Allcom Ltd has the following provisions in its articles: Paragraph X: The company secretary may not make any contract on behalf of the company for an amount exceeding 10,000. Paragraph Y: The Companys borrowings shall n

The company’s constitution lies at the heart of their activity; it is the one document that controls the business. S.18 reads “A company must have articles of association prescribing regulations for the company.” The company now can operate with the use of the constitution, directors and company secretary. However the constitution along with the Companies Act 2006 regulates and controls the actions of the directors and company secretary to ensure that they do not breach their duties.

Allcom Ltd. has made a series of statements in its articles the first of which is, “The company secretary may not make any contract on behalf of the company for an amount exceeding £10,000.” This article limits the secretary’s power when it comes to making a contract on its behalf. In this case the doctrine of ultra vires and capacity need to be discussed. Sally as the company secretary has the capacity to make contracts for the company however did she act within ultra vires; or beyond her powers. Sally the clearly breaches this article as she enters a contract with Motorhire Ltd. for the hire of cars to the value of £50,000.

This contract has been formed so now its validity is in question. Whether a company is bound by acts which are done on its behalf depends on whether the director, or other individual, who acted for the company had authority to do so.” This doctrine describes authority as having two branches the first actual authority and the second apparent authority. Actual as its name suggest means that the agent has actually been given that particular authority through the articles. The second view apparent (also known as ostensible) is where the agent appears to have that authority.

In the view of Motorhire Ltd. Sally was the company secretary and when she approached them with regards to a car hire contract, they would have assumed that she had the authority to make such a contract. Motorhire Ltd. can rely on the Turquand rule; which primarily protects outsiders from dealing with authorised agents who are not however authorised. The rule allows the outsider- Motorhire Ltd. to enforce the contract made. Reynolds has also said that “An agent binds his principal in contract when he acts within his actual authority.” Sally is the agent in this case and has bound Allcom.

From the point of view of Allcom, it has been contracted into this situation through the company secretary however it is not completely helpless. Sally is a 25% shareholder in Motorhire Ltd. this comes under the banner of avoiding conflicts of interest. Although the Act focuses a great deal on directors and their duties it has under s.252 and 175tried to encompass duties of all connected to the directors and the company. To simplify the section deals with people connected to the director; who should not be involved with any transaction with any party where they control 20% or more shares. This means that Sally had a conflict of interest as she contracted with Motorhire Ltd. as inevitably she was promoting the success of Motorhire Ltd. and so would expect a better return in her dividends and shares prices.

Allcom’s constitution states; “The Company’s borrowings shall not be allowed to exceed £1 million without the authorisation of the general meeting.” This issue is linked in with the other article that states “The quorum for meetings of the board of directors shall be five.” In this case four of the directors have decided to borrow money from the company’s bank, which would take their borrowings over the £1million threshold. However the banks lawyers have read the companies articles and have reported on them.

S.318 specifies the need to adhere to quorum in meetings, although the Act is directed to the company’s members. Allcom has adopted this quorum requirement for the board of directors meetings. The directors have not met this quorum; they have breached their duty to exercise reasonable care, skill and diligence.  This section can be quite broadly interpreted and so does encompass their breach of duties. Berg states “A director must exercise his powers honestly and for their proper purpose, and in accordance with the company's constitution and decisions taken lawfully under it.” The directors should have been very careful to meet the requirements of the articles whilst conducting the meeting. Leading from this they passed a resolution to borrow money which would take their borrowings over the £1million threshold. S.201 dictates the rules for credit transactions, directors are required to undertake a series of tasks to get approval of their credit transactions. However the articles of Allcom do not put in place such strict procedures.

The company’s bank, Grandbank have looked into the company’s articles and reported on their findings. They had also assumed that the finance director was authorised to make the transaction, which he was not. The circumstances in which the decision to borrow money had been conducted were not valid. As Grandbank had access to Allcoms articles they are aware that the directors collectively or individually are not allowed to make this contract. Allcom are not bound by the contract made to Grandbank.

In conclusion Allcom are bound to Motorhire Ltd. but not to Grandbank. Sally was not authorised to make the contract with Motorhire Ltd. and further more she had a financial interest in the contract. However any action to be taken against this contract will have to be taken personally from Sally. If they fail to continue the contract they may be liable for legal action, in Tesco Supermarkets Ltd. v Nattrass, Lord Reid said “the criminal act of the officer, servant, or agent including his state of mind, intention, knowledge or belief is the act of the company.” Grandbank had the opportunity to research and assess the articles of the company before they passed the loan. The nature of the financial industry is very risky and so the Bank has the tools to prevent them from making invalid contracts.

Allcom have several options to deal with the company secretary and directors breach of duty through remedies available to them. The most common remedy for breach is to recover loss suffered by the company including costs for carrying out the proceedings.

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