I suggest we might state again for the purpose of the record the view of the Joint Committee after their deliberations.
Following is the statement:
"(i) Modification of the ultra vires rule : Prior to the making of the European Communities (Companies) Regulations, 1973, the law in regard to the ultra vires rule was set out in section 8 of the Companies Act, 1963, as follows :
8. —(1) Any act or thing done by a company which if the company had been empowered to do the same would have been lawfully and effectively done, shall, notwithstanding that the company had no power to do such act or thing, be effective in favour of any person relying on such act or thing who is not shown to have been actually aware, at the time when he so relied thereon, that such act or thing was not within the powers of the company, but any director or officer of the company who was responsible for the doing by the company of such act or thing shall be liable to the company for any loss or damage suffered by the company in consequence thereof.
(2) The court may, on the application of any member or holder of debentures of a company, restrain such company from doing any act or thing which the company has no power to do.
It will be seen that this modification relates only to the objects of a company. Modification of this rule could have been effected (a) by amending section 8 either by way of a short Act amending the Act of 1963 or by a regulation under section 3 of the European Communities Act, 1972 or (b) by making a Regulation as has been done in Regulation 6, which is to be construed with section 8 of the Companies Act, 1963.
Regulation 6 reads as follows:
Organs authorised to bind companies
6.—(1) In favour of a person dealing with a company in good faith, any transaction entered into by any organ of the company, being its board of directors or any person registered under these regulations as a person authorised to bind the company, shall be deemed to be within the capacity of the company, and any limitation of the powers of that board or person, whether imposed by the memorandum or articles of association or otherwise, may not be relied upon as against any person so dealing with the company.
(2) Any such person shall be presumed to have acted in good faith unless the contrary is proved.
(3) For the purpose of this Regulation, the registration of a person authorised to bind the company shall be effected by delivering to the registrar of companies a notice giving the name and description of the person concerned.
It will be seen that the modification thereby effected relates to the powers of organs of a company.
It seems to the Joint Committee that the proper way to have effected the further modification was by an amendment of section 8 itself of the Act of 1963 as failure to do so could seem to have the following consequences.
Third parties are protected under section 8 unless they can be shown to have actual knowledge. In Regulation 6 they are protected only if they are not shown to have lacked good faith. What is bad faith? It is difficult to envisage what degree of knowledge or suspicion on the part of the third party about the impropriety of the contract needs to be proved. This remains to be settled by judicial decision while there is no such difficulty in regard to section 8. This difficulty was recognised by the Jenkins Committee (1962) which expressly recommended that the third party “ should not by reason of his omission (so) to investigate be deemed not to have acted in good faith ”. Under Regulation 6 how can a man be in good faith who was told by some responsible person that the Board had not got the powers it was purporting to exercise, yet was so careless as not to investigate the matter? On the other hand, he could have actual knowledge of the terms of the limitation (e.g. a copy of the Memorandum and Articles might be shown to have been in his possession) but be in good faith because he failed to comprehend its meaning. And what if the limitation is one where the Board has the power if it gets the authority of a special resolution (which is a public document of which he gets constructive notice) and such a resolution is not passed. Even if he is in good faith (having no actual knowledge) is he safe in such a case?
Regulation 6 will be construed in the light of the language of the section. The Courts may attach significance to the fact that section 8 expressly preserves the liability of any director who was responsible to pay damages for any loss suffered by the company as a result of the ultra vires action. Regulation 6 does not and that liability will depend upon a judicial decision as to whether the Regulation in the context of section 8 effects an amendment of the general law which would make the director liable unless the Articles of Association of the Company indemnified him (subject to the limitations of section 200 of the 1963 Act). Section 8 also saves (as Regulation 6 does not) the right of any member of holder of debentures of a company seeking an injunction. The same question also arises on this point as in the case of the preceding paragraph.
Regulation 6 saves transactions in favour of third parties entered into by any organ of the company not-withstanding limitations imposed by the Memorandum and Articles. The Regulation defines " organ " as the Company's " board of directors or any person registered under these regulations as a person authorised to bind the company ". It does not seem to affect the position of a third party dealing with a person authorised by the articles provided he gets an authority of the existence of which he will have constructive notice, because it is a public document. While Regulation 4 provides for the publication of a notice of a return of a person so authorised, there is no provision making such a return obligatory. A person may be actually authorised whose name may never have been returned to the Companies Office as being so authorised.
Regulation 6 refers to the " board of directors ". It does not refer to one of several members of the board. If the director acts in a manner consistent with the usual authority of a single director the company would be bound but not if he acts outside the authority where the third party is put on enquiry and cannot make the assumption that everything is in order.
A company is bound by acts of individual directors:
(1) where it has been represented that the director had authority;
(2) the representation is by persons actually authorised; and
(3) the representation induced the contract.
What is the position of a third party dealing with an officer held out by the company as having authority, e.g. the managing director (but not registered under the Articles) and who purports to exercise a power a managing director would usually have but in this case does not have and the third party knows it or the circumstances put him on enquiry?
In such a case the Joint Committee feels that the Company may not be bound notwithstanding the Regulation. The Regulation does not appear to show a sufficient awareness of the applicability of the law of agency to the affairs of companies.
It is not clear that the definition of " organ " in the Regulation is intended to be exhaustive and to displace the existing law that those who express " the mind and will " of a company constitute an organ responsible for its actions. Lack of clarity on the point could have seriously confusing effects.
The Joint Committee is of opinion that the liabilities of a company for acts of its officers is a vast field and any amendment of the law thereto should be thoroughly studied, debated and be the subject of primary not secondary legislation."
