Directors: The Costly Mistake of Assuming Authority

A recent case has demonstrated the potential repercussions of a director complacently assuming that he is impliedly authorised to enter into all transactions on a company’s behalf, according to a corporate lawyer.

“A contract may be entered into on behalf of a company by any director acting under express or implied authority,” according to Philip Round, a partner at the Wolverhampton office of George Green LLP. “A contract entered into by a director without the requisite authority may be set aside by the company. A recent High Court case has shown that, whilst the requirements for obtaining authority are not particularly onerous, the consequences of proceeding without authority are potentially costly.”

Mr Round continues, “the case of Dickinson v NAL Realisations (Staffordshire) Ltd” concerned certain transactions entered into between a company and its managing director, who was also its controlling shareholder, in an apparent attempt to move assets out of the company at a time when it was subject to a potentially significant nuisance claim. When the company was subsequently placed into liquidation, the liquidators sought to set aside the transaction.”

According to Mr Round the transactions included a buyback of shares from the director, a sale and leaseback of the company’s property and the sale of a majority holding in the company’s overseas subsidiary. “In addition to finding that the company had not complied with the statutory formalities required for a buyback of shares and a sale of a substantial property to a director, the transactions were also voidable for want of authority. It was apparent that no board meetings had been convened to approve the relevant transaction, and even if they had been held, they would not have been quorate because under the company’s articles, the director was not entitled to vote on any matter in which he had a personal interest.”

Mr Round concludes, “Clients are frequently surprised by the formalities to which they must adhere in approving a transaction between a company and its controlling shareholder and director. This case demonstrates the importance of taking these formalities seriously.”