Paragraph X: "The company secretary may not make any contract on behalf of the company for an amount exceeding 10,000." Paragraph Y: "The Company's borrowings shall not be allowed to exceed 1 million without the authorisation of the general meeting." Paragraph Z: "The quorum for meetings of the board of directors shall be five." Sally is the company secretary. Sally makes a contract with Motorhire Ltd to hire several cars for Allcom for a period of one year at a contract price of 50,000. Sally owns 25% of the shares of Motorhire, although she is not involved in the running of the company.
At a meeting of the Board of Allcom at which four directors are present, a resolution is passed authorising Wally, the company's finance director, to take out a loan from the company's bank, Grandbank. This will take the company's aggregate borrowings from Grandbank to over 1 million. Grandbank's lawyers have read Allcom's articles and have reported on them to Grandbank. Consider whether the contracts with Motorhire and Grandbank are binding on Allcom.
In this essay I shall advise Allcom as to whether contracts made on its behalf are legal binding. The main source for the recommendations I make will be from the Companies Act 2006 (referred to as the Act). Allcom Ltd, is a limited liability company, the definition of a company is "a legal entity distinct from its members."1 It members or shareholders choose the directors of the company according to their abilities to run the business. They pass on a great deal of power and responsibility to them this is clear from the Companies Act2 the such as duty to act within powers, to promote the success of the company, to exercise independent judgement3 etc.
Along with the directors the company secretary has a duty to work for the company. S.271 is very clear in its instruction "A public company must have a secretary."4 The secretary has an important role their role is to ensure that corporate governance is followed as well as other secretarial tasks. The directors and company secretary together have the responsibility of ensuring that the company's constitution and articles are adhered to. Collectively they work for the best interest of the company.
The company's constitution lies at the heart of their activity; it is the one document that controls the business. S.18 reads "A company must have articles of association prescribing regulations for the company."5 The company now can operate with the use of the constitution, directors and company secretary. However the constitution along with the Companies Act 2006 regulates and controls the actions of the directors and company secretary to ensure that they do not breach their duties.
Allcom Ltd. has made a series of statements in its articles the first of which is, "The company secretary may not make any contract on behalf of the company for an amount exceeding ï¿½10,000." This article limits the secretary's power when it comes to making a contract on its behalf. In this case the doctrine of ultra vires and capacity need to be discussed. Sally as the company secretary has the capacity to make contracts for the company however did she act within ultra vires; or beyond her powers. Sally the clearly breaches this article as she enters a contract with Motorhire Ltd. for the hire of cars to the value of 50,000.
This contract has been formed so now its validity is in question. Whether a company is bound by acts which are done on its behalf depends on whether the director, or other individual, who acted for the company had authority to do so."6 This doctrine describes authority as having two branches the first actual authority and the second apparent authority. Actual as its name suggest means that the agent has actually been given that particular authority through the articles. The second view apparent (also known as ostensible) is where the agent appears to have that authority.
In the view of Motorhire Ltd. Sally was the company secretary and when she approached them with regards to a car hire contract, they would have assumed that she had the authority to make such a contract. Motorhire Ltd. can rely on the Turquand7 rule; which primarily protects outsiders from dealing with authorised agents who are not however authorised. The rule allows the outsider- Motorhire Ltd. to enforce the contract made. Reynolds has also said that "An agent binds his principal in contract when he acts within his actual authority."8 Sally is the agent in this case and has bound Allcom.
From the point of view of Allcom, it has been contracted into this situation through the company secretary however it is not completely helpless. Sally is a 25% shareholder in Motorhire Ltd. this comes under the banner of avoiding conflicts of interest. Although the Act9 focuses a great deal on directors and their duties it has under s.25210 and 17511tried to encompass duties of all connected to the directors and the company. To simplify the section deals with people connected to the director; who should not be involved with any transaction with any party where they control 20% or more shares. This means that Sally had a conflict of interest as she contracted with Motorhire Ltd. as inevitably she was promoting the success of Motorhire Ltd. and so would expect a better return in her dividends and shares prices.