Thread: Beyond Capacity or beyond power?

Beyond Capacity or beyond power?

Re Introductions Ltd [1970]

Here is a company, Introductions Ltd which was formed around 1951 for the purpose of making money from foreign visitors by providing accommodation and entertainment for the Festival of Britain. When the festival was over, the company started to do other things and eventually ended up rearing pigs and did no better by going bankrupt. The company had an outstanding overdraft from National provincial Bank. The constitution, of which the bank had a copy, stated that it can borrow money and also the purpose of the company is to the business of "tourisms".

HELD: Borrowing is power not an object. Company has power to borrow but it had acted ultra-vires for purpose beyond the stated capacity of the company i.e. not to breed pigs. The bank knew as he had a copy of the memorandum, therefore the borrowing was void and unenforceable. The Bank lost all rights to pursue its case.

Analysis: Shouldn't this BE a case of abuse of power by the director rather than a case of an ultra-vires act? Had the bank been properly advised, it would not have lost its case.

Company with stated objects or restricted objects requires directors to observe them. Although an outsider need not inquire whether an act of a directors is within the company objects but if he knows of the limitation, a question will arise whether the director has acted beyond the power of the stated purpose or it was altogether not within the capacity of the company to enter into such transaction. Power and objects can be in-distinguishable but we still need to hang them on the right pegs because ultra vires transactions are void and unenforceable while abuse of power is valid but voidable.

Beyond capacity?

In Re Introductions Ltd [1970], the bank knew as he had a copy of the memorandum, therefore the borrowing was void and unenforceable. The Bank lost all rights to pursue its case.

If this case were to br decided today, will the result be the same?

The later case Rolled Steel v BSC 1986 suggests that acting for an improper purpose is an abuse of power should not be construed as acting beyond capacity, thus the contract between the bank and Introduction Ltd should not be void, rather it should valid but voidable for other reasons. So it is legitimate to make a distinction between capacity and power.

Could the contract be voided for the fact that the bank had notice of the company object and thus should have realized that the company directors had abuse its power acting for an improper purpose?

First, the rule in Turquand may support the bank that it may assume and need not inquire into whether permission had been granted internally by the Company. Secondly, CA 2006 section 40, the legislature allows the transaction to be valid for third parties acting in good faith.

The knowledge alone of the company incapacity may not be considered bad faith Midland Bank v Green1981., the requirement of constructive notice was abolished by s9(1) of ECA 1972 directive, a person acts in good faith if he had acted honestly and genuinely in the circumstances of the case Barclays bank v TOSG Trust Fund 1984, TCB Ltd v Gray 1986.

Will he be acting dishonestly, if he should have made inquires under the circumstance of the case?

Beyond Power?

CA 2006 section 40 protects the outsiders to the extend that the directors have unlimited power to bind the company. What if the directors in question do not have actual authority to bind the company, will the transaction be void under the ordinary law of agency? What if the insiders have apparent authority? see Freeman and Lockyer v Buckhurst properties [1964].