How authorisation is given to directors irregular acts in a general meeting of an established or new company formation UK?

09 Jan

At the time of forming a limited UK company or any other type of Great Britain company register, appointment of directors, members and other staff members of the company should be done for effective company establishment. After company registration UK, it’s the duty of directors to manage the company and take decisions that are in the interest of company. So, majority of decision making power is given to directors. However, there may come scenario where decision taken by directors seems inappropriate. This article focuses on how such acts can be given approval by the members of the company and what restrictions may be imposed on the ratification of such actions.

Ratification of Voidable Acts of Directors

If after forming a limited company UK, any act of the directors lies beyond the regular usage of their authorities, i.e., they have acted by using their powers irregularly, the act becomes voidable. However, a general meeting is authorised to ratify such an act. Consider the following case studies for a better understanding.

Case Study: Bamford Ltd

500,000 shares of Bamford Ltd at par were issued to FH Burgess Ltd by the directors of the company, Bamford. FH Burgess was amongst the main distributors of the goods of the company Bamford. The articles had bestowed upon the directors of Bamford, a power allowing them to take such an action. However, as accused by the plaintiffs, the directors used their power in an inappropriate manner to forestall a seizure bid given by JC Bamford. It so happened that a writ was issued for challenging the authenticity of allotment but the directors, then arranged a meeting of the members and got ratification of the allotment by them. However, the shares that were issued latest did not involve in voting. The Court of Appeal ordered that such an authorisation of act would remain effective.

Harman LJ held that:

  • This is a cliché law. I believed that if acts are committed by directors just like their daily routine, with a special reference to private firms, that are, probably, because of no quorum or defective selection of quorum or at times because of no proper appointment of directors at all or for the purpose that they have inappropriate goals, kept being committed for years and they keep conducting the business, which, with proper constitution, should have been conducted and later when they figure out that everything was done in a wrong manner, as there was no appropriate board, then the directors are allowed to arrange a meeting, and obtain forgiveness for their actions. However, the actions should not exceed the legal authority of the company. As a consequence, all the things will be conducted in a way as if they were never done wrongly at the beginning.
  • I do not have the opinion that this scenario is not common to company law. It is obvious that if the major participants of the general meeting do not approve the action and forgive the directors, the directors will be liable to pay.

Then the Judge referred to the case of Regal and continued saying:

  • It is apparent to me that here the directors committed an action of allotment which was violating their duties and they did it for the purpose of urgent need of takeover and did not consider the benefit of the company on the whole. Hence, the allotment may be termed as a bad one. However, as it is an allotment, this cannot be doubted that the directors are authorised to allot shares.
  • Nor can this be doubted that they made an allotment of shares and that the persons to whom the shares were allotted are filed in the register of the company and that they all hold membership of the company. The only point to consider is that whether this kind of allotment can be termed void by the company or not, and only by the company as the wrong done by the allotment effects the company?
  • If the answer is “yes”, then the same company also has the authority to call a meeting and give approval and forgiveness for such an allotment. And I do not find it difficult to mention that the decision taken in the meeting of 15th December to give approval to this act of directors, was a good way of whitewashing the transaction that was voidable by that time.

A similar verdict was delivered by Russel LJ and it was concurred upon by Karminski LJ.

Another case study is presented to shred some more light on this topic to give an example of another case that may arise after company registration UK:

Case Study: North-West Transportation Corporation Ltd

The facts of the case can be known from the verdict.

It was held by Sir Richard Baggallay:

  • Henry Beatty, who is the plaintiff, holds shares in North-West Transportation Co Ltd. He sues the company, on behalf of every shareholder as well as himself. However, this does not include the shareholders who are at the position of defendants. Amongst the defendants, is the company, and 5 persons having shares in that company. These persons held directorship in the company when the action was initiated.
  • The action is claimed for the purpose that it sets aside an auction made, to the corporate body by James Beatty, who is also a director of United Empire, a steamer, and was also the only owner of such a sale made previously.
  • The general principles relating to similar cases have been developed well. Any approval given for a resolution for any action in question that can be done legally by the company, by majority of the participants of a meeting becomes a binding upon the minority as well as the company. Also, all the shareholders are authorised to give their votes upon any such matter, albeit their personal interests may differ from the company’s interests. And, remains a binding as long as there is no contradictory provision or rule in any instrument of statute which is used for the incorporation of the company.
  • On the other side, the directors are not authorised to take any action or enter into any contract on behalf of the company or himself, that conflicts in their personal interests or which leads to a conflict of interests of those who are under fiducial law, in the protection of directors and the directors. And this rule finds its application on one of many directors in the same way as on managing or single director.
  • But it may be possible to get approval from the company for any such action or deal and the company may also adopt it, given that the approval is not taken by any wrongful means or the action does not harm the rights of or oppress the opposing shareholders.
  • There are evidences having no contradiction that show that when the auction was done, at that date, it was required by the company for its proper business conduction to acquire another steamer for supplying for the place of Asia. The United Empire was suitable for this reason. It did not lie within the scope of the company’s authority to take any streamer as suitable for the business and also the price decided for the steamer was not beyond affordability.
  • It is obvious that the authorities knew that the agreement could be made effective against the company, at the request of the defendant, James Beatty. However, it is also quite obvious that it lied within the capacity of the shareholders to reject or adopt the action in a meeting on the 16th. The action was adopted by them with a major support, and the view of the majority should be prevalent as long as the votes are not gathered for the adoption by any wrong means.
  • The only unfair point in this matter is that, James Beatty also had a right to vote being a shareholder in the company authorising him and his supporters, for the adoption of the bye-law and enabling them for the ratification of and adoption of contract that was voidable, which was signed by him and his supporters as directors or to sign a similar agreement which seems to do what was aimed to be done by the resolution that was passed on 7th of February.
  • It may not be very wrong to say that in such a case the minority should be given the authority, to question the action taken, and be enabled to prove that the action is inappropriate and also they should be independent of the restriction that such a lawsuit can be brought by the company only.
  • However, the company’s articles gave the authority to James Beatty to get the authority of voting and no restriction was imposed on the number of shares that could be held by a shareholder, and for every share held by the shareholder, one vote was allotted. The charter acknowledged the defendant as holding 200 shares in the company which equalled 1/3rd of the aggregate.
  • Hence, James Beatty had the right to gain more number of shares. Also, he was given the right to utilise his votes in such a way that led him to secure the directors’ election who had views similar to his regarding policy and could show support to his views in any meeting of the shareholders.
  •  Seizure of United Empire was purely relevant to policy. So a conflict of opinions might be expected in this matter. Hence, the views of majority shareholders must prevail. By rejecting the votes given by the defendants, one would disregard the views of majority by giving regard to the views of minority.

Inferences from the Case Studies

  • The rules that have been adopted in these cases can be contingent to certain limitations that have been acknowledged in case studies, relevant to the laws of Great Britain company register, like Cook v Deeks as well as Menier v Hooper’s. This authority of ratification is restricted only to actions that are not fraudulent or expropriating or in more particular terms, the directors that are responsible for any such action cannot authorise their wrong actions by using their authority of voting as members. It extends to situations where the ratification of directors’ ignorance is done, when the ignorance leads to a personal advantage of the directors.
  • However, there is a conflict in this simple statement as well. Because the right to claim, opposing the directors in default, is a corporate asset for the company. So if the members decide to give away this right, then it is quite similar to waiving off an opportunity of the corporate for example, Cook v Deeks. This cannot be done by the members in any general meeting at least in situations where the resolution was passed by the votes given by the wrongdoers.  Even then there are many examples where the control of the general meeting lies in the hands of directors and they are allowed to vote upon resolutions enabling them to maintain the contractual advantages with the corporate body as in North-West Transportation or enabling them to get away with any compensation claimed for their ignorance as in Pavlides v Jensen.
  • Another point is that there must exist a decision of member for ratification as the case of Re D’ Jan depicts that it is not sufficient that the decision taken in a general meeting would certainly support the wrongdoer or the accused director. Because in this case 99% shares were held by the director and only 1% by his wife. Also, there is a point to be recognised that in the case of company going towards its insolvency, the rights of voting given to the members are lost regarding the dispensation of assets of the company to specific persons, detrimental to the claims of creditors of the company. As in the case of Kinsela v Russell.
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