NO VALIDATION OF DIRECTOR'S ACT

A company director could not rely on his own mistake to invoke statute in order to validate an action unauthorised by the company's constitution.

The Court of Appeal so held dismissing an appeal by Geoffrey Paul Smith from the striking-out by Mr Justice Rimer on October 17, 2001 of his action against the defendants, Henniker-Major & Co, a firm of solicitors.

Mr Smith was a shareholder, chairman and one of three directors of a company, SPFL, formed in 1993 to identify sites for development. Mr Smith claimed that the other two directors diverted the company's business to another company, SPL, and that the solicitors wrongfully accepted a retainer on behalf of SPL when already instructed by SPDL.

Mr Smith took proceedings under section 459 of the Companies Act 1985 alleging unfair prejudice in the conduct of the company's affairs. In 1998, when one of the other directors had resigned he convened a board meeting of SPDL.

He notified the only other director, who did not attend, and believing that he had power under the company's articles to act alone, he resolved to assign SPDL's causes of action to himself personally.

Mr Smith then executed an assignment on behalf of the company and issued proceedings against the solicitors who denied breach of duty and claimed that in any event the assignment was ineffective because the board meeting was inquorate.

In 2001 Mr Smith entered into a deed with SPDL purporting to ratify the 1998 assignment and introducing new terms. The solicitors applied to the court for summary judgment.

The judge had held that the assignment was invalid and that the 1998 deed did not ratify the assignment retrospectively. He refused an application to amend the pleadings to rely on the 2001 deed.

Section 35A of the Companies Act 1985, as substituted by section 108(1) of the Companies Act 1989, provides:

"(1) In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution."

LORD JUSTICE ROBERT WALKER, dissenting in part, said that section 35A was engaged if a genuine decision was taken by a person or persons who could on substantial grounds claim to be the board of directors acting as such even if the proceedings were marred by procedural irregularities. The essential distinction was between a nullity or non-event and procedural irregularity.

If an outsider had been negotiating with the company, believing the board meeting to have been properly constituted, Mr Smith's one-man meeting would have attracted the protection of the section.

Since "a person dealing with a company" in section 35A made no distinction between a director and an outsider, the meeting should be deemed to have been properly constituted.

His Lordship went on to hold, in agreement with Lord Justice Carnwath that the 2001 deed could not operate as a retrospective ratification of the assignment, nor would permission to amend be given. The 2001 deed contained additional provisions.

LORD JUSTICE CARWATH said that the problem relating to section 35A could not be solved by re-organising a distinction between "nullity" and "procedural irregularity". Although the words any "person dealing with a company" were wide enough to include a director, the facts here were quite exceptional.

Mr Smith was not simply a director dealing with the company. As chairman of the company it was his duty to ensure that the constitution of the company was properly applied, yet he was personally responsible for the error, by which he purported to turn himself into a one-man board.

Assuming an honest mistake, did not make it any less a mistake, or one for which he was any less responsible. He could not rely on his own error to turn his own decision, which had no validity under the company's constitution, into a decision of "the board".

Even on a purposive approach to section 35A, which suggested a lower threshold for its operation, there was nothing to give it that magical effect.

Lord Justice Schiemann delivered a judgment agreeing with Lord Justice Carnwath on the section 35A point.

"The Times" 29th August 2002