Company - Ultra vires & the authority of company agents - Notes (1)

VI. Ultra Vires & the Authority of Company Agents

Consequence of the transaction being held ‘ultra vires’:
(i) External
- Effect between company and 3rd party
- At common law the transaction was VOID: it could not be ratified
* irrelevant that 3rd party did not know, form the object clause that the capacity of the company did not cover the current transaction
* By the doctrine of ‘constructive knowledge’, she was deemed to know what the objects clause said, and what it covered
(ii) Internal
- Effect between shareholders and the directors
(a) the memorandum is part of s14 contract, i.e. the shareholder has invested her money on the assumption that it will only be used for lawful, intra vires purposes.
Therefore if the company purports to use the money for ultra vires purposes, she has a personal contractual right to stop the company so doing
(b) By making the company do something ultra vires, the directors have breached their fiduciary duties owed to the company.
Note that the duty is owed to the company, so the company alone can take action against directors to recover and loss suffered

Reform of CA 35
- abandon the external effects but to retain the internal effects, i.e. to make ultra vires contracts binding between the company and 3rd parties, but not to lose the rights of shareholders or of the company as against its directors

Consequences of lack of authority
(i) External
- The contract is voidable
- If the company wishes to avoid, then it can do so.
- If the 3rd party wishes to avoid, it is a bit more difficult
- If the company chooses not to affirm, the 3rd party might be able to sue the unauthorized agent with which it dealt for breach of warranty of authority

(ii) Internal
- To the extent that a shareholder can insist the company is properly run, then she can stop the company doing sth which has not been authorized by the proper person -> personal action
- if a person does cause the company to act in a way he was not authorized to make it do, then that person might breach their duties and be subject to action (action by the company)

Types of authority:
- Express authority
- Implied authority
- Ostensible authority
- Restriction authority in the company’s constitution- CA 1985 35A