Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA LW Exams › Directors s40
- This topic has 20 replies, 2 voices, and was last updated 1 month ago by MikeLittle.
- February 7, 2023 at 9:52 am #678465
Bpp textbook states that 3rd party must rely on representation and if they know or have knowledge of lack of actual authority than they cannot claim ostensible authority
But s40 ca06 states that 3rd party’s actual knowledge of lack of authority is not sufficient for lack of good faith…but if 3rd party knows of lack of authority then shouldn’t he be unable to claim ostensible authority?February 7, 2023 at 12:18 pm #678471
That’s a great question! The point about the issue is that a third party dealing with a company is protected in any situation where the company is acting beyond its constitutional limits.
Section 40 (2) (b) (iii) is simply re-affirming that concept EVEN THOUGH the third party IS aware that the director(s) are acting beyond their powers. So the company is bound by the transaction no matter that the company is acting beyond the limits imposed by its constitution and is equally fully liable where the director(s) acting on the company’s behalf are acting beyond their powers and the third party KNEW that they were acting beyond their powers
In these circumstances, the third party is protected and is legally considered not to be acting in bad faith
If, however, the third party KNEW that the company was acting beyond the limits of its constitution, then in that situation, the third party would likely be considered to be acting not in good faith
How’s that?February 7, 2023 at 12:28 pm #678472
Sir i appreciate your quick response
But can you kindly explain it again (considering myself) with a simplified versionFebruary 7, 2023 at 3:28 pm #678481
Now I’m upset!! 🙁
I’ve just typed a long reply to this last post of yours, hit a key, and the whole reply has disappeared! 🙁 🙁
Not your fault 🙂
So here I go again.
When a third party enters into a transaction with a company, CA 2006 assumes that the transaction is valid against the company SO LONG AS THE THIRD PARTY IS ACTING IN GOOD FAITH
And proof of bad faith is the only way that the company could avoid liability.
But, you ask, what if the transaction lies beyond the allowable activities for the company as spelt out in the company’s constitution, the Articles of Association?
Not a problem, says CA 2006. Where a third party, acting in good faith, enters into a transaction with a company, it shall be deemed to be within the powers of the company to enter into that transaction.
The company’s only way to avoid the transaction would be to show that the third party is not acting in good faith but is, in fact, acting in bad faith. For example, if the third party KNEW that the transaction lay beyond the allowable activities of the company as set out in the company’s constitution, yet still went ahead with the transaction, then that would be an example of bad faith.
But, of course, a company being an artificial person cannot itself enter into contracts. It needs the involvement of humans – the directors. And the directors are limited in their powers to enter transactions on behalf of companies. It’s an internal set of restrictions imposed individually by each separate company so there’s no generalisation available to identify what is and, crucially, what isn’t the limit of directors’ allowable activities on behalf of the company.
So when a director, acting on behalf of a company, does so within their allowable powers, then that’s no problem.
But what if a director exceeds their powers when entering into that transaction but the third party is not aware of that excess? CA 2006 says ‘No problem’.
But now the kicker! What if the third party KNEW that the director was acting beyond their authority and yet still went ahead with the transaction? And that’s where S40 (2) (b) (iii) comes in and says …. ‘No problem’
Just because the third party KNEW about the director’s excess over the director’s powers, that in itself is not an indication of the third party acting in bad faith.
Is that better now?February 7, 2023 at 3:38 pm #678482
Not only better but great sir!!!!!
So this s40 kicker is applicable only in case of company right?
As in normal partnership or principal/agent situations if 3rd party knows then they cannot claim ostensible authority
BUT IN COMPANY THEY CAN
right?February 7, 2023 at 5:00 pm #678491
That’s the way I see it, yes.
I believe the rationale would be that the directors are acting not on their own account but on behalf of a different ‘person’ – albeit an artificial person
Whereas, in the partnership situation, there is no concept of the firm being a separate legal entity.
OK?February 7, 2023 at 5:08 pm #678492
Yes sir got it
So sir in a nutshell
In Partnership and normal principal and agent situation IT IS ONLY THE REPRESENTATION OF PRINCIPAL THAT LEADS TO OSTENSIBLE AUTHORITY AND NOT AGENT AND 3RD PARTY HAS TO RELY ON IT AND ALTER THEIR REPRESENTATION .February 7, 2023 at 5:16 pm #678494
I believe that’s correct … though I’m not sure what you mean by the last 4 words – ‘AND ALTER THEIR REPRESENTATION .’February 8, 2023 at 2:57 am #678506
Alter their position*February 8, 2023 at 6:25 am #678508
Ah! OK – yes, that seems to summarise the situationFebruary 8, 2023 at 7:32 am #678509
Also sir i read something in bpp and i just want to confirm it
If any individual director claims to third party to be MD (no other board has given the apparent authority) and they are dealing for the first time
Then third party has the right to assume any power the director profess that they have
Right?February 8, 2023 at 1:20 pm #678540
Or it must be representation by rest of board for such authority then only 3rd party can rely?February 8, 2023 at 6:55 pm #678565
I believe that it requires tacit acceptance. That is, the Board knows that the individual is holding him/ herself out as the CEO and the Board takes no action to refute that misrepresentation
From memory (I could be wrong here!) the case Morris v Kanssen illustrates this. I’ll check the case tomorrow – it’s too late for me to do this evening.February 9, 2023 at 1:26 am #678592
What if only a single director represents himself without other board members?
Will company havev to bind or not?February 9, 2023 at 3:29 am #678593
And even when only individual directors acts with greater power without being held out….and third party relies on it…will company have to bind it?February 9, 2023 at 12:22 pm #678622
Not sure how a single director can hold him/herself out to have authority beyond their authority! Who else in a single director company has authority if the single director doesn’t?February 9, 2023 at 12:27 pm #678623
‘And even when only individual directors acts with greater power without being held out….and third party relies on it…will company have to bind it?’
I believe that the situation here is that, provided there are no grounds for any element of doubt, a third party acting in good faith is entitled to believe that the director has the authority to bind the company in contract.
I think that it’s also the case that if the director has a specific title such as ‘Sales Director’ or ‘Marketing Director’ then that director would not be seen to have the authority to enter into, for example, a loan agreement with the bank.
OKFebruary 9, 2023 at 12:32 pm #678628
So even if a sales director acts beyond his ostensible authority…becoz of special benefits to third party in case of company the contract will be binding
But if same happens in case of partnership that a partner acts outside implied authority without being held out then he will be solely responsible and cannot bind the partnership firm( given there is no apparent authority by other partner)February 9, 2023 at 3:21 pm #678656
‘So even if a sales director acts beyond his ostensible authority…becoz of special benefits to third party in case of company the contract will be binding’
Not so sure about this! If a sales director acts beyond the limitations suggested by the job title, that would be seen (by me!) as sufficient indication that that director does not have the requisite authority.
‘But if same happens in case of partnership that a partner acts outside implied authority without being held out then he will be solely responsible and cannot bind the partnership firm( given there is no apparent authority by other partner)’
Again, I feel I need to dispute this :-(. So long as the acts of the partner are in the course of the firm’s business, the acts of the partners DO bind the firm and the other partners. The exceptions are 1) when the other party KNOWS that the partner is acting in excess of his / her authority and 2) where the act is outside the scope of the firm’s business ie where it’s not in the ordinary course of the firm’s business.
OK?February 9, 2023 at 3:33 pm #678658
Yes sir i got that if job title specifies that ,for example a sales director , then he may not take part in something which is usually a work done by financial director .But since third party,in case of company, is not considered acting in bad faith even when they know the lack of authority, the contract will still be binding.February 9, 2023 at 6:05 pm #678669
I’m not convinced! If a bank manager is dealing with a director, knowing that s/he is a sales director, I believe that that would nullify the contract.
If the bank manager knows that the person is a director (as distinct from the specifics of being a sales director) that may well be a different kettle of fish.
Whereas I’m not 100% on this I would think that an ordinary person (as distinct from someone with a position like a bank manager) who deals with a company through the personality of a director would have a good claim in Court asking that the contract was valid
You seem quite hooked on this! Is your father / mother (or even you yourself) in this position (not as the bank manager)? If so, I’m disassociating myself as of right now. If you want proper legal advice, go see a proper legal advisor 🙂
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