Principles of Modern Company Law Essay

Brief Introduction

According to Salomon Principle, Company is not liable for the director’s act. In Part A, Potomac Ltd will be liable for Rob’s act if the court treats them as the same person. However, Potomac Ltd has no criminal liability for pedestrian injury but there are few established cases where the court adopts some tortuous liability. If the court applies these cases then Potomac Ltd will be liable for Rob’s act. The second part raises some issues from the doctrine of the ultra vires act.

In Part B, the constitution of Falcon Ltd particularly prohibits financial speculation activities. In this context, Falcon Ltd will be bound by the contract if the contract is ratified by a special resolution. It is essential to mention that under the Companies Act 2006 Falcon Ltd is bound by the contract. Though the contract is valid Tom and Jerry can’t avoid their liability for their activities. If their activity is approved by a special resolution then they can avoid their liability.

Answer Part A

From the Salomon1 principle, a company is a separate legal entity different from its members and it can therefore sue and be sued in its name. The first problem arises from the nature of legal personality that is from the Salomon principle, the problem arises from lifting the veil of incorporation. In this case, Rob, a director of Potomac Ltd, and His car mounted the pavement and seriously injured a pedestrian. Here it needs to consider whether Potomac Ltd has any vicarious liability in tort for Rob’s act or not. Potomac Ltd will be liable for Rob’s act if the court decides that the separation of legal personality of the company and the members is not to be maintained.

This question raises also some issues from negligence. To answer this question it is necessary to discuss negligence, the duty of care, and breach of duty, causation, and remoteness. Rob as a road user had a duty of care to the pedestrian. He became distracted as he was driving along and talking into his mobile phone. In Caparo Industries, v Dickman2 provides the current test to show a duty of care. It needs to prove that it was reasonably foreseeable that a person in the claimant’s position would be injured.

There was sufficient proximity between the parties and it is fair, just, and reasonable to impose liability. In this case, Rob breaches the duty and the injury was foreseeable. If we consider but-for-test it can be found that the accident is caused by talking into his mobile phone and his negligence not for Potomac Ltd. In The Wagon Mound3, The Privy Council held that defendant would be liable only if it was the foreseeable consequence. So Rob was criminally liable for this accident but Potomac Ltd is not criminally liable for the injury of the pedestrian though he was involved in the company’s work.

Now it needs to consider whether Potomac Ltd has any tortuous liability or not. In Campbell v Paddington4 it was accepted that companies could commit torts and the courts have subsequently applied the principle of vicarious liability to the company as an employer.

As a result, Potomac Ltd can be vicariously liable in tort for the acts of its employees, even though they may not be specifically authorized to carry out the act that leads to the tort but is nevertheless acting within the scope of their employment. It is important to note that here that attribution through vicarious liability in the context of a tort involves no fault on the part of the company: it is simply legally responsible for the acts of another. So vicarious liability will not attribute criminal liability for the actions of an employee. Sometimes to resolves these issues courts consider the organic theory of the company.

In Lennard’s Carrying Co. Ltd v Asiatic Petroleum Co. Ltd5 the fault requirement arose about a particular section of the Merchant Shipping Act 1894. Viscount Haldane LC set out an organic theory of the corporation in order to deal with the fault issue. If on an individual can be identified who can said to be essentially the company’s alter ego and that individual has the required fault, then the fault of that individual will be attributed to the company.

The attribution of responsibility here is very different than through vicarious liability in tort, where the company is responsible for the actions of another. Here the law treats the individual and the company as single person. However, this theory has been particularly problematic in attributing criminal responsibility to companies, especially when attempting to determine the company’s mens rea or guilty mind.

In Tesco6, this company was charged under the TDA 19687. They had advertised goods at a reduced price but sold them at a higher price. In order to avoid conviction Tesco had to show that they put in place a proper control system. Tesco argued that they had and that the manager of the store had been at fault. J. Lowry & A. Dignam, (2007), p-271 mentioned that the court regarded as whether the director was performing as an organ of the company. In this case the manager who was not the guiding mind and therefore Tesco could not be liable for his action. From the above discussion it can be said that it is judge discretion to decide whether Potomac Ltd will be liable for Rob’s act or not. Potomac Ltd has no criminal liability.

Ans. to the Question No. 2

Tom and Jerry, the directors of Falcon Ltd has entered into several contracts for the company. It needed to be examined whether they are valid beneath the doctrine of ultra vires. Whether Tom and Jerry will be liable in any way for having breached an express constitutional provision of Falcon Ltd depends on common law provision and Companies Act 1985 and Companies Act 2006 provisions. Here two thinks need to consider. To justify if the act was surrounded by the authority of the company and if the act was contained by the supremacy of the company, the individuals those who have contracted on behalf of the company were authorized to do so. Here Tom and Jerry have engaged in financial speculation activities contrary to the prohibition in Falcon’s constitution. Therefore the agreements would be void as well as unenforceable.

Above all, it is required to discuss whether contracts made by Tom and Jerry in behalf of Falcon Ltd have imposed binding on the company. In the landmark case8 the House of Lords have taken the prospect to explain obviously that the ultra vires doctrine should be appropriate to registered or incorporated companies.

Consequently, if a company formed or incorporated by means of or beneath statute acted ahead of the scope of the visions or objects affirmed in the statute otherwise in memorandum of association of the company such acts would be void at the same time as beyond the company’s power yet if endorsed by all members of the board. In A-G v Great Eastern Rly9 the House of Lords delineated a very significant board explanation of the powers those could be put into effect in the detection of its objects. They have measured a company could go through into transactions those were reasonably observed as accompanying or consequential of its visions or objects. This has given the companies with enough room to manoeuvre.

In Re German Date Coffee Co10 the company’s object was to acquire and exploit a German patent but obtained a Swedish one instead. Despite the fact the company had a thriving date coffee business it was wound up by the court because it could not achieve its stated object. As a result of the dangers posed to companies by this rule much legal ingenuity went into framing objects clauses to minimize the impact of the ultra vires rule. A huge number of functions and activities that the company could carry on have been explained in some objects clauses. These were every so often successful but at further needs the courts have interpreted whatever thing subsequent the most important object as organism only the power that have to be put into effect ensuring the main object.

In Cotman v Broughham (1918) the House of Lords reluctantly accepted an objects clause that was very widely drafted with a clause at the end stating that any of the objects listed could be carried on as the company’s main objects.

In Re Jon Beaufort (London) Ltd11 the company’s object stated that it was to carry on a business as gown makers but the business had evolved into making veneered panels. No change had been made to the object clause to reflect this change. A coal merchant had supplied coal to the company which was ordered on company notepaper headed with a reference to the company being veneered panel maker. The coal merchant was deemed because of constructive notice to know of the original objects clause and because of the headed notepaper to have actual notice of the change in the business. Consequently, the contract was treated as ultra vires and void.

In Re Introductions Ltd v National Provincial Bank12 the case concerned a company incorporated in 1951 around the time of the Festival of Britain with the specific object of providing foreign visitors with accommodation and entertainment. After the Festival was over the company diversified and eventually devoted itself solely to pig breeding, which the original framers of the objects had not considered (naturally enough).

The company had granted National Provincial Bank a debenture to secure a substantial overdraft that had accumulated before its eventual insolvent liquidation. In this case, held that this company had liable for the ultra vires act. Consequently, this contract was canceled as well as the bank could not enforce the debenture, not only that the Bank had not claimed as a common creditor in the liquidation. As a result of cases like this, it was generally agreed that only intervention could solve the problem in the long term.

Agency principle may be applicable here. The normal general principles of the agency will apply to determine whether Falcon Ltd is bound by the financial speculation activities. If an individual acted as an agent of the company then it can be assumed that he has ostensible authority to enter into the contract. The principle may also ratify a contract entered into without authority. This type of authority arises where rather than any actual authority being given to the board of directors or the general meeting allow someone to hold themselves out as having such authority or allowing someone to hold themselves out as having a position in the company that would have such authority.

In Freeman & Lockyer v Buckhurst Park Ltd13 a firm of architects was engaged by a person acting as Buckhurst’s managing director. Buckhurst would not pay the fees as it claimed he was not the managing director as he had never been appointed managing director. The CA upheld the architect’s claim ruling that though he was never appointed as managing director and had no definite power he had ostensible authority to contract for the company.

Falcon Ltd’s object is more specific. Its constitution contains an express provision prohibiting it from engaging in any financial speculation activities. Here the constitution had a potentially drastic effect on outsiders as they were deemed to know about any internal procedures in the constitution as it is a public document.

Therefore it can be said that if an individual act according to the constitution of the company but he had no authority to do it than this act also amount to ultra vires because the individual’s failure to comply internal procedure. The court found that the director’s failure to observe the articles rendered the contract contrary to the articles unenforceable. If the doctrine of constructive notice was applied strictly the outsider could not complain about the lack of authority as they were deemed to know that there was a limit on the actual authority of the company’s agent14.

In Turquand15 case was intended to limit the inquiries that persons dealing with companies had to make. Directors borrowed money from Royal Bank on its behalf and had attached the company’s seal and it was approved by the members but the company claimed that no resolution had been adopted to cover this borrowing. The company argued that it was not necessary to pay back the money because the manager who negotiated the loan should have been authorized by a resolution of the general meeting to borrow but he had no such authorization. As a result of the doctrine of constructive notice the bank deemed to know this.

The court held that the public documents only revealed that a resolution was required not whether the resolution was passed. In attempting to mitigate this effect the court held that the public documents only revealed that a resolution was required not whether the resolution had been passed. The bank did not know that the resolution had not been passed and thus it did not appear on the face of the public documents that the borrowing was invalid. Outsiders are therefore entitled to assume that the internal procedures have been complied with. This is often called the indoor management rule.

In 1972 the UK joined the European Community and as part of its obligations on entry, it introduced legislation reforming ultra vires in s.9 (1) of the ECA 197216. This section undoubtedly eliminated the doctrine of constructive notice where it concerned the company’s constitution17. It also contained a saving provision for ultra vires transactions where the transaction was dealt with by the directors and the third party was acting in good faith. Now Falcon Ltd can change their constitution to avoid ultra vires issues. Now the company can change its memorandum under s.4 into the CA 1985 which was introduced by s.110 of the CA 1989. To amend the memorandum it’s required 75% of the majority vote. So Falcon Ltd will be bound by the contract if they ratified the contract by special resolution.

In a new law that is s.39 (1) of CA 2006 and s.35 (1) CA 1985 provides the same provision. The Act makes the sense that any action taken by a company should not be questioned reasoning by the ground of lacking or contradictory with the company’s constitution. The outcome of the act is that if a company rather than any charitable company, could not refuse or ignore to honour a contract just for the reason that it is incapable or contradictory within the company’s vision or objects, because it could have completed beneath the old ultra vires rule.

Now the question arises whether Tom and Jerry had the authority to enter into the contract or whether they will be liable in any way for having breached an express constitutional provision of Falcon Ltd. Section 40 (3) of CA 2006 emphasizes the directors must observe any internal restrictions on their powers flowing from the constitution. They will be a breach of duty it they do not uphold the constitution18. An ultra vires transaction can be ratified by a special resolution of the general meeting but this will not affect the liability of the directors for breach thus a separate special resolution passed by the members is the only way the directors can be relieved from liability for an ultra vires act. But here it is necessary to indicate that they were company officers not directors of the company.

The Companies Act 2006, s 40 (2) (a) only protects the outsider by enforcing the contract valid but it does not protect the insider. Section 40 (4) CA 2006 provides that officers will be liable for breach of duty if they do not uphold the constitution. From the above discussion, it can be said that Falcon Ltd will be bind by the contract but Tom and Jerry are still liable for the contract though it can be approved by the special resolution.

Bibliography

Gower, L.C.B, & Davies, P.L. (2007) Principles of Modern Company Law, Sweet & Maxwell, 8th edition, Page 320-330.

J. Lowry & A. Dignam, (2007), Company Law, 4th edition, Oxford University Press, Page: 261- 278.

Lipton, P & Herzberg, A, (2008), Understanding Company Law, 14th edition, Gaunt Inc, pp-552- 578.

Mayson, French & Ryan, (2007) Company Law, 24th edition, ISBN-13: 978-0-19-921081-7, Oxford University Press, pp-571-620.

Markesinis and Deakin, (2003), Tort Law, 5th Edition, Clarendon Press-Oxford, pp-62-79.

1. Salomon v Salomon & Co. [1897] AC 22.
2. [1990] 2 AC 605.
3. [1961] AC 388 PC.
4. [1911] 1 KB 869.
5. [1915] AC 705.
6. Tesco Supermarkets Ltd v Nattrass [1971] 2 AII ER 127.
7. Trade Description Act 1968.
8. Ashbury Carriage Company v Riche (1875) LR 7 HL 653.
9. (1880) 5 App Cas 473, HL.
10. (1882) 20 ChD 169, CA.
11. [1953] Ch 131.
12. (1970) Ch 199.
13. [1964] 2 QB 480, CA.
14. Knopp v Thane Investments Ltd (2003) 1 BCLC 380.
15. Royal British Bank v Turquand (1856).
16. European Communities Act 1972.
17. memorandum and articles of association.
18. Mayson, French & Ryan, (2007) pp-584.