Ultra Vires 2019

Bachelor of Laws Company Law ITC School of Laws
Revision Answer Guides 2018/2019
ULTRA VIRES
2007 Zone B Q5
Arad is the new managing director of Core Ltd, a company that operates recycling
business. During Arad’s review of the business, he notices that Core’s objects
clause states: The business of the company is to manufacture industrial paint.
On further enquiry, Arad discovers that over the past 50 years the company has
slowly moved away from paint manufacture but has never changed its objects
clause. He also discovers that the articles of association specifically restrict the
managing director from borrowing amounts over 100,000 pounds.
Arad is ver concerned about this, as he has just signed a loan agreement with Leaf
Bank for 500,000 pounds to expand the business.
Discuss the implications of Arad’s discover for the company and the bank.
The issues:
The carrying on of business contrary to the objects clause
- transactions carried on by the company would be subject to the ultra vires
doctrine
The loan for 500,000
- As the loan is in pursuance of a business that is not provided for in the objects
clause, there is an UV issue. As the amount exceeds the sum authorised in the articles
(100,000), the director is acting beyond his authority.
Deal with UV first

The Law:
This is a common law doctrine that continues to apply despite the reduction of its
significance as a result of successive Companies Act amendments.
Ashbury Carriage Company v Riche (1875)
UV doctrine applies to all companies. Loan transaction was approved by shareholders.
But, the loan was advanced for a purpose that was not provided for in the objects.
Held: Ultra Vires. Any UV transaction would be void ab initio & unenforceable. Company
cannot sue on it. Third party with notice cannot sue on it. (There will be constructive
notice of the restriction. Actual notice of the breach arise as a result of the transaction
itself when it is contrary to the objects.)
It cannot be ratified by the shareholders.
AG v Great Eastern Railway (1880)

Lord Selbourne: ‘…whatever may fairly be regarded as incidental…consequential
…ought not to be held…to be ultra vires…’
This is seen as a relaxation of the UV doctrine.
OTF: objects: manufacturing paint

Company's business - recycling business. Is it related? Consequential to the objects?
May have started out that way. But,
Unrelated. Under the common law doctrine, this would be ultra vires.
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The Bell Houses Clause:

Bell Houses Ltd v City Wall Properties Ltd (1966)
'to carry on any other trade or business whatsoever which can, in the opinion of the board
of directors, be advantageously carried on by the company in connection with or as
ancillary to any of the above businesses or the general business of the company.'
But, it doesn't appear that there is a Bell Houses clause on our present facts.
The scenario is more like cases involving the borrowing powers which nevertheless had
to be read in the context of whether the company had the capacity in the first place.
Re Jon Beauforte Ltd (1953)
Gown makers… later went into making veneered panels. Contracts were ultra vires.
The 3rd party would have had constructive notice of the objects. When they were
corresponding with each other, the company’s letterhead referred to veneered panels.
This amounted to actual notice of the different line of business. Therefore, transaction
was void.
Similarly in
Re Introductions Ltd v National Provincial Bank (1970)
providing accommodation to visitors of Festival of Britain.
Diversified: pig breeding and selling
Held: Ultra Vires
S.35 CA 1986 (as amended by CA 1989) came close to abolishing the UV doctrine.
But, the doctrine still remained and the section allowed for UV transactions to be valid.
In CA 2006, the requirement of an objects clause has been removed. As such, companies
will be treated as general commercial companies capable of carrying out any business as
they deem fit, unless they choose to restrict themselves. s.31(1) CA2006 - Unless a
company's articles specifically restrict the objects of the company, its objects are
unrestricted.
s.39 CA2006 - validity of an act done by the company cannot be questioned on the
grounds of lack of capacity by reason of anything in the Company's constitution.
Effectively, any transaction that would be considered to be ultra vires under the common
law would be deemed to be valid. Third parties entering into contracts with the company
are unaffected.
OTF: Therefore, all the contracts that have been entered into to date are expressly
deemed to be valid including the loan obtained by Arad from the bank.
But, the old s.35 under CA 1985 was couched in such terms that a prospective UV
transaction may be restrained by the shareholders and such a transaction if it had already
been entered into may constitute a breach of the director's duty and that director may be
sued unless the shareholders ratify:
o prospective UV - restrain the transaction
o past UV - breach of director's duty
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Under the common law, one of the exceptions to the rule in Foss v Harbottle was stated
in Edwards v Halliwell as Ultra Vires transactions. It was possible for shareholders to
institute proceedings against directors when a transaction was UV. S.35 of the 1985 Act
provided statutorily for such a remedy.
The relevant sub-provisions under s.35 CA1985 have not been retained in s.39 CA 2006.
Instead s.171 CA2006 expressly states the directors have a duty to act in accordance
with the company's constitution. As such, a transaction in breach of the objects clause
would constitute a breach of duty under s,171. If there is a prospective breach, arguably
the company may be able to obtain an injunction to prevent the breach. This is not entirely
clear as there is no specific sub-provision in s.39 for that unlike s.40(4) which states: “This
section does not affect any right of a member of the company to bring proceedings to
restrain the doing of an action that is beyond the powers of the directors”
However, it is arguable that s.40(4) is broad enough to be used in situations where a

transaction is contrary to the objects clause. The phrase “beyond the powers of the
directors” could be read to include instances where directors act contrary to the objects
(as the objects will now be part of the Articles of the company). The court would have the
power to grant injunctive relief against prospective breaches generally as an equitable
remedy. If the breach has already occurred, then the transaction cannot be set aside as
it would have been validated by s.39. Thus, the director would be liable to the company
for the breach of his duty. That breach would be by virtue of s.171.
By virtue of s.239 CA 2006, majority shareholders will be in a position to ratify the breach
of the director’s duty. But, s.239(7) states that any rule of law on ratifiable breaches
remains. Under the common law, ultra vires was not ratifiable.
Pursuant to s.33 CA 2006, the Constitution is the contract between the Company and its
shareholders. As such, any breach by the company of the objects clause would also give
rise to a personal action by the individual shareholder. This will be consistent with
Edwards v Halliwel, where ultra vires transactions were seen as an exception to the
proper plaintiff rule.
OTF: we have UV transactions that have already taken place.

The loan will be valid as far as the bank is concerned (from the UV perspective)
Any future loans or contracts can be restrained by the shareholders.
The present loan that Arad has taken is UV the objects clause - Arad is therefore in breach
of his directors' duties.
A further issue:
The loan is not only UV the objects clause, it is also beyond the authority of the
director.
Arad has a borrowing power of only 100,000 pounds.
This is a contract that is now beyond the director's authority.

At the common law, this issue was dealt with by the rule in Turquand's case.
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Royal British Bank v Turquand (1856)

Articles: can borrow such sums as were authorised by ordinary resolution.
Ordinary resolution not required to be filed at Companies House.
Held: bank had constructive notice of the existence of the Article. But, they are entitled to
assume that the procedure was complied with. There would be no constructive notice of
the company not obtaining an ordinary resolution.
OTF:
Restriction on borrowing with a limit of 100,000. Doesn't state that a higher sum can be
borrowed by approval of shareholders through ordinary resolution.
Applying Turquand: Bank has constructive notice of the article. The article is an absolute
restriction. No allowance for ordinary resolution….. therefore, facts in Turquand can be
distinguished.
On our facts, there should have been an amendment of the articles in order to authorise
borrowing up to 500,000. This would have been done through passing a special
resolution to amend - s.21 CA 2006.
Special resolutions are filed at the Companies House.
3rd party would have constructive notice that this has not been done.
Note: Irvine v Union Bank of Australia (1877)

Borrowing power. Requirement of special resolution. It was deemed that third party has
constructive notice that no such resolution was done.
The Rule in Turquand is of no assistance for the bank.
But, the bank will seek to rely on s.40 CA 2006 - Power of the company's directors to bind
the company is not limited in relation to a person dealing with the company in good faith.
s.40(2) - Mere knowledge by the 3rd party that the act is UV under the constitution does
not amount to bad faith.
OTF:
Bank does not have actual knowledge of lack of authority. Its knowledge of the lack of
authority is constructive. All the more, the courts would not find bad faith. That being the
case, the loan transaction is valid.
For the director, Arad, this is again a question of his duty as a director.
If the company commences proceedings against him, he would be liable to pay to the
company the damages suffered by it through the loan transaction. s.171 CA 2006.
Under s.40(4), the shareholders can restrain a prospective transaction. Thus, future
transactions can be restrained by the shareholders.
2005 Zone B Q5
Abby Ltd was formed in 1950 and its objects clause states that the company was
formed to “carry on the business of supplying farm equipment”. Additionally, the
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articles of association state: “The Board of directors may make any borrowings
they wish up to a limit of 50,000 pounds.
Any amount above this figure requires approval of the shareholders in general
meeting.”
The company has changed the nature of its business a number of times over the
past 55 years and now arranges holidays in Britain for German tourists. The
objects clause has never been changed. Sean was appointed as Managing Director
in 2003 and expanded the business substantially in his first 12 months as Managing
Director. He funded the expansion with a loan from Barney Bank PLC for 200,000
secured over all the assets of Abby. The amount was approved by the board of
directors, which contains more than half the shareholders of the company. Barney
did obtain a copy of the articles of association before the lending was approved.
The expansion of the business proved spectacularly unsuccessful and Abby was
placed in insolvent liquidation recently.
Advise the liquidator as to the consequences of the above transactions for the
company, the bank, the directors and the shareholders.
Issues:
Business operations beyond the objects clause - UV
Loan of 200,000 – UV & Beyond the authority in the articles
The Law:
UV doctrine applies to all companies. Any UV transaction would be void & unenforceable.
It cannot be ratified by the shareholders.

Can enter into transactions that were incidental or consequential to the objects.
OTF: objects: supplying farm equipment

Company's business - German tourists in Britain. Is it related? Consequential to the
objects?
Unrelated. Under the common law doctrine, this would be ultra vires.
The Bell Houses Clause:

'to carry on any other trade or business whatsoever which can, in the opinion of the board
of directors, be advantageously carried on by the company in connection with or as
ancillary to any of the above businesses or the general business of the company.'
But, it doesn't appear that there is a Bell Houses clause on our present facts.
The scenario is more like cases involving the borrowing powers which nevertheless had
to be read in the context of whether the company had the capacity in the first place. Re
Jon Beauforte Ltd (1953)
Gown makers… later went into making veneered panels. Contracts were ultra vires.
Re Introductions Ltd v National Provincial Bank (1970)
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o providing accommodation to visitors of Festival of Britain.

o Diversified: pig breeding and selling
Held: UV.
Submitted, OTF it is UV.
S.35 CA 1986 (as amended by CA 1989) came close to abolishing the UV doctrine.
But, the doctrine still remained.
In CA 2006, the requirement of an objects clause has been removed. As such, companies
will be treated as general commercial companies capable of carrying out any business as
they deem fit, unless they choose to restrict themselves. s.31(1) - Unless a company's
articles specifically restrict the objects of the company, its objects are unrestricted.
s.39 - validity of an act done by the company cannot be questioned on the grounds of
lack of capacity by reason of anything in the Company's constitution.
Effectively, any transaction that would be considered to be ultra vires under the common
law would be deemed to be valid. Third parties entering into contracts with the company
are unaffected.
The loan is also UV, but it is deemed valid by s.39 CA2006
But, the old s.35 under CA 1985 was couched in such terms that a prospective UV
transaction may be restrained by the shareholders and such a transaction if it had already
been entered into may constitute a breach of the director's duty and that director may be
sued unless the shareholders ratify:
o prospective UV - restrain
o past UV - breach of director's duty
It is submitted that the current position in the law would be similar.

Follow the argument in the previous question. – the position under s.39, s.40(4) –
s.171 – s.33 – Edwards v Halliwell, etc.
OTF: we have UV transactions that have already taken place.

The loan will be valid as far as the bank is concerned (from the UV perspective)
The present loan that the MD has taken is UV the objects clause - He is therefore in
breach of his directors' duties under s.171 CA2006
Next issue: Was the loan beyond the authority of the director?
This is a contract that is now beyond the director's authority.
At the common law, this issue was dealt with by the rule in Turquand's case.
Royal British Bank v Turquand (1856)
Articles: can borrow such sums as were authorised by ordinary resolution.
Ordinary resolution not required to be filed at Companies House.
Held: bank had constructive notice of the existence of the Article. But, they are entitled to
assume that the procedure was complied with.
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OTF: Articles contain restriction. But, borrowing may be done through ordinary resolution
by shareholders. Therefore… bank has constructive notice of the article. But, no
constructive notice of whether the procedure was complied with.
Similar to the Turquand case.
Different from the Irvine v Union Bank of Australia

There the articles provided for a special resolution and the bank was placed with
constructive notice that no such resolution was filed?
But, the bank will seek to rely on s.40 CA 2006

Power of the company's directors to bind the company is not limited in relation to a person
dealing with the company in good faith.
Mere knowledge by the 3rd party that the act is UV under the constitution does not amount
to bad faith.
OTF:
Bank would rely on s.40 - But, the problem? The bank has a copy of the company's
articles. They have knowledge of the fact that the articles require the ordinary resolution.
But, of course, they would not know whether the procedure was complied with. S.40 does
state that mere knowledge of UV does not amount to bad faith. That being the case, the
loan transaction is valid.
For the managing director, this is again a question of his duty as a director under
s.171CA2006.
If the Liquidator commences proceedings against him, he would be liable to account for
the liability incurred by the loan transaction.
It appears that the Board of directors has approved the loan. More than half of the
shareholders sit on the board. Nothing is said about whether the shareholders had
passed a resolution to ratify the breach. If such a ratification is done under s.239 CA 2006
(with the exclusion of the wrongdoers from the shareholders’ meeting), then no action can
be brought against the director.
2012 Zone B Q7
Diary Ltd was founded in 1910 and its objects clause states that it is to ‘produce
and sell diaries and other productivity related notebooks’. The articles of
association also state that the managing director must put any transactions worth
over £50,000 to the shareholders for approval.
Recently Diary’s business has declined due to electronic diaries replacing
notebook based diaries. Bob has been appointed to revive the business and has
entered into a contract worth £100,000 with Xu plc to produce electronic diaries.
This contract was not put to the shareholders for approval.
Sam is a shareholder and wishes to stop this move to electronic diaries as he is
concerned it represents a major change in the nature of the business.
Discuss.
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Issues
Does company have capacity to enter into the contract? [Ultra Vires]
Does Bob have authority to enter into the contract on behalf of the company?
Company’s Capacity
OTF: ‘related notebooks’? Could electronic diaries be incidental to notebooks? Arguable
In any event, s.39 – transaction is valid.

Restraining prospective breach s.40(4)
Here the contract has been entered into already.
Suing for breach
s.171 CA, s.239 CA
s.33 contract – shareholder’s personal right to sue for UV.
Does Bob have authority?

Bob acting on behalf of company - has authority to do so?
- If Yes: valid transaction
- If No: voidable at the instance of the company
Assuming that Bob is the managing director, he is acting beyond his authority because
he did not comply with a procedural requirement in AA. MD must obtain shareholders’
approval for transactions above 50,000 pounds. (presumably, ordinary resolution of the
shareholders.)
This deals with internal matters which cannot be ascertained from the articles alone
Turquand Rule - Contrast with Irvine
OTF
Is Xu Plc aware of the fact that the transaction requires shareholders’ approval? – most
likely no
Even if Xu Plc is aware that approval is required, Xu Plc would never be able to find out
whether the ordinary resolution was passed or not!!
But, transaction will be valid because of s.40CA2006

s.40 (2)(b): No duty to enquire as to capacity of a company or authority of directors. Even
if 3rd party has knowledge of restriction that does not amount to bad faith.
Authority of Bob
Does Bob have the authority to enter into a contract on behalf of the company? It is not
stated whether Bob is a managing director.
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Bob is appointed to revive the business. Arguably, he should have been authorized to
enter into contracts.
But, if there is no actual authority, then is there Usual Authority?
Single director will not have usual authority. But, managing director would have. No
indication as to his position. Is he an MD? Normal director? Employee – business
development officer?
Panorama Developments (Guildford) v Fidelis Furnishing Fabrics (71): Lord

Denning: Secretary regularly makes representations on behalf of company and enters
into contract on behalf of company within day to day running of the business – has
authority. Salmon LJ: secretary is chief administrative officer – has authority
OTF – as ‘business development officer’, entering into contract worth £ 100,000 could be
within his job scope
Possible Apparent Authority:
Freeman & Lockyer v Buckhurst Park Properties [64]
Representation, Reliance and TP alter his/her position
Companies Act 2006: S. 40 (1) CA’06 – “power of the board of directors to bind the
company, or authorise to do so…deemed to be free of any limitation…”
OTF: Is Bob a director? What are Bob’s powers?
no protection for transactions entered into with other officers (non-Directors) of the
company
If Bob is not a director but instead an officer of the company – company is not bound by
his actions
If he is a director and s.40 is used to save the transaction, Company may sue him for the
breach of s.171 CA2006
s.239 – ratification by shareholders
2013 Zone B Q8
Tess is the new managing director of Bakker Ltd, a bakery based in London. The
company incorporated many years ago with an objects clause that states ‘The
business of the company will be to manufacture chocolates.’ The articles of
association also state that decisions on substantial property transactions must be
approved by a majority of the shareholders.
As part of Tess’s assessment of the company before she was appointed, Tess
noticed that the objects clause was incorrect and that the business had changed
substantially since incorporation. She is concerned about this development but
does not fully understand the consequences. Her first order of business is to
purchase a new building to expand the bakery funded by a substantial loan from X
bank. She is aware of the necessity for shareholder approval but does not have
time to get it so goes ahead anyway and purchases the building. Afterwards Tess
comes to you for advice as to the objects clause and the property transaction.
Advise her.
Loan transaction – UV?
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Property transaction – breach of articles?

Her authority as a managing director

OTF objects clause: to manufacture chocolate. Bakker Ltd a bakery company – UV? Is
it incidental?
The loan taken and the purchase of the asset was for expanding the bakery business.
Consider the borrowing cases as well:
Re Introductions: Russell LJ
The bank being fully aware that the borrowing was only for use in the pig breeding
business and are aware that such business was wholly ultra vires the company.
OTF: is the bank aware loan was for ultra vires transaction? (Constructive notice of
articles is sufficient. Must have actual notice of the type of business currently undertaken)
Note the difference between powers and objects:

Rolled Steel Products v British Steel Corporation (1982)
There should be distinction between transaction which are beyond the capacity of the
company and those which are in excess or an abuse of the director’s powers.
OTF: substantial property transaction must be approved by majority shareholders. – this

is an issue of directors’ power
OTF: borrowing is not part of objects clause but power/authority given to directors which
ought to be exercised ancillary to objects clause.
Discuss – s.39 – the transaction in breach of objects will be valid. Only issue is s.171 –
breach of duty
The property transaction in breach of director’s power

Turquand rule
OTF – ordinary resolution – third party will not have constructive knowledge.
Alternatively – s.40 – transaction binds the company. – 3rd party has no duty to enquire.
Good faith not affected by knowledge of defect in procedure.
s.171 – breach of director’s duty
As single director does she have power to bind the company?

Usual authority – Managing director has usual authority to enter into contracts on her
own.
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She could be sued under s.171 by the Company for the UV as well as the breach of the
procedure in the articles if majority shareholders are willing to pursue a claim. The
transactions could be ratified under s.239
Advise Tess to propose alteration of articles to remove restrictions. – special resolution

by shareholders.
2015 Zone B Q7
Bookworms Ltd was incorporated in 1902, and runs a chain of bookshops. The
objects clause in Bookworms’ constitution states that it shall operate a chain of
bookshops. Sarah owns 26% of the company’s shares, but is not a director of the
company. In recent years the company’s sales have fallen, and the board has
decided the company should stop selling books and convert all its shops to
cafes. Sarah strongly objects to this.
Bookworms’ board has been trying, for some weeks, to negotiate a building
contract with Quickbuild Plc, to convert Bookworms’ London bookshop into a
café. James, who has been working as an intern for Bookworms, is keen to prove
himself. He visits Quickbuild’s offices, finalises negotiations with Quickbuild’s
managing director, Alice, and signs the contract on Bookworms’ behalf. Alice is
concerned whether James is exceeding his authority. She speaks to James’
secretary at Bookworms, who tells her James has full authority to sign any
contract for Bookworms.
Bookworms’ board also recently decided to award a one-year-service contract to
Petra, one of Bookworms’ directors. Bookworms’ articles say that any
employment contract awarded to a director must be approved unanimously by all
of its shareholders. However, the board deliberately chose not to get shareholder
approval, believing that Sarah was bound to refuse her consent.
Advise Sarah whether:
(a) Bookworms is bound by the contract with Quickbuild;
(b) she, Sarah, could prevent Bookworms converting any other stores into cafes;
(c) Bookworms is bound by the contract with Petra;
(d) the directors of Bookworms have breached their duties to the company.
Answer guide (a):

Is Bookworms bound by the contract with Quickbuild;
1. Objects clause
Bookworms objects clause will be part of the company’s articles of association today
after the enactment of Companies Act 2006 – section 28 CA’06.
The objects clause are therefore binding on the company and members – section
33(1) CA’06.
OTF: Bookworms objects: ‘shall operate a chain of bookshops’. But the board has
decided to open a café due to the poor sales.
Ashbury Railway Carriage & Iron Company v Riche [1875]:
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- Issue: whether the contract which was unauthorised by the MA (constitution) was
nonetheless approved by the shareholders valid? [loan]
- HL: anything which is not authorised by MA (constitution) is ultra vires. Transaction is
therefore void and ratification will be ineffective.
- As such:
I. Contract cannot be ratified [Ashbury].
II. Company cannot enforce contract against third party [Mocatta J:Bell Houses v City
Wall Properties].
III. Third party cannot sue company to enforce contract if she/he knows contract is ultra
vires or director is in breach of duty.
IV. Directors can be sued for breach of their duties (s. 171 CA’06).
- Rationale behind Ashbury: to protect shareholders.
- OTF: based on Ashbury, Bookworms will not be able to enforce the contract entered
by James with Quickbuild.
- No exception to this general rule. If Bookworms not able to achieve its objects, it will
have to close its operations: Re German Date Coffee.
- Parliament intended to abolish the ultra vires doctrine due to the draconian effect of
the Ashbury decision i.e. this decision is detrimental to third parties.
S. 39 CA’06: Company’s capacity not limited by constitution [act done by company
shall not be called into question on the ground of lack of capacity.
Effect of s.39 : TP or Company cannot invoke ultra vires doctrine to defeat
transaction.
OTF: contract entered on behalf of Bookworms by James with Quickbuild is valid
and enforceable.
2. Authority
Issue: does James have the authority to enter into contract on behalf of
Bookworms?
OTF: James is an intern – would he have authority to enter in major contracts
involving the change of business?
Actual authority / implied authority?
Usual authority?
Apparent authority? Alice called James’ secretary and she is told by the secretary
that James has authority to enter into contracts on behalf of Bookworms.
Consider : Freeman & Lockyer v Buckhurst Park Properties [64] -
(Representation, Reliance and third party must alter position)
OTF: Does the secretary have authority to make representation? Very unlikely. She
would not have such authority.
OTF: thus it is safe to say that James does not have authority to enter into contract
on behalf of the company.
OTF: since the company had intention to change its business into café – most likely
the transaction would be ratified– s. 239 CA’06.
It should be noted that, s 239, applies to the ratification by a company of conduct by
a director.
OTF, James is an intern and it can be assumed that he entered the contract on behalf
of the board (Questions says on behalf of the company).
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Note: Although ultra vires transactions are legally enforceable by virtue of s.39
Companies Act 2006, there is no statutory provision to govern company ratifying ultra
vires transactions. This simply means, the ultra vires doctrine has not been completely
abolished and this clearly shows Parliament’s intention in allowing companies to resolve
their internal issues/breach. Company can therefore choose to ratify the transaction or
choose not to do so and hold the director to be in breach of director’s duty: s. 171
Companies Act 2006.
Consider the issue of ratifiable breaches and unratifiable breaches under the common
law and whether s.239 has retained that distinction.
Answer guide (b):

Advise Sarah, whether she could prevent Bookworms converting any other
stores into cafes
The questions states that Sarah intends to prevent Bookworms converting any other
stores into cafes – future transactions.
The company should be minded that it is bound by its objects clause / constitution:
s. 33 CA’06.
Alternatively, Sarah may initiate proceedings to restrain the doing of an action that is
beyond the powers of the directors as per s. 40 (4) CA’06.
OTF: since the board is bound by the objects clause, Sarah may seek for an
injunction from the courts preventing them from converting the bookstores into cafes.
Sarah should also be minded that, the Companies Act do allow companies to make
amendments to objects clause i.e. the board may alter its objects clause.
Since the objects clause are today part of the constitution, amendments to objects
clause should comply with procedures set in s. 21 CA’06.
S. 21 CA’06: Bookworms may amend its objects through special resolution. Sarah
may object to the amendments as she owns 26% shares.
Answer guide (c) Bookworms is bound by the contract with Petra;

OTF: one year contract and articles of association requires the board to get
unanimous approval from the shareholders.
OTF: approval was not obtained from shareholders and as such the appointment
contract of Petra as a director is arguably void.
Petra would however rely on s. 40 CA’06: ‘person dealing with company in good
faith, power of the board of directors to bind the company…deemed to be free of any
limitation’.
Petra must be dealing in good faith – OTF: most likely yes – when she is appointed
by the board, it is reasonable for her to believe that the board has authority – s. 40 (2)
(b) (ii) CA’06 (Third party is presumed to be acting in good faith)
Q: What if she is aware that the board did not comply with the procedure?
A: s. 40 (2) (b) (iii) – Third party is not to 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.
OTF: even if Petra is aware that the board did not confirm with the condition laid in
AA, Petra will be considered to be acting in good faith and the employment contract will
be binding – s. 40 CA’06.
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Sarah may raise s. 41 (2) (a) (b) (i) CA’06 to invalidate the employment contract –
company enters into such a transaction, and the parties to the transaction include— a
director of the company. OTF: the director was one of the parties to the contract – the
transaction would be voidable at the instance of the company. Sarah may raise her
objection and void the employment contract.
On the other hand it should be noted that, s. 188 CA’06 requires the member’s
approval for directors’ long term service contract (2 years). OTF: only one year.
Contract would however most likely be void.
Answer guide (d):

Advise the directors of Bookworms whether they have breached their duties to
the company.
The board is in breach of s. 171 (a) CA’06 – duty to act in accordance with the
company’s constitution.
Who is the duty owed to? Duty is owed to company – Percival v Wright & s. 170 (1)
CA’06.
OTF: therefore only Bookworms will have locus to sue the board of directors.
Derivative action by Sarah?
2016 Zone B Question 8 (Outline for this question will be done in class after discussion)
Martin, a wealthy environmentalist, is currently the sole director and shareholder of
Greenspaces Ltd, which he formed in 2010. He gave the Examiners’ reports 2016 17
company £10 million, which it has used to purchase a large nature reserve. The
company has unamended model articles of association. Martin is now 70 years old, and
wishes to transfer the running of Greenspaces to his children, Tanya and Sabrina. He
will appoint each of them to be a director of the company, and give each of them 24% of
his shares. He fears, however, that Tanya and Sabrina may not share his passion for
the natural environment, and may sell off the company’s existing nature reserve to a
house-building company, which has expressed interest in buying it.
Advise Martin whether:
a) as a 52% shareholder in Greenspace, he would still be able to prevent Tanya and
Sabrina from selling the company’s existing nature reserve;
b) he would be able to stop such a sale if the company’s articles were altered to include
the following clause: ‘the company’s objects are limited to the acquisition and
management of areas of natural beauty’; and
c) he would be able to stop such a sale if the company’s articles were altered to include
the following clause: ‘the directors shall not enter into any contract over £5,000 without
the consent of the shareholders’.
2017 Zone B Q6 (Outline for this question will be done in class after discussion)
In 2000, Mei formed Safehomes Ltd. The company owns a large hostel in London,
which provides accommodation for victims of domestic violence. Originally, Mei was the
only shareholder and director of the company. In 2016, Mei decided to hand over day to
day control of the company to her two daughters, Bik and Chun. She gave each of them
30% of the shares in the company, and appointed each a director of the company. Mei
14
remained a director. The company’s articles provide that no contract for more than
£100,000 can be entered into without Mei’s consent. At a board meeting two weeks
ago, Bik and Chun passed a resolution to convert the hostel into a luxury hotel. Mei is
passionately opposed to this. On behalf of the company, Bik and Chun have now
entered into a contract with Darren, a builder, to carry out the conversion works, which
will cost £500,000. Darren has read the company’s articles. He knows that Mei does
not consent to this contract.
a) Advise Mei whether she can prevent Bik and Chun going ahead with these
conversion works.
b) In addition, explain whether your answer would be any different in EACH of the
following situations:
i) If Darren were Bik’s husband;
ii) If the company’s articles contained a clause saying that the objects of the
company were limited to running a hostel for the victims of domestic violence.
2018 Zone B Q7 (Outline for this question will be done in class after discussion)
Delicious Ltd owns a number of hotels. Yuet is a director of Delicious, and owns 25% of
its shares. Delicious has model articles, but amended to include an additional article 55,
which states that Yuet shall be entitled to veto any board decision to enter into a
contract exceeding £250,000. Organo Ltd makes and sells organic beers. Its
constitution provides that the company’s capacity shall be restricted to the manufacture
and sale of organic beer. Stephen owns 30% of Organo’s shares. Organo’s board has
decided to diversify the company’s activities into running hotels. Stephen opposes this.
In April 2018, Delicious’ board meets to discuss a proposal that Delicious should sell, for
£4 million, one of its hotels to Organo. Yuet is strongly opposed to the sale, and
declares that she is exercising her veto. The other directors resolve, nevertheless to sell
the hotel to Organo. Yuet is unsure if a contract to sell the hotel has yet been entered
into between Delicious and Organo.
a) (Advise Stephen what action, if any, he could take to prevent Organo purchasing the
hotel; and
b) Advise Yuet what action, if any, she could take to prevent Delicious selling the hotel;
and
c) Will the directors of either company be in breach of their duties if the hotel is sold to
Organo
15

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Bachelor of Laws Company Law ITC School of Laws

Revision Answer Guides 2018/2019

Deal with UV first

AG v Great Eastern Railway (1880)

OTF: objects: manufacturing paint

The Bell Houses Clause:

However, it is arguable that s.40(4) is broad enough to be used in situations where a

OTF: we have UV transactions that have already taken place.

This is a contract that is now beyond the director's authority.

Royal British Bank v Turquand (1856)

Note: Irvine v Union Bank of Australia (1877)

The Rule in Turquand is of no assistance for the bank.

AG v Great Eastern Railway (1880)

OTF: objects: supplying farm equipment

The Bell Houses Clause:

o providing accommodation to visitors of Festival of Britain.

Submitted, OTF it is UV.

The loan is also UV, but it is deemed valid by s.39 CA2006

It is submitted that the current position in the law would be similar.

OTF: we have UV transactions that have already taken place.

Different from the Irvine v Union Bank of Australia

But, the bank will seek to rely on s.40 CA 2006

AG v Great Eastern Railway (1880)

OTF: ‘related notebooks’? Could electronic diaries be incidental to notebooks? Arguable

In any event, s.39 – transaction is valid.

s.33 contract – shareholder’s personal right to sue for UV.

Does Bob have authority?

But, transaction will be valid because of s.40CA2006

Panorama Developments (Guildford) v Fidelis Furnishing Fabrics (71): Lord

Loan transaction – UV?

Property transaction – breach of articles?

Ashbury Carriage Company v Riche (1875)

Note the difference between powers and objects:

OTF: substantial property transaction must be approved by majority shareholders. – this

The property transaction in breach of director’s power

As single director does she have power to bind the company?

Advise Tess to propose alteration of articles to remove restrictions. – special resolution

Answer guide (a):

Answer guide (b):

Answer guide (c) Bookworms is bound by the contract with Petra;

Answer guide (d):

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