Court upholds company sale contract despite director's failure to state capacity, ruling it valid and enforceable.

[*380] 1977 January.29

(PIKIS, AG.P.D.C. AND CONSTANTINIDES,D.J.)

IN THE DISTRICT COURT OF LARNACA

Estates Potamitis J.P. Ltd.,

Plaintiffs,

and

Costas M. Athinodorou,

Defendant.

(Action No. 1189/75).

Company - Ultra vires doctrine - Sale of immovable property - Act intra vires the company - Sale concluded by one of the two directors of the company - To whom authority had been conferred, in general meeting, to sell immovable property during absence of co-director - Failure of director to indicate capacity in which she signed the contract does not invalidate the contract and does not absolve the defendant of his obligation thereunder - And the company had the right to enforce it - Section 186 of the Contract Law, Cap. 149.

A. Demetriou (now deceased), for Plaintiffs -

A. Kramvis, appeared for Plaintiffs to hear judgment.

G. Achilles, for the Defendant.

JUDGMENT

The judgment of the Court was delivered by:-

PIKIS, AG.P.P.C. : The plaintiff is a company [*381] limited, the liability of its shareholders being limited by the value of their shares, established on 30th January 1970. The defendant is a resident of the United Kingdom. On 25th June 1974, the parties purported to enter into a sale agreement (exhibit 2), the validity of which is contested by the defendants in these proceedings. The plaintiffs, on the other hand, seek to uphold the agreement and seek to recover arrears of the purchase price due under the terms of this agreement. In the contention of the defendant this agreement is ultra vires the objects of the plaintiff/company and in any event even if intra vires the objects of the company it was not validly executed on behalf of the company.

The agreement in question stipulates for the sale of two building sites owned by the plaintiffs to the defendant for £14,000 payable by instalments as provided therein. It is admitted that if the agreement is valid the plaintiffs are entitled to recover £4,500 plus interest, arrears due under this contract. The defendant pursues his allegation that the agreement is invalid in a counterclaim wherein he prays for a formal declaration of the invalidity of this agreement.

The facts of the case are in substance admitted and may be summed up as follows: The plaintiff/company is

managed by a board of directors, the directors being Ioannis Potamitis and Violanda Potamiti. On 2nd June 1974, Ioannis Potamitis planned to travel abroad and in

order to face this eventuality the company passed a resolution authorizing Violanda Potamitou to carry on the business of

the company during the absence of her fellow director and for a long as he would be abroad up [*382] to two months. The resolution specifically authorized Violanda Potamitou to sell, inter alia, property of the company (exhibit 4). The agreement between the parties was executed on 25th June 1974, at a time when Ioannis potamitis was absent abroad. The memorandum and articles of association of the company as well as a certificate of the Registrar of Companies, naming the directors of the plaintiff/company, were, by the consent of the parties, produced as exhibits (exhibit 1 and 3 respectively) .

1. The Agreement (its contents)

The parties to the agreement are described in the body of the agreement and they are the plaintiffs and

defendant respectively. The agreement was signed by the defendant and by Miss Violanda Potamitou. Miss Potamitou did not

accompany her signature with any declaration indicating the capacity in which she signed. In the submission of Mr. Achilles, counsel for the defendant, this omission on the part of Miss Potamitou prevented the formation of a valid contract between the parties.

The principal submission made on behalf of the defendant is that the agreement between the parties is ultra vires the objects of the company, and if this submission succeeds the action must inevitably be dismissed because a company cannot contract outside the objects and purposes of its existence. Further, it has been argued on behalf of the defendant that even in the event of the Court finding the agreement to be intra vires the company still no binding contract came into existence for the alleged reason that - and we are quoting from paragraph 2(b) of the defence [*383] Miss Violanda Potamitou had no authority, under the articles of association or otherwise, to sign and/or Lind the plaintiff/ company and in any event she did not sign this agreement on behalf of the company.

In his final' address learned counsel for the defendant, in further support of his case, argued that inasmuch as the plaintiff/company is not a trading corporation it cannot contract with any person other than the persons named in the memorandum of association and inasmuch as the defendant did not belong to a class of persons with whom the company could contract this agreement was invalid for that reason as well.

2. Companies - The Doctrine of Ultra Vires

The history of the evolution of the Company Law is indicative of the devices adopted over the years for the purpose of conferring corporal status on two or more persons trading together, overcoming in the process both conceptual and practical difficulties hindering this development. Since the decision in Salomon v. Salomon & Company Ltd. (1895-1899) All E.R. Reprint 33 it has been accepted that a limited company has, in law, an entity distinct from that of its shareholders and in consequence it has an existence of its own. This legal fiction and the impersonal status of a company is a salient aspect of a company but recently it has been emphasized that this veil of impersonality covering the shareholders may, if justice so requires, be removed in an appropriate case. (see Littlewoods v. McGregor (1969) 3 All E.R. 855).

Of necessity the will of the company

is manifested by the actions of its executive organs, such organs having [*384] often been described as the "alter ego" of the company. This

description has recently been criticized by Lord Reid in Tesco Supermarket Limited v. Natrass (1971) 2 All E.R. 127 observing that the will of the directors of the company is not a manifestation of the will of anybody other than the company and therefore they could more happily be described as the "ego" of the company.

A company can only operate within the sphere of the objects of the company defined in the memorandum of association. This is a limitation principally designed to protect investors in a company, also intended to encourage investment in public companies inasmuch as persons are more likely to invest money in a company when they have advance knowledge of the nature of its business. In this case the objects of the company are defined in paragraph 2 of the memorandum of association under 26 objects’ clauses. In accordance with clause 2(d) the company is empowered, inter alia to trade in every transaction involving immovable property, including the development, improvement, sub-division, letting, maintenance and exploitation of immovable property. In accordance with clause 2(lb) the company is empowered to carry out any business that can conveniently be carried out in combination with the main business of the company or incidental thereto if such activity is expected directly or indirectly to enhance the assets of the company and its profitability. This clause may justifiably be described as an incidental objects’ clause conferring power on the management to engage in trading activities allied to its main objects or incidental thereto. [*385]

The memorandum of association is a business document and must be interpreted in that spirit. The objects’ clause of a company must not be construed in a restrictive manner and whatever may be regarded as incidental or consequential to the main objects of the company must be treated as an act intra vires the company unless expressly prohibited. (See London County v. The Attorney-General (1902) A.C. 165 - Ashbury Railway Carriage Company v. Riche (1875)L.R.7.H.L,653 - Palmer’s Company Law, 12th edition, p. 80).

The interpretation of the objects of a company is a question of law, depending on the construction placed by the Court on the clauses of the memorandum of association. (See Palmer’s Co. Law (supra), p. 87). We are of the view that on any fair construction of the objects’ clauses of the plaintiff/ company, particularly the clauses specifically referred to above, one would inevitably be driven to the

conclusion that the plaintiff/company had power to sell immovable property. We may note in particular the authority conferred on the company to engage in every kind of dealing affecting immovable property as well as the power conferred therein to exploit, with a view to profit,"ekmetallefsis", immovable property of the company. In our judgment specific' authority is conferred on the company to sell, in the course of its business, immovable property. Assuming, contrary to our finding, that such a power is not specifically conferred the exercise Of such a power would be incidental to the objects of the company and should, therefore, be recognized as a power possessed by the management of the company if the objects of the company are not to be frustrated. Therefore we find that the plaintiff/ company had authority to sell immovable property and the [*386] transaction in question, evidenced by the sale agreement, between the parties, is intra vires the company.

3. The Articles of Association

The articles of association are a set of rules governing matters pertaining to the internal management of the company; and whereas the memorandum of association may be treated as the constitution of the company, the articles may be likened to the domestic legislation of the company prescribing the conditions under which a company should function and operate.

By virtue of the articles of association

of the plaintiff/company the rules laid down in table ’A’ of the Companies Law are excluded and a set of rules indigenous to

the company is adopted in their stead. It is, if we may say so, a poorly drafted set of rules especially where they purport to define the way the company will be managed. It is provided that the company shall have a maximum of three and a minimum of two directors with Ioannis Potamitis being a life director. The powers of the directors are hardly defined. Summarizing the effect of the articles the management of the company is placed in the hands of the directors who are vested with power, inter alia, to appoint at their discretion a managing director "diikitikos simvoule".

It is settled that the articles of association should be construed in a manner achieving maximum business efficacy thus making feasible the smooth running of the affairs of the company. The proper approach to the construction

of the articles of association is summed up in Halsbury’s Laws of England, 4th edition, volume 7, in these terms:- [*387]

"The articles should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable".

In law, the directors of the company are regarded as the agents of the company subject to any restrictions imposed in this respect by the articles of association and directors have authority to do whatever is fairly incidental to the exercise of their powers in carrying out the objects of the company. (See Halsbury’s Laws of England, volume 7, paragraphs 496-498). On the other hand, in the absence of express authority directors cannot delegate their duties or powers. (See Halsbury's Laws of England, 4th edition, volume 7, Paragraph 501).

The point raised in paragraph 2(b) of

the defence is that Violanda Potamitou had no power or authority to enter into this agreement on behalf of the company. The allegation made

here is twofold: (a) That Violanda Potamitou had no authority to sign and (b) that she was not empowered under the articles to bind the company in a transaction of the nature under consideration and in the circumstances she did.

The scope of the authority of an agent is defined by section 148 of the Contract law.Cap. 149 and the director of the company being the agent of the company, as mentioned above, he can bind the company in the same way that an agent can bind his principal. The power to sign agreements on behalf of the company is a power incidental to the authority [*388] of a director provided the agreement fails within the objects of the company. The second part of the submission made on behalf of the defendant in this respect involves matters pertaining to the internal management of the company. Generally the Court will he slow to absolve a third party from his obligations to a company under an agreement entered into by an agent of the company for alleged failure to comply with internal management provisions so long as the contract is within the objects of the company and the subject an agreement, the execution of which is insisted upon by the company. It is now well settled that if a company has acouiesed to the acts of a director

acting in pursuance of the objects of the company the agreement will be upheld. (See Halsbury's Laws of England. 4th edition, volume 7, paragraph

504). In this case there is ample evidence that the company not only acquiesed to the acts of Violanda Potamitou but adopted the transaction as a transaction of the company.

Moreover, the Court cannot examine the acts of Violanda Potamitou divorced from their background. The company, in general meeting, had conferred authority on Violanda Potamitou to sell immovable property during the absence of her co-director. To this

decision her co-director was a party and in full agreement. Therefore one may legitimately regard the decision of Violanda Potamitou as that of the directors of the company for all purposes. The resolution passed in general meeting may properly be regarded as a decision filling the vacuum left in the articles for the management of the company when the [*389] directors present in Cyprus are less than two and indeed there is authority that the company has a residual authority to provide for the effective management of the company. The observations of Lord Hailsham in Alexander v. Ward Samiang Navigation (1975) 2 All E.R. 424 on this subject are very apt and to the point:-

"The company could have done so either by appointing directors or as; I think, by authorising proceedings in general meeting which, in the absence of an effective board, has a residual authority to use the company's powers “

The last submission made on behalf of the defendant is that the plaintiffs are not a trading corporation and in consequence they cannot contract with anybody not specifically mentioned in the memorandum of association and invited the Court to treat the agreement in question as invalid for failure of authority on the part of the company to contract with the defendant. In our view this submission is totally devoid of merit. It is manifest from the objects of the company that trading was the principal purpose for the existence of this company. (The judgment of the Supreme Court in Electricity Authority of Cyprus v. Petrolina Company Ltd. (1971) 1 C.L.R. 19 is illustrative as to what amounts to a trading corporation).

The, contracts of a company must be in the form envisaged by section 33 of the Companies Law, Cap. 113 and the contract under consideration cannot be faulted for lack of proper form. [*390]

The failure on the part of Miss Potamitou to indicate the capacity in which she signed the agreement does not invalidate the contract and certainly does not absolve the defendant of his obligations thereunder. Miss Potamitou contracted on behalf of the company and signed the agreement as an agent of the company. In consequence her principals in this respect, the company, had the right to enforce the contract. (See section 186 of the Contract Law, Cap. 1h9). In the instant case it is perfectly clear from the body of the agreement that the defendant knew who the other contracting party was.

In our judgment the agreement between the parties is valid and the plaintiffs have a right to enforce it. In the result, judgment is given for the plaintiffs as per claim, with costs on the scale of claims between £2,000 to £5S000, to be assessed by the Registrar and approved, by the Court. The 1 counterclaim is dismissed, with costs recoverable on the same scale, to be assessed by the Registrar and approved by the Court.

Judgment for plaintiff

as per claim with costs.

Counterclaim dismissed.