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Ultra Vires and Agency Untwined

Published online by Cambridge University Press:  16 January 2009

Colin Baxter
Colin Baxter
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The author acknowledges with gratitude the help he received from Dr. L. S. Sealy
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Extract

An act done by or on behalf of a company may be defective for a variety of reasons. It may be ultra vires the company itself: in which case it will be void. It may be within the powers of the company but outside the authority or powers of the agent (usually the directors) doing the act: in which case it will also be void, but may nevertheless in varying circumstances be ratified by the company. It may be within the powers both of the company and of the agent but be done for an improper purpose: in which case it may in some circumstances be set aside or afford some other remedy.

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Articles
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The Cambridge Law Journal , Volume 28 , Issue 2 , November 1970 , pp. 280 - 313
Copyright
Copyright © Cambridge Law Journal and Contributors 1970

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References

1 (1875) L.R. 7 H.L. 653.

2 Ibid. 670.

3 Deuchar v. Gas Light and Coke Co. [1925]Google Scholar A.C. 691; Evans v. Brunner, Mond & Co. [1921]Google Scholar 1 Ch. 359.

4 e.g., (i) Capacity subject to condition subsequent: see Fountain v. Carmarthen Rail Co. (1868) L.R. 5 Eq. 316 (limited capacity to borrow). (ii) Capacity subject to condition precedent: (a) see memorandum in Re Introductions [1970]Google Scholar Ch. 199 (there can be no subsidiary business unless the main business is carried on): (b) see Bell Houses Ltd. v. City Wall Properties Ltd. [1966] 2 Q.B. 656Google Scholar (capacity dependent upon a specified intention on the part of the director).

5 Modern Company Law (3rd ed., 1969), p. 93.Google Scholar

6 [1953] Ch. 131.

7 Ibid. 135; and cf. his remarks made during the argument at p. 134.

8 [1970] Ch. 199, affirming Buckley J. [1968] 2 All E.R. 1221.

9 [1918] A.C. 514.

10 [1968] 2 All E.R. 1221.

11 Ibid. 1227.

12 Ibid. 1225.

13 [1970] Ch. 199, 210–211.

14 [1904] 2 Ch. 608.

15 Ibid. 612.

16 (1871) L.R. 12 Eq. 516.

17 [1904] 2 Ch. 608, 617–618.

18 [1904] 2 Ch. 608, 615 (italics inserted).

19 (1871) 7 Ch.App. 161.

20 If the directors in Re Jon Beauforte had bought buttons from a third party who knew that they intended to use them to play tiddlywinks, it would have followed that the company lacked capacity to buy those buttons and that seems plainly ridiculous.

21 (1871) 7 Ch.App. 161, 166 (italics inserted).

22 [1904] 2 Ch. 608, 613.

23 In neither case, however, could they have bound the company to use the money for the ultra vires activity. The company lacked capacity to make that promise.

24 [1970] Ch. 62.

25 Ibid. 69.

26 [1932] 2 Ch. 46.

27 Ibid. 51.

28 Ibid.

29 [1970] Ch. 62, 70. His assault is strengthened by the fact that he admits to being at fault in his earlier decision in Ridge Securities v. I.R.C. [1964] 1 W.L.R. 479Google Scholar, in giving uncritical approval to the remarks of Eve J. In that case a holding company, for tax purposes, caused certain subsidiaries to pay to it large sums of money in the guise of debenture interest. He says that these transactions were dressed-up gifts, and that he had held that in the absence of appropriate powers in the memoranda of those companies the transactions were ultra vires. This seems odd. In his earlier judgment in Ridge Securities he observed that he had not been asked to look at the memorandum of any of the companies. Surely the correct basis for this decision was that the transactions were a sham disguising an illegal reduction of capital.

30 Further, a party receiving “trust” money will always be liable in a personal action in equity unless he can show that he gave value: Baker v. Medway Building & Supplies Ltd. [1958] 1 W.L.R. 1216Google Scholar; Ministry of Health v. Simpson [1951]Google Scholar A.C. 251.

31 [1961] 1 W.L.R. 493; later proceedings [1962] Ch. 927.

32 [1961] 1 W.L.R. 493, 501.

33 [1962] Ch. 927.

34 (1883) 23 Ch.D. 654.

35 Ibid. 673.

36 Ibid. 677–678.

37 [1962] Ch. 927, 963.

38 Ibid. 961.

39 Ibid. 962.

40 [1962] Ch. 927.

41 [1967] 1 W.L.R. 432.

42 Ibid. 437.

43 Ibid. 438.

44 Ibid. 437.

45 Liability under this head would have been sufficient to defeat Mrs. Roith, who claimed through her husband. However in Jacobus Marler Estates v. Marler (1913)Google Scholar 114 L.T. 640n. Lord Parker stressed that before a company could maintain such an action it had to prove that it had suffered loss. It was not sufficient to say that what the directors had done was not as beneficial as it might have been if they had exercised reasonable care!

46 In the present case the company could not have returned R.'s services and current erudition would suggest that in consequence the company had no remedy. Certain remarks in Re Cape Breton Co. (1885) 29 Ch.D. 795 seem to suggest a contrary conclusion. (1) Fry L.J. at p. 811 expressly declined to state that this would be the position if an agent had done acts preventing rescission. Perhaps he would have taken a similar view of consideration which was inherently non-returnable. (2) Further he stated that, in the case before him, the profit accruing to the directors resulted from the company's affirmation which was equivalent to a new sale. In almost all the authorities the right to rescind was lost either in this way or by laches, i.e., presumed affirmation. Surely it is only in cases such as these that it is wrong for the court to make a new bargain? (3) Cotton L.J. said that although he did not wish to say that in no case could a director be made answerable for the difference between the price paid by his company and the value of an article which had a market value, in the case before him the property had no market value and it would have been difficult to ascertain the price which another purchaser would have paid at the time of the sale ( cf. a curious application of similar ideas in the Jacobus Marler case). It is difficult to see how such considerations can be relevant in deciding whether to grant relief at all. Surely a market value is significant only as evidence of fraud? It is submitted that relief is always available when there is something more than a conflict of interest and duty. Perhaps this explains the award of damages in Re Leeds & Hanley Theatres of Varieties [1902] 2 Ch. 809.Google Scholar

47 In some cases a purported ratification will be open to attack as a fraud on the minority: Cook v. Deeks [1916] 1 A.C. 554.Google Scholar Surely in Parke v. Daily News Ltd. it was not consistent with “those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities” (M.R, Lindley. in Allen v. Gold Reefs of West Africa [1900] 1 Ch. 656, 671)Google Scholar for the majority to sacrifice the interests of the minority in order to gratify their charitable desires?

48 [1932] 2 Ch. 46, 53.

49 [1967] 1 W.L.R. 432, 437.

50 [1970] Ch. 62, 74.

51 Ibid.

52 Ibid.

53 See Re Cleadon Trust Ltd. [1939]Google Scholar Ch. 286: of course, a company would not be prevented from disowing the acts of its directors by a misapplication of property in ultra vires activities.

54 On the pleadings before the court, it is surprising that it was not contended that the transaction was res inter alios acta.

55 Perhaps C. Co., as constructive trustee for the purchaser, also had a duty to avoid the charge.

56 See L.J, Harman. in Re Introductions Ltd.Google Scholar and J, Roxburgh. in Re Jon Beauforte.Google Scholar

57 (1856) 6 E. & B. 327; cf. the position re corporate capacity. In Fountain v. Carmarthen Rail Co. (1868) L.R. 5 Eq. 316, Page Wood V.-C. contrasted the position of a party from whom the directors made an irregular borrowing with that of a party who had lent money to the company after its borrowing capacity had been exhausted.

58 The Chancery Courts applied rules relating to trustees to other persons that they regarded as standing in an analogous position. Although they used the familiar language of trust, directors were not regarded as trustees: see L. S. Sealy [1967] Camb.L.J. 83. Such language was used almost as much of other agents.

59 See J, Pennycuick. in Charterbridge Corpn. v. Lloyds Bank [1970]Google Scholar Ch. 62, 69.

60 [1917] 1 Ch. 123.

60a Ibid. 133–135.

61 Ibid. 136.

62 [1942] Ch. 304.

63 Ibid. 307.

64 Ibid. 308.

65 Berry v. Tottenham Hotspur Football & Athletic Co. Ltd. [1935]Google Scholar Ch. 718.

66 Re Cawley & Co. (1889) 2 Ch. 209. A Shareholder showed that he was not a debtor of the company because of an irregularity in a call.

67 (1866) 1 Ch.App. 161.

68 (1862) 14 De G.F. & J. 566.

69 (1868) L.R. 3 H.L. 171.

70 (1866) 1 Ch.App. 161, 168.

71 Ibid. 169.

72 (1868) L.R. 3 H.L. 171.

73 Ibid. 186.

74 Ibid. 186–187.

75 Ibid. 190.

76 Ibid.

77 Lords St. Leonards and Romilly dissented.

78 (1868) L.R. 3 H.L. 171, 230.

79 Ibid. 233. Lord Romilly would no doubt have found this unacceptable. It seems that his sole reason for holding that the transaction was voidable was a curious notion that void acts could not be ratified. See on this point Cotton L.J. in Grant v. U.K. Switchback Rail Co. (1888) 40 Ch.D. 135.

80 Ibid. 247–248.

81 (1864) 2 Hem. & M. 10.

82 Ibid. 28–29.

83 Ibid. 29–30.

84 Ibid. 31–32 (italics inserted).

85 [1903] 2 Ch. 506.

86 Ibid. 515–516.

87 [1920] 1 Ch. 77.

88 Ibid. 85.

89 [1967] Ch. 254.

90 Ibid. 268–269.

91 Ibid. 270–271 (italics inserted).

92 More difficult questions apply as regards the loan: see below, p. 310.

93 [1942] Ch. 304.

94 Nevertheless this view of the cases was taken by Megarry J. in Gaiman v.National Association for Mental Health [1970] 2 All E.R. 362Google Scholar, 373.

95 See L.S. Sealy [1967] Camb.L.J. 33.

96 In this decision the facts bore some resemblance to those which led to the investigation by a Board of Trade Inspector of the affairs of the Savoy Hotel Co., but the device there adopted by the directors to protect the company from the presumed intentions of the person bidding for control was to sell the company's principal asset to collaborating trustees, and lease it back on restrictive terms. (The lease-back device is often used to provide cash for expansion.) In his report (H.M.S.O., 1954) the Inspector expressed the view that, notwithstanding that the directors had acted bona fide and within the express terms of the powers conferred on them, they had done so for an improper purpose which could not be upheld.

97 For a selection see , Rubner, The Ensnared Shareholder (London, 1965)Google Scholar, Chap. 2.The growth of these tendentious views has been facilitated by the gradual change in judicial language from company “are” to company “is,” following the general availability of corporate personality.

98 [1967] Ch. 254, 268.

99 [1970] Ch. 212.

1 As reported in [1968] 3 W.L.R. 317, 319.

2 This is not in fact right. That was the decision in relation to the allotment only.

3 [1970] Ch. 212, 238.

4 (1877) 12 App.Cas. 589.

5 (1880) 40 Ch.D. 135; although the facts he actually gives are those of Irvine v.Union Bank of Australia (1877) 2 App.Cas. 366.

6 [1970] Ch. 212, 241.

7 Ibid. 242.

8 Ibid.

9 See especially Bamford v. Bamford, above.

10 See especially Spackman v. Evans, above.

11 [1929] A.C. 176.

12 Ibid. 182.

13 [1924] 1 K.B. 775.

14 Ibid. 796.

15 Bankes L.J. calls this “the Turquand rule” but this is not the Turquand rule in its purity. In this type of situation there is no reason why special rules should apply to company directors.

16 Buckley J. assumed that the trustees could not rely on the Turquand rule (see footnote 15). What would have been the position if some of the trustees had not had knowledge?

17 [1904] 2 K.B. 10.

18 Ibid. 23.

19 See also Lloyds and Scottish Finance Ltd. v. Williamson [1965] 1 W.L.R. 404.Google Scholar The plaintiff authorised an agent to sell his car on terms that he should receive £625 and the agent should keep any excess. The agent sold to the defendant, who took in good faith, by a transaction resulting in a set-off against him. In the Court of Appeal, Salmon L.J. said that it was not a true case of estoppel and the fact that the agent was a factor was irrelevant. The defendant got a good title because the plaintiff had by implication expressly authorised his agent to sell as principal.

20 [1929] A.C. 176, 183.

21 [1893] A.C. 170, 180.

22 [1904] 2 K.B. 10, 21–22.

23 [1924] 1 K.B. 775, 792.

24 [1929] A.C. 176, 185.

25 Ibid. 184–185.

26 [1924] 1 K.B. 775, 786–787.

27 See Fridman, Law of Agency (2nd ed.), p. 66.

28 [1904] 2 K.B. 10, 25.

29 [1953] Ch. 131.

30 [1970] Ch. 199.

31 [1962] Ch. 927.

32 [1904] 2 Ch. 608.

33 [1970] Ch. 62.

34 [1932] 2 Ch. 46.

35 [1967] 1 W.L.R. 432.