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Director Cannot Rely on Statute to Validate Own Unauthorised Act

A recent Court of Appeal case, Smith v Henniker-Major & Co (a Firm,) (The Times, 29 August 2002), decided that a director could not rely on section 35A of the Companies Act 1985 to validate an action by him that was unauthorised by the company’s constitution.  Section 35A can normally be relied on by “a person dealing with a company”.  This person is entitled to assume that the power of the board of directors is free from any limitation under the company’s constitution.  The effect of this section is to make actions that are outside the board’s powers enforceable by the person dealing with the company. The facts are set out below. 

In 1998, the director, Mr. S, who was also chairman and a shareholder, convened a board meeting that he alone attended.  At this meeting, Mr. S resolved to assign the company’s causes of action against other directors of the company for unfair prejudice in the conduct of the company’s affairs to himself.  Mr. S believed that the meeting was quorate.  This board meeting was in fact inquorate under the company’s constitution.  Following the resolution, Mr. S signed an assignment on behalf of the company. 

In later proceedings brought by Mr. S against his solicitors, Mr. S sought to rely on section 35A to support his case.  He failed to win the case. 

WHY HE LOST: 

  1. Mr. S was not just a director dealing with the company but also the chairman.  It was his duty to ensure that the company’s constitution was properly applied. 
  1. Mr. S had caused the procedural irregularity.
  1. Even if the irregularity were an honest one, it was still an irregularity.
  1. Although a director could be “a person dealing with a company”, the circumstances in which Mr. S sought to rely on section 35A were exceptional. Section 35A is available to persons who do not have knowledge of a company’s constitution before dealing with it. Clearly here, Mr. S was a member of the board and should have known the limits on the board’s powers.
  1. A legal provision aimed at protecting third parties should not be used to rectify his errors as a director.
  1. The wrongdoer would have been the only one to benefit by validation under section 35A.