolution to borrow money which would take their borrowings over the ï¿½1million threshold. S.20116 dictates the rules for credit transactions, directors are required to undertake a series of tasks to get approval of their credit transactions. However the articles of Allcom do not put in place such strict procedures.
The company's bank, Grandbank have looked into the company's articles and reported on their findings. They had also assumed that the finance director was authorised to make the transaction, which he was not. The circumstances in which the decision to borrow money had been conducted were not valid. As Grandbank had access to Allcoms articles they are aware that the directors collectively or individually are not allowed to make this contract. Allcom are not bound by the contract made to Grandbank.
In conclusion Allcom are bound to Motorhire Ltd. but not to Grandbank. Sally was not authorised to make the contract with Motorhire Ltd. and further more she had a financial interest in the contract. However any action to be taken against this contract will have to be taken personally from Sally. If they fail to continue the contract they may be liable for legal action, in Tesco Supermarkets Ltd. v Nattrass,17 Lord Reid said "the criminal act of the officer, servant, or agent including his state of mind, intention, knowledge or belief is the act of the company."
18 Grandbank had the opportunity to research and assess the articles of the company before they passed the loan. The nature of the financial industry is very risky and so the Bank has the tools to prevent them from making invalid contracts. Allcom have several options to deal with the company secretary and directors breach of duty through remedies available to them. The most common remedy for breach is to recover loss suffered by the company including costs for carrying out the proceedings.
1 Pg 33, Principles of Modern Company Law, Gower and Davies, Eighth edition 2 Companies Act 2006 also referred to as the Act. 3S.171-173, General duties, Companies Act 2006 4s.271, Companies Act 2006