Indoor management rule - Companies Act 2016 PDF

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Indoor management rule - Companies Act 2016...

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will of the company. Here the store manager did not have the necessary control/responsibility of the company’s operation to be identified as the controlling mind/will of the company. Thus, the company was not liable for the acts/default of the said manager

Corporate Transaction-Agency Who are the organs of a company? •

Brambles Holdings v Carey Here the operations manager was the directing mind of the company as responsibility to ensure the company’s vehicles complied with the legislation was delegated to him. As such the company is liable.

The Board of Directors and shareholders in General Meeting

Whose acts bind the company? •

The agents of the company acting within the scope of their authority (law of agency applies)

Smorgon V. Australia & New Zealand Banking Group H : Organic theory can only be applied which the ends of justice have been thought to require the attribution of mental states of corporation.

Who then is the “company”? •

The organs – acting within the power given by Merger & Acquisition/ Constitution is regarded as the company itself – the “directing min and will of the company” (DMW); its alter-ego. This is called organic theory of corporate personality.

A company is bound by the acts of its agent provided it is within the scope of his authority. Thus under Section 64 CA 16 contracts made on behalf of the company via its formalities shall bind the company. The contract is made via agents whose authority may be derived from the M&A, or any act of the company (resolutions – Heap Huat Rubber v. UOB LTD.)

How do you decide whether the Board of Director/agent is the DMW of the company and thus pin the liability on the company? Lennard’s Carrying Co Ltd v. Asiatic Petroleum L was the active director and took active role in the management of the ship which caught fire and destroyed the petroleum. The company sought to attach liability to L and away from the company itself.

Section 64 of Companies Act 2016 (1) A contract may be made – (a) By a company, in writing under its common seal; (b) On behalf of a company, by a person acting under its authority, express or implied; or (c) On behalf of a company, orally, by any person acting under its authority, expressed or implied.

Held: the directing mind and will of the company may be Board of Directors/shareholders in General Meeting/person of co-ordinate jurisdiction appointed by the General Meeting like L who is the directing mind of t he company and thus his action was the action of the company.

(2) Any formalities required by the law in the case of a contract made by an individual shall apply, unless the context otherwise requires, to a contract made by or on behalf of a company.

HL Bolton Ltd v. TJ Graham Held: here the intention of the Board of Directors/ Shareholders in General Meeting could not be attributed to the company as they had not met formally to consider the question whether to occupy certain premise. The various directors who managed the company was the intention of the company.

CONCLUSION: The company is bound if the persons acting / entering into the contract for the company is i.

Tesco Supermarkets v Nattrass Employees who have been delegated the functions of BOD/Shareholders in GM is no longer acting as the agent of the company but the

ii.

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A person / entity is deemed the directing mind and will of the company, or An agent acting within the scope of his authority.

TYPES OF AGENCY

Freeman & Lockyer v. Buckurtst Park Properties. Articles (D’ comp.) provided the power to appoint MD, but the director K had not been appointed such though he acted as if he was MD to the knowledge of the board. K appointed P’ as architects on behalf of the D’ company.

1. Actual Authority – Express or Implied authority Express authority can be created via: Power of Attorney a deed creating agency whereby the agent’s actual authority is stated therein. It could be sated in the contract of service or the Merger & acquisition/ Constitution or resolution if General Meeting.

Held: P could claim from the D’ company as K was acting throughout as managing director and held out by the BOD as such – further his act of employing the P was within the normal scope of authority of a MD. P did not have to inquire whether K was properly appointed.

Implied authority may arise from post/position of the agent appointed by the company. As such his scope of authority arise from the customary practice of the said position. Whether implied authority arises depends on the facts and circumstances of each case.

In short in order to hold that the MD has the requisite ostensible authority it is essential that the articles provides power for the appointment of a MD; otherwise it cannot be argued that the company has held out the ostensible authority.

Hely-Hutchingson v. Brayhead Ltd R was the chairman and chief executive of the said company; who made final decisions on finance. He normally enter into contracts for the company and reveal to the company later – a practice which the company has accepted. R gave several guarantee and undertakings to P’ on behalf of the company. Now the company claim that R had no authority to give the said indemnities.

If articles provide power for appointment then the 3rd party can invoke Turquand’s rule and collaborate with apparent agency to bind the company. Diplock LJ …when the ostensible agency is created the agent need not be aware of the representation.

DECIDING THE EXISTENCE APPARENT AUTHORITY

Held: R had actual authority to do the same as this can be implied from the conduct of the parties and the circumstances of the case. 2. Apparent Authority

authority/

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It’s irrelevant whether the agent had actual authority since in ostensible authority it is the estoppel of the principal’s representation that binds him. 4 conditions are required for the agent who has no actual authority to bind the company :

Ostensible

Company represents / holds-out to the outsider that the agent has requisite authority and the outsider relied on it to contract. Representation may arise from conduct like company allowing agent to occupy a particular position or carry out certain task on the principal’s behalf which is beyond the agent’s customary authority.

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A contract made on behalf of the company may be made via Section 64 CA’16 can be via express / implied authority.

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Representation made to the 3rd party that the agent had authority to enter into that type of contract. The persons who made the representation (the principal) had actual authority to manage the business of the company in respect of the matters to which the contract relate. 3rd party relied on the representation. The Constitution/M&A provides for the capacity to enter into such contract and delegate authority to agent to enter such contract.

Chew Hock San v. Connaught Housing Development D’s clerk issued receipts to the purchaser’s (P’) in respect of booking cheques even though the official booking period has yet to commence. Receipts issued by the clerk were kept by her and banked in only at the day of trial and it didn’t bear the D’ company’s letterhead. Q – did the clerk have apparent authority?

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H : No apparent agency was created here. This type of agency can be created by the conduct of principal permitting the agent to act in some way in the conduct of the principle’s business. The person making the representation to the 3rd party must have actual authority as empowered by the constitution/M&A.

DOCTRINE OF CONSTRUCTIVE NOTICE BEFORE CA ‘16 3rd parties who deals with the company is deemed to have knowledge of the nature and contents of the M&A as it is a public document which has been lodged with the ROC. They are deemed to have read and understood the M&A. This assumption is known as the doctrine of constructive notice.

Public Bank Bhd v. Metro Construction Sdn Bhd Here the 2 directors of D company executed a third party charged in favor of an unrelated company. They were appointed and their appointments were sent to the ROC; further resolutions were passed by the Defendant’s company to create the 3rd party charge. The M&A did not prohibit the creation of such charge. The M&A did not prohibit the creation of such a charge and the common seal was properly affixed here.

Woodland Development Sdn. Bhd. v. Chartered Bank H : Anyone who has dealings with the company must be taken to have notice of the contents of M&A, whether he has read them or not. After CA’16- Section 39- not applicable except for registration of charges.

Held: the directors here had actual authority – and even apparent authority to execute the charges.

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In short this doctrine is relied upon by the company who does not want to be bound by a contract entered into by its ‘agent’ not authorized by its M&A. It acts against 3rd parties who wants to escape liability under a contract by pleading ignorance to the M&A – since they are estopped from denying entering into the contract without full knowledge of the other parties’ position.

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On the other hand, Turquand’s rule is relied upon by 3rd parties who are unaware of the internal irregularities of the company. It acts against the company.

Panorama Development v Fidelis Furnishing Fabrics Ltd. Held: Secretary of company had the apparent authority to enter into H-p contracts; even if it was hired for the secretary himself. Here the contract was an administrative kind which the secretary had the apparent authority to enter on behalf of the company. Thus these cases suggest that actual position of agent and nature of business of the company are determining factors in deciding whether the agent has the apparent authority to bind the company.

COMPANIES ACT 1965

WHEN AN OUTSIDER DEALS WITH THE COMPANY SEVERAL ISSUE ARISES: •

Further if the agent/BOD acted in breach of the M&A/Constitution by entering into a transaction outside its object clause (even if the agent had power to enter such contracts) then the contract is UV but valid – via Section 20 CA’65 but now UV under Section 35(2) CA’16. The 3rd party who wants to escape liability on the contract would plead that they had no knowledge of the M&A/Constitution –

KL Engineering Sdn Bhd. V Arab Malaysian Finance The doctrine is applicable in Malaysia to the contents of F49 which is a public document which affects the powers of the company and its agents. Here the retired director entered into a H-

The contract is only binding on the company if the agent acted within the scope of his authority as stated in the M&A/Constitution – law of agency (express and apparent as discussed above).

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P Ag. which was not binding on the company since the outsider had constructive notice of this via F49.

Royal British Bank v Turquand: The articles of association of a company authorised the directors to borrow such sums as may be authorised by a resolution at the general meeting. The company borrowed money from Mr. Turquand and issued a bond to him. When the company was sued on the bond, it alleged that under its articles of association, directors only had power to borrow what had been authorised by a resolution, and that a resolution had been passed, but did not specify how much the directors could borrow, thus claiming the bond as invalid.

The doctrine of constructive notice is mitigated by the rule in Turquand’s case.

Indoor Management Rule A company may enter into a contract either through an organ such as its board of directors or by means of an agent. Where the board has delegated its powers to a managing director or a committee of directors or another agent, the question may arise as to whether the particular act was within the authority of the person to whom the power was delegated.

Held: Mr. Turquand was entitled to assume that the necessary resolution had been passed and that the company had complied with the procedure required for borrowing money. Hence, the company was liable on the bond as the excess of authority was a matter only between the directors and the members.

DOCTRINE OF CONSTRUCTIVE NOTICE: •

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An important feature of public companies is that the constitution is available for public inspection. Thus, a person dealing with a company is deemed to have constructive notice not only of the nature, but also the contents of its public documents, which it had lodged with the Registrar, irrespective of whether the person has actual notice of those public documents.

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The rule provides that outsiders dealing with a company are not bound to ensure that all the internal regulations of the company have in fact been complied with as regards to the exercise and delegation of authority, but are entitled to assume that all acts of internal management have been properly carried out.

If the constitution contains a limitation on the authority of the company’s organ, officer or agent, the law deems this to be known by an outsider dealing with the company.

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Where the authority of an agent is limited by a company’s constitution, an outsider dealing with the company is taken to have read and understood these documents and are aware of the agent’s lack of authority.

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A company is not bound by a contract with an outsider if its documents show that the person who purported to act as agent did not have the requisite authority or exceeded his authority. The outsider cannot then hold the company liable for any act not carried out within the terms of the documents.

The Turquand’s rule helps prevent companies from relying on an irregularity to avoid performing their contractual obligation.

The indoor management rule also known as the Turquand’s rule was developed as a means of mitigating the harshness and burden of the doctrine of constructive notice in relation to outsiders dealing with companies.

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A person dealing with an incorporated company is not expected to look further into the internal affairs of the company or to investigate the locus standi of the officers before transacting any business with the company. - Thus, it is not necessary for outsiders to investigate whether or not any irregularities had taken place.

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As long as an agent of the company has apparent authority to act, the third party is entitled to assume that all the necessary procedures have been complied with.

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The rule helps protect a third party in instances such as: - When there is an inadequate notice of the meeting; voting irregularities during the meeting; where the common seal is

not properly affixed according to the constitution; the board is not properly constituted.

Pekan Nenas Industries Sdn Bhd v Chan Ching Chuen: The purpose and extent of inquiry will depend on whether the circumstances raised doubt regarding possible abuse of power or existence of power.

EXCEPTIONS TO THE TURQUAND’S RULE (CIRCUMSTANCES IN WHICH THE RULE IS INAPPLICABLE):

4. Where the outsider is relying on an irregularity concerning a forged document

1. Where the outsider has actual knowledge of the irregularity

Ruben v Great Fingall Consolidated : The company’s secretary forged the director’s signature on a share certificate and affixed the seal without authority. Held: The company was not bound by the share certificate as it had not held out that the secretary had the authority to do more than merely deliver valid certificates.

Howard v Patent Ivory Manufacturing The article provided that the value of £1000 was a limit that could not be exceeded. However, the directors lent money to the company on the security of debentures in excess of £1000. The directors then sought to enforce the debentures. Held: The debentures were only valid to the extent of not more than £1000. The directors must be taken to know that the internal requirements of the company had not been observed, and thus, could not rely upon the indoor management rule. 2. When the outsider knew or ought to have known of the limitation, they cannot rely on the rule as an outsider Where the third party is an ‘insider’ of the company: Howard’s case. Irvine v Union Bank of Australia: Despite a limitation in the article, the directors exceeded the limit imposed on the amount that could be borrowed and obtained a loan from a bank. The bank sought to enforce the security given to it. Held: Where a mere reading of the articles would have revealed the limitation, the bank could not apply the rule in its favour. 3. When the outsider dealing with the company is put on inquiry and fails to inquire When there are unusual circumstances which ought to have aroused the suspicions of the outsider.

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