COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (RIMER J)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE ROBERT WALKER
LORD JUSTICE CARNWATH
|- and -|
|HENNIKER-MAJOR & CO||Respondent|
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Christopher Symons QC and Mr Daniel Gerrans (instructed by Mills & Reeve) for the respondent
AS APPROVED BY THE COURT
Crown Copyright ©
Lord Justice Robert Walker:
“Mr Smith convened a board meeting of SPDL for 12 August 1998. He gave notice of it to Mr McCall by a letter of 9 August 1998. Mr McCall replied on 10 August, saying that he was unable to attend the meeting, and nor did he. The meeting was attended by Mr Smith alone. Its minutes record that he was authorised to sign two assignments which were before the meeting. One of them was that with which this action is concerned, namely an assignment of certain of SPDL’s alleged claims to Mr Smith himself.”
“1 The Assignor considers themselves to be rightful in taking proceedings for damages for negligence and/or breach of contract against Henniker-Major & Co, the Assignors appointed Company Solicitors.
2 The Assignor Company is based in England.
3 The Assignee is desirous of acquiring all of the rights subsisting in the above referred to rights, and the Assignor has agreed to assign all the said rights to the Assignee accordingly.
4 The Assignee indemnifies the Assignor against any costs of such pursuit of the Rights afforded by the said Court Order.
5 The Assignee is the only remaining Creditor of the Assignor Company.
6 The consideration for the aforementioned assignment, shall be an undertaking that whilst the pursuit of any entitlements against Messrs Henniker-Major & Co, the Assignee shall hold off any action to recover the acknowledged indebtedness sum due to him, in the order of £45,000 (plus any interest due) until all efforts to recover this sum elsewhere are exhausted.
7 This Assignment was approved and agreed at a properly convened meeting of the Board of Directors of the Assignor Company held on the 12th of August 1998 and held at the Registered Office.
8 The signatory below is Chairman of the Board of Directors of the Assignor Company and the Company will be bound by the terms of this agreement save by prior mutual consent between the Assignor and the Assignee.”
The assignment was signed (once) by Mr Smith as director and chairman, and dated in manuscript ‘14-8-98’.
“(1) SPDL hereby ratifies the 14/8/98 Assignment to the fullest extent possible and, for the avoidance of doubt, retrospectively.
(2) Without prejudice to clause (1) above, SPDL hereby confirms and repeats the assignment by it to Mr Smith of all claims against Henniker-Major & Co, including for the avoidance of doubt all claims now pleaded in the proceedings begun by Mr Smith against Henniker-Major & Co in the Queen’s Bench Division, Ipswich District Registry on 28th September 1999, Claim No. IP 990075, and since transferred to the Chancery Division, London. As between SPDL and Mr Smith, this clause (2) shall take effect so far as possible from 14th August 1998.
(3) Mrs Smith hereby assigns to Mr Smith in equity all her claims against, including for the avoidance of doubt all her interest in claims against, SPDL.
(4) It is hereby agreed between SPDL, Mr Smith and Mrs Smith that the consideration for the assignment by SPDL to Mr Smith of all claims against Henniker-Major & Co effected by the 14/8/98 Assignment and/or by this deed shall extend beyond clause 6 of the 14/8/98 Assignment to the satisfaction of all claims of Mr Smith and/or Mrs Smith against SPDL, whether or not Mr Smith makes any recovery against Henniker-Major & Co and irrespective of the amount thereof; but so that: -
(a) for the avoidance of doubt, if such assignment by SPDL to Mr Smith is invalid, the claims of Mr Smith and/or Mrs Smith against SPDL shall not be satisfied thereby; and
(b) if Mr Smith makes recovery against Henniker-Major & Co but is required for any reason to, and does: -
1. account for it or part of it to SPDL, or
2. pay it or part of it or an amount equal to it or part of it to SPDL,
then to the extent of the amount so accounted for or paid by Mr Smith to SPDL, but to a maximum of the amount by which the amount of the above claims of Mr Smith and/or Mrs Smith against SPDL (including any claims or potential claims to interest under Section 35A of the Supreme Court Act 1981 or otherwise) exceeds the amount so recovered by Mr Smith and retained by him net of the beneficial interest described at sub-clause 5(a) below, the claims of Mr Smith and/or Mrs Smith against SPDL shall not be satisfied by the assignment by SPDL to Mr Smith; and so that where the claims of Mr Smith and/or Mrs Smith against SPDL are satisfied in part but not in full, each such claim shall be satisfied rateably.
(5) Mr Smith declares that he holds all claims against Henniker-Major & Co assigned to him by the 14/8/98 Assignment and/or by this deed, and their fruits, upon trust: -
(a) to apply 24% of such fruits, or such lesser percentage thereof as may suffice, in indemnifying SPDL against any valid and enforceable claim by Mr C M Meynell under paragraph 17 of the Order dated 19th May 1995 made by His Honour Judge Bromley QC in proceedings in the Cambridge County Court in relation to SPDL, the short reference to which was List 2/94; and subject thereto
(b) for himself.”
“The issue which arises under that document is as to whether it was in fact a true ratification of the 1998 transaction. If it was, then at least for certain purposes its effect would have been retrospective and the 1998 transaction would be regarded as having always been a valid one. Mr Steinfeld submitted, however, that it was not a true ratification at all. If it was not, then the 1998 transaction would remain the unauthorised transaction which it has always been, and the 2001 transaction would have operated for the first time - and only as from 31 August 2001 - to assign to Mr Smith SPDL’s causes of action against HM.
Mr Steinfeld’s submission was that it makes no difference to Mr Smith’s plight whether or not the 2001 deed was a true ratification. He said that either way Mr Smith’s procedural problems are insoluble. His primary argument, however, was that the deed did not effect the true ratification.”
The section 35A point
“1. Acts done by the organs of the company shall be binding upon it even if those acts are not within the objects of the company, unless such acts exceed the powers that the law confers or allows to be conferred on those organs.
However, Member States may provide that the company shall not be bound where such acts are outside the objects of the company, if it proves that the third party knew that the act was outside those objects or could not in view of the circumstances have been unaware of it; disclosure of the statutes shall not of itself be sufficient proof thereof.
2. The limits on the powers of the organs of the company, arising under the statutes or from a decision of the competent organs, may never be relied on as against third parties, even if they have been disclosed.”
“(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.
(2) For this purpose –
(a) a person ‘deals with’ a company if he is a party to any transaction or other act to which the company is a party;
(b) a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution; and
(c) a person shall be presumed to have acted in good faith unless the contrary is proved.
(3) The references above to limitations on the directors’ powers under the company’s constitution include limitations deriving –
(a) from a resolution of the company in general meeting or a meeting of any class of shareholders, or
(b) from any agreement between the members of the company or of any class of shareholders.
(4) Subsection (1) does not affect any right of a member of the company to bring proceedings to restrain the doing of an act which is beyond the powers of the directors; but no such proceedings shall lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company.
(5) Nor does that subsection affect any liability incurred by the directors, or any other person, by reason of the directors’ exceeding their powers.
(6) The operation of this section is restricted by section 65(1) of the Charities Act 1993 and section 112(3) of the Companies Act 1989 in relation to companies which are charities; and section 322A below (invalidity of certain transactions to which directors or their associates are parties) has effect notwithstanding this section.”
“In favour of a person dealing with a company in good faith, any transaction decided on by the directors shall be deemed to be one which it is within the capacity of the company to enter into, and the power of the directors to bind the company shall be deemed to be free of any limitation under the memorandum or articles of association; and a party to a transaction so decided on shall not be bound to enquire as to the capacity of the company to enter into it or as to any such limitation on the powers of the directors, and shall be presumed to have acted in good faith unless the contrary is proved.”
“In approaching the construction of the section, it is in my judgment relevant to note that the manifest purpose of both the directive and the section is to enable people to deal with a company in good faith without being adversely affected by any limits on the company’s capacity or its rules for internal management. Given good faith, a third party is able to deal with a company through its “organs” (as the directive describes them) or directors. Section 9(1) achieves this in two ways: first it “deems” all transactions to be authorised; second, it deems that the directors can bind the company without limitations. The second part of the subsection reinforces this by expressly abolishing the old doctrine of constructive notice of the contents of a company’s memorandum and articles. It being the obvious purpose of the subsection to obviate the commercial inconvenience and frequent injustice caused by the old law, I approach the construction of the subsection with a great reluctance to construe it in such a way as to reintroduce, through the back door, any requirement that a third party acting in good faith must still investigate the regulating documents of a company.”
What the Vice-Chancellor referred to as the first way, the second way and the reinforcement are now to be found in s.35, s35A and s.35B respectively.
“Any provision in the articles as to the manner in which the directors can act as agents for the company is a limitation on their power to bind the company and as such falls within the first part of section 9(1).”
“All that section 35A does is to deem the board of directors to be free of any limitation on its powers which the company’s constitution imposes. In this context, the reference in section 35A to the power of the “board of directors to bind the company” can sensibly only be to powers exercisable by the directors when they gather together and act as a board. It is only possible to ascertain how they can so act – and whether in any particular case they have done so – by examining the articles relating to their proceedings. If the articles provide that a quorum for their meetings is three, then a meeting of only two of them will not be a meeting of “the board” at all, or at any rate it will not be a meeting at which the board can transact business. If, despite this, such a meeting purports to resolve to bind the company to a transaction, it will not be an exercise of the board’s power at all, it will be a nullity. In that example, the point of inquiry as to whether section 35A has any application has simply not been reached. It is irrelevant to inquire whether a particular power is free of a particular limitation in a case in which the power has not been exercised at all.”
“Just as the Vice-Chancellor held that it was necessary to be able to show that the relevant transaction had been decided on by the board before section 9(1) could come into play, I also consider it clear that it is necessary to be able to show a transaction decided on by the board before section 35A can operate.”
“Since Link never sealed the debenture in the only way authorised by the articles, there was no transaction by Link at all; the debenture was not the act of Link. If this argument is right, it drives a coach and horses through the section. In every dealing with the company the third party would have to look at its articles to ensure that the company was binding itself in an authorised manner. In my judgment the section does not have that effect.”
Then after considering its effect in relation to a company’s capacity the Vice-Chancellor continued,
“Similarly a document under seal by the company executed otherwise than in accordance with its articles was not, under the old law, the act of the company: but section 9(1) deems it so to be since the powers of the directors are deemed to be free from limitations, ie as to the manner of affixing the company’s seal.”
“It is one thing, in the interest of harmonizing laws to facilitate inter-state trade, to provide that third parties dealing with the board of directors of a company can safely assume that the board’s capacity to bind the company is unlimited; it is another to emancipate third parties from the need to verify that the individuals they are dealing with are in fact the company’s board, or have authority from the board, just as they need to do when dealing with an agent professedly acting for a non-corporate principal.”
“The evidence clearly established that no such meeting of the directors of Link ever took place. But in fact all the directors of Link individually had decided to grant the debenture, although not at a meeting at which they were all present.”
So the absence of a properly-convened meeting, or a signed written resolution, was treated as an irregularity. It is true that the Vice-Chancellor then went on to refer to Link having put forward the (false) board minutes as one of the completion documents, and so being unable to deny their validity. In that case solicitors had undoubtedly been instructed on behalf of the company and so it was plainly possible to rely on their ostensible authority. But in other circumstances resort to the doctrine of estoppel would simply shift the problem of whether a representation purportedly made by a company had been authorised by the board of directors or (in the absurd extreme example) by the office boy.
i) The contrary reading would be inconsistent with section 322A of the Companies Act 1985, a provision introduced as part of the same set of amendments made by the Companies Act 1989, which must have been intended to have a coherent scheme.
ii) The natural meaning of “person” is wide and the court should be slow to find an unexpressed limitation in what are quite detailed statutory provisions.
iii) That point was reinforced by doubt as to what limitation ought to be read in, if there were to be any interference with the statutory text.
iv) All or most leading textbooks take the view that s.35A(1) is not restricted in this way.
“(1) This section applies where a company enters into a transaction to which the parties include –
(a) a director of the company [ ... ]
and the board of directors, in connection with the transaction, exceed any limitation on their powers under the company’s constitution.
(2) The transaction is voidable at the instance of the company.
(4) Nothing in the above provisions shall be construed as excluding the operation of any other enactment or rule of law by virtue of which the transaction may be called in question or any liability to the company may arise.
(7) This section does not affect the operation of section 35A in relation to any party to the transaction not within subsection (1)(a) or (b) ... ”
“There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all.”
appears to me to give some slight support to the view which I have expressed in paragraph 41 above. I readily acknowledge that it is not a wholly satisfactory test but I can see no alternative short of what I would regard as an unduly restrictive reading of section 35A.
The ratification issue
“It is well established that a ratification may be implied from conduct. It is further well established that the adoption of part of a transaction operates as a ratification of the whole transaction. A principal cannot pick out of a transaction those acts which are to his advantage. If he ratifies at all he must ratify cum onere:”
“ ... was, apart from its attempts to ratify the 1998 assignment, to make the terms of that assignment appear a little more respectable and a little less one-sided.”
“Any true ratification in this case would therefore have required SPDL to manifest an intention to adopt the 1998 transaction in its entirety, including the modest consideration to be found in clause 6 of the 1998 assignment. But it is obvious from a reading of the 2001 deed that SPDL was not doing that.”
“Ratification is not effective where to permit it would unfairly prejudice a third party, and in particular –
(1) where it is essential to the validity of an act that it should be done within a certain time, the act cannot be ratified after the expiration of that time, to the prejudice of any third party,
(2) the ratification of a contract can only be relied on by the principal if effected within a time after the act ratified was done which is reasonable in all the circumstances.”
The most important English authority cited in support of this statement of principle is the decision of this court in Re Portuguese Consolidated Copper Mines Ltd (1890) 45 Ch D 16. It is also necessary to examine closely the decision of this court in Presentaciones Musicales SA v Secunda  Ch 271, which is discussed (without whole-hearted approbation) in Bowstead and Reynolds at 2-089.
“ ... as it is an election, it must take place within a reasonable time, and the standard of reasonableness must depend upon the circumstances of the case.”
“ ... that the act of ratification must be taken at a time, and under circumstances, when the ratifying party might himself have lawfully done the act which he ratifies.”
(The clearest illustration of that principle is in the field of landlord and tenant; a party cannot, by means of an unauthorised notice to quit, postpone the moment at which he has to make a decision until after the time for giving notice has expired.) In Presentaciones the defendants sought to apply the same principle to ratification of an action after the cause of action was wholly or partly statute-barred.
“ ... if a time is fixed for doing an act, whether by statute or by agreement, the doctrine of ratification cannot be allowed to apply if it would have the effect of extending that time.”
He then considered the effect of the Limitation Act 1980 (which was complicated, on the facts of the case before the court, by transitional provisions effecting the transition from the Copyright Act 1956 to the Copyright Designs and Patents Act 1988).
“Where a writ is issued without authority, the cases show that the writ is not a nullity. For the nominal plaintiff to adopt the writ, or ratify its issue, does not require any application to the court. Accordingly, on the same general principle that justifies Pontin v Wood  1 QB 594, the plaintiff, in the simple example of an action raising a single cause of action which has been begun by solicitors without authority, must be entitled to adopt the action notwithstanding the expiration of the limitation period applicable to that cause of action.”
“The rule as to ratification is of course subject to some exceptions. An estate once vested cannot be divested, nor can an act lawful at the time of its performance be rendered unlawful, by the application of the doctrine of ratification.”
Roch LJ then noted (to my mind correctly) that Cotton LJ was there giving examples of exceptions, rather than setting out an exhaustive list of exceptions (p.285). Then at pp.285-6 Roch LJ said (apparently treating non-divestment as the exception which might be relevant),
“I would suggest that that exception ought to be stated in these terms: that the putative principal will not be allowed to ratify the acts of his assumed agent, if such ratification will affect adversely rights of property in either real or personal property including intellectual property, which have arisen in favour of the third party or others claiming through him since the unauthorised act of the assumed agent. The expiry of the limitation period in the present case does not create any such right in the defendants; if applicable it would merely bar the plaintiff company’s remedies. I would not extend this exception to cases such as the present where a defendant would receive a windfall defence in a case where the vice against which the Limitation Acts are designed to protect defendants, namely the bringing of claims at a time so far after the occurrence of the cause of action that a defendant is put at a disadvantage in defending the claim, does not exist.”
“The right of action on behalf of [SPDL] is being assigned to Mr Smith. You will note from the judgment that he has been given leave by the Learned Judge to take action for and on behalf of [SPDL].”
This contained two inaccuracies. The 1998 assignment had already taken place and there is no evidence that a fresh assignment was in mind at that stage. Moreover Judge Bromley had not given leave for proceedings against the solicitors.
The amendment issue
“The first basis is that, if the addition were allowed, it would relate back, so that the action would be deemed to have been begun as against the person added, not on the date of amendment, but on the date of the original writ; that the effect of such relation back would be to deprive the person added of an accrued defence to the claim on the ground that it was statute-barred; and that this would be unjust to that person. I shall refer to this first basis of the rule of practice as the “relation back” theory.
The second and alternative basis for the rule is that, where a person is added as defendant in an existing action, the action is only deemed to have been begun as against him on the date of amendment of the writ; that the defence that the claim is statute-barred therefore remains available to him; and that, since such defence affords a complete answer to the claim, it would serve no useful purpose to allow the addition to be made. I shall refer to this second and alternative basis of the rule of practice as the “no useful purpose” theory.”
“There is, in my view, a high degree of artificiality and unreality about the “relation back” theory. There is no reason to quarrel with the general proposition that an amendment of a writ or a pleading relates back to the original date of the document amended, as stated by Lord Collins MR in Sneade v Wotherton Barytes & Lead Mining Co  1 KB 295, 297. This seems to me to be an entirely sensible proposition so long as the amendment concerned does not involve the addition of a new party, either as plaintiff or defendant, or the raising of a new cause of action, but involves only the modification, by addition, deletion or substitution, of pleas or averments made between existing parties in respect of a cause or causes of action already raised. Where, however, the amendment concerned involves the addition of a new party or the raising of a new cause of action, it appears to me to be unrealistic and contrary to the common sense of the matter to treat it as relating back in the same way.”
Brandon LJ’s provisional conclusion was approved by the House of Lords in Ketteman v Hansel Properties Ltd  AC 189 (although Lord Brandon dissented as to the outcome of that appeal).
“ ... any claim involving either –
(a) the addition or substitution of a new cause of action; or
(b) the addition or substitution of a new party.”
“The purpose of these recommendations was to allow a limited number of amendments to existing proceedings to be made after the expiry of the limitation period which could not have been made before. They were not intended to deprive the court of any existing power to allow amendments after the expiry of the limitation period, nor were they intended to cover amendments which, though made after the expiry of the limitation period, were not statute-barred. It would have been completely outside the committee’s terms of reference to make any recommendations of the latter kind.”
“The selection of the material facts to define the cause of action must be made at the highest level of abstraction.”
“The policy of the section is that, if factual issues are in any event going to be litigated between the parties, the parties should be able to rely upon any cause of action which substantially arises from those facts.”
“If a statement of claim fails to disclose a cause of action, but by some amendment can be made to do so on the same facts or substantially the same facts as those already pleaded, I cannot believe that the Rule Committee intended that, if the limitation period had expired, there should be no discretion to allow the amendment. It may be that in some cases it should not be allowed; perhaps a plaintiff whose original claim was manifest nonsense should not be allowed to cure it after the limitation period had expired, even if he can do so on substantially the same facts. For example, a plaintiff who pleads that the defendant ran him down in his car, and claims damages for libel, might not be allowed to amend “libel” to “personal injury” after the expiry of the limitation period. But that would be an exercise of discretion, and is not remotely like this case.”
“The purpose of the re-amendment is to specify the reason why the plaintiff alleges that he is entitled to bring the claim. The cause of action remains the same: the additional facts cause no prejudice or embarrassment to the defendants.”
“As matters stand at present, [Mr Smith] is in effect suing as an impostor. What he wants to do is to plead a post-claim form event which will actually give him a title to sue. In my view, those features of his proposed amendments are so fundamental that they cannot fairly justify the new claim as one which can be regarded as arising out of “substantially the same facts” as the current claim, let alone out of the same facts.”
Lord Justice Carnwath:
“It has to be borne in mind on this aspect of the case that I have to determine whether a valid debenture was granted by Link. In my judgment Link, having put forward the minutes of the meeting of 25th January as one of the completion documents on the basis of which TCB made the loan, could not be heard to challenge the validity of that minute by denying that such a meeting ever took place. Therefore the minute stands as irrefutable evidence against Link that the grant of the debenture was a ‘transaction decided upon by the directors’. Accordingly the necessary basis for section 9(1) of the Act of 1972 to apply as between Link and TCB, exists.” (p637 C-E).
“For here Morris was himself purporting to act on behalf of the company in a transaction in which he had no authority. Can he then say that he was entitled to assume that all was in order? My Lords, the old question comes into my mind, ‘Quis custodiet ipsos custodes?’ It is the duty of directors, and equally of those who purport to act as directors, to look after the affairs of the company, to see that it acts within its powers and that its transactions are regular and orderly. To admit in their favour a presumption that that is rightly done which they have themselves wrongly done is to encourage ignorance and condone dereliction from duty…. (p 476).
Lord Justice Schiemann:
The limits on the powers of the organs of the company, arising under the statutes or from a decision of the competent organs, may never be relied on as against third parties, even if they have been disclosed.