By Jessica Middleton - October 2018
In the recent Court of Appeal case of Bishop Warden Property Holdings Limited v Autumn Tree Limited, a director of a property development company, Tina, entered into an agreement to sell the company’s major property asset at a price significantly below value. At some stage before signing, the purchaser checked the Companies Office register for the company, which apparently showed that Tina was the sole director of the company. The parties signed the agreement at approximately 6pm on 3 August 2017.
However earlier that day, the company had registered another director, Anna. This meant that at the time the agreement was signed, only one of two directors had signed it. Tina claimed that she was the sole director at the time the agreement was signed and that she had full authority to sign it. The purchaser, which was attempting to prove that the agreement was valid and gave rise to interests in the property, agreed with Tina's assertion.
The Court of Appeal noted that in most circumstances, a party entering into a contract with a company will be entitled to assume that the company has complied with all its internal procedures to authorise its entry into the contract, and that the agreement is valid.
Section 18 of the Companies Act 1993 was enacted for this very purpose – it provides that a company cannot assert non-compliance, lack of authority or invalidity of a document against a third party on the basis that the company did not comply with the Act or its constitution, or that a person named as a director on the register or held out by the company as a director has in fact not been appointed and did not have authority to enter into the document.
Simply put, a company cannot use its own failure to comply with its own procedures as an excuse to get out of an agreement with a third party, if it has represented that the transaction is otherwise valid.
However in the Autumn Tree case, the Court found that the purchaser could not rely on this assumption to protect the validity of the agreement. While a sole director may enter into a significant contract on behalf of the company, a director who is one of multiple directors would not customarily have authority to do so, without express authorisation from the company to the contrary, such as a directors’ and/or shareholders’ resolution, depending on the transaction. In the case of “major transactions”, shareholder approval will generally be required.
At the time the agreement was signed, Tina was not the sole director of the company as Anna had already been registered as a director. The company had held out (by virtue of the Companies Office register entry) that both Anna and Tina were registered as directors. One of two directors of a property development company would not customarily have authority to unilaterally enter into a significant property transaction, and Tina did not have any other express authority from the company to enter into the agreement alone.
It makes sense that a person will not be able to rely on section 18 if they have actual knowledge of a defect in authority. The Court in Autumn Tree noted that actual knowledge went so far as to include “wilful blindness” – where a person is sufficiently aware that something is wrong, but deliberately avoids further investigation.
There is a further exception to the protections of section 18 on the basis of constructive knowledge of a defect, found in the proviso: “unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge …”.
The Court in Autumn Tree confirmed the prior approach by the High Court in Equiticorp, that if a person has an ongoing relationship with a company and by virtue of that relationship knows or ought to know that, for example, a signing director does not have authority, or that someone being held out by the company as a director is actually not one, that person cannot rely on section 18 to protect a contract.
This case serves as a red flag to parties dealing with a director of a company who is flying solo – whether they are the only director or one of several is a critical point to check before entering into a contract. If they are a sole director, make sure you are working from the most up-to-date Companies Office register entry. If they are one of multiple directors purporting to act alone on behalf of the company, it is not unreasonable to ask for further evidence of sufficient actual authority of the company. One director signing on behalf of a company with a board of several, even with a witnessed signature, may not be enough.
Jessica is a Senior Solicitor in our Commercial Team and can be contacted on 07 958 7436.