Company Law Reform Bill [HL] (16-19)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (16-19)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 4 — A company’s capacity and related matters
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purporting to give a person a right to participate in the divisible profits of the
company otherwise than as a member is void.
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Application to single member companies of enactments and rules of law

Any enactment or rule of law applicable to companies formed by two or more
persons or having two or more members applies with any necessary
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modification in relation to a company formed by one person or having only
one person as a member.
Part 4
A company’s capacity and related matters
Capacity of company and power of directors to bind it
10
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A company’s capacity
(1)
The validity of an act done by a company shall not be called into question on
the ground of lack of capacity by reason of anything in the company’s
constitution.
(2)
This section has effect subject to section 42 (companies that are charities).
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40
Power of directors to bind the company
(1)
In favour of a person dealing with a company in good faith, the power of the
directors to bind the company, or authorise others to do so, is deemed to be free
of any limitation under the company’s constitution.
(2)
For this purpose—
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(a)
a person “deals with” a company if he is a party to any transaction or
other act to which the company is a party,
(b)
a person dealing with a company—
(i)
is not bound to enquire as to any limitation on the powers of the
directors to bind the company or authorise others to do so,
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(ii)
is presumed to have acted in good faith unless the contrary is
proved, and
(iii)
is not to be regarded as acting in bad faith by reason only of his
knowing that an act is beyond the powers of the directors under
the company’s constitution.
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(3)
The references above to limitations on the directors’ powers under the
company’s constitution include limitations deriving—
(a)
from a resolution of the company or of any class of shareholders, or
(b)
from any agreement between the members of the company or of any
class of shareholders.
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(4)
This section does not affect any right of a member of the company to bring
proceedings to restrain the doing of an action that is beyond the powers of the
directors.

But no such proceedings lie in respect of an act to be done in fulfilment of a
legal obligation arising from a previous act of the company.
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Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 4 — A company’s capacity and related matters
17

(5)
This section does not affect any liability incurred by the directors, or any other
person, by reason of the directors’ exceeding their powers.
(6)
This section has effect subject to—
section 41 (transactions with directors or their associates), and
section 42 (companies that are charities).
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41
Constitutional limitations: transactions involving directors or their associates
(1)
This section applies to a transaction if or to the extent that its validity depends
on section 40 (power of directors deemed to be free of limitations under
company’s constitution in favour of person dealing with company in good
faith).
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Nothing in this section shall be read as excluding the operation of any other
enactment or rule of law by virtue of which the transaction may be called in
question or any liability to the company may arise.
(2)
Where—
(a)
a company enters into such a transaction, and
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(b)
the parties to the transaction include—
(i)
a director of the company or of its holding company, or
(ii)
a person connected with any such director,

the transaction is voidable at the instance of the company
(3)
Whether or not it is avoided, any such party to the transaction as is mentioned
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in subsection (2)(b)(i) or (ii), and any director of the company who authorised
the transaction, is liable—
(a)
to account to the company for any gain he has made directly or
indirectly by the transaction, and
(b)
to indemnify the company for any loss or damage resulting from the
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transaction.
(4)
The transaction ceases to be voidable if—
(a)
restitution of any money or other asset which was the subject-matter of
the transaction is no longer possible, or
(b)
the company is indemnified for any loss or damage resulting from the
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transaction, or
(c)
rights acquired bona fide for value and without actual notice of the
directors’ exceeding their powers by a person who is not party to the
transaction would be affected by the avoidance, or
(d)
the transaction is affirmed by the company.
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(5)
A person other than a director of the company is not liable under subsection (3)
if he shows that at the time the transaction was entered into he did not know
that the directors were exceeding their powers.
(6)
Nothing in the preceding provisions of this section affects the rights of any
party to the transaction not within subsection (2)(b)(i) or (ii), but the court may,
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on the application of the company or any such party, make such order
affirming, severing or setting aside the transaction on such terms as appear to
the court to be just.
(7)
In this section—
(a)
“transaction” includes any act; and
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Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 4 — A company’s capacity and related matters
18

(b)
the reference to a person connected with a director has the same
meaning as in Part 10 (company directors).
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Constitutional limitations: companies that are charities
(1)
Sections 39 and 40 (company’s capacity and power of directors to bind
company) do not apply to the acts of a company that is a charity except in
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favour of a person who—
(a)
does not know at the time the act is done that the company is a charity,
or
(b)
gives full consideration in money or money’s worth in relation to the
act in question and does not know (as the case may be)—
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(i)
that the act is not permitted by the company’s constitution, or
(ii)
that the act is beyond the powers of the directors.
(2)
Where a company that is a charity purports to transfer or grant an interest in
property, the fact that (as the case may be)—
(a)
the act was not permitted by the company’s constitution, or
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(b)
the directors in connection with the act exceeded any limitation on their
powers under the company’s constitution,

does not affect the title of a person who subsequently acquires the property or
any interest in it for full consideration without actual notice of any such
circumstances affecting the validity of the company’s act.
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(3)
In any proceedings arising out of subsection (1) or (2) the burden of proving—
(a)
that a person knew that the company was a charity, or
(b)
that a person knew that an act was not permitted by the company’s
constitution or was beyond the powers of the directors,

lies on the person asserting that fact.
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(4)
In the case of a company that is a charity the affirmation of a transaction to
which section 41 applies (transactions with directors or their associates) is
ineffective without the prior written consent of—
(a)
in England and Wales, the Charity Commission;
(b)
in Northern Ireland, the Department for Social Development.
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(5)
This section does not extend to Scotland (but see section 112 of the Companies
Act 1989 (c. 40)).
Formalities of doing business under the law of England and Wales or Northern Ireland
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Company contracts
(1)
Under the law of England and Wales or Northern Ireland a contract may be
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made—
(a)
by a company, by writing under its common seal, or
(b)
on behalf of a company, by a person acting under its authority, express
or implied.
(2)
Any formalities required by law in the case of a contract made by an individual
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also apply, unless a contrary intention appears, to a contract made by or on
behalf of a company.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 4 — A company’s capacity and related matters
19

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Execution of documents
(1)
Under the law of England and Wales or Northern Ireland a document is
executed by a company—
(a)
by the affixing of its common seal, or
(b)
by signature in accordance with the following provisions.
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(2)
A document is validly executed by a company if it is signed on behalf of the
company—
(a)
by two authorised signatories, or
(b)
by one authorised signatory in the presence of a witness who attests the
signature.
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For the meaning of “authorised signatory”, see section 281.
(3)
A document signed in accordance with subsection (2) and expressed, in
whatever words, to be executed by the company has the same effect as if
executed under the common seal of the company.
(4)
In favour of a purchaser a document is deemed to have been duly executed by
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a company if it purports to be signed in accordance with subsection (2).

A “purchaser” means a purchaser in good faith for valuable consideration and
includes a lessee, mortgagee or other person who for valuable consideration
acquires an interest in property.
(5)
Where a document is to be signed by a person as an authorised signatory of
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more than one company, it is not duly signed by that person for the purposes
of this section unless he signs it separately in each capacity.
(6)
References in this section to a document being (or purporting to be) signed by
an authorised signatory are to be read, in a case where the signature is that of
a director or secretary and that office is held by a firm, as references to its being
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(or purporting to be) signed by an individual authorised by the firm to sign on
its behalf.
(7)
This section applies to a document that is (or purports to be) executed by a
company in the name of or on behalf of another person whether or not that
person is also a company.
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Common seal
(1)
A company may have a common seal, but need not have one.
(2)
A company which has a common seal shall have its name engraved in legible
characters on the seal.
(3)
If a company fails to comply with subsection (2) an offence is committed by—
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(a)
the company, and
(b)
every officer of the company who is in default.
(4)
An officer of a company, or a person acting on behalf of a company, commits
an offence if he uses, or authorises the use of, a seal purporting to be a seal of
the company on which its name is not engraved as required by subsection (2).
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(5)
A person guilty of an offence under this section is liable on summary
conviction to a fine not exceeding level 3 on the standard scale.
(6)
This section does not form part of the law of Scotland.