Ratification in Company Law: Key Points and Considerations
Exploring the concept of ratification in company law, this article discusses the improper exercise of powers by directors, the distinction between internal and external consequences, and the significance of ratification in resolving issues related to defective appointments or unlawful exercises of power. Through examination of key points and applicable principles, the importance of ratification in upholding the validity of company actions is highlighted.
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WHOSE POWER IS IT ANYWAY? Steven Thompson QC, Hugh Miall, and James Fennemore
Improper exercise of powers: the company context if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board,
Ratification: 3 key points 1. Exploitation or cure of these issues invariably involves ratification. Meaning? Adopting the exercise of the power (e.g., a transaction) where authority or appointment defective, or exercise unlawful. Curing or absolving the wrongdoing of the person concerned. These positions might overlap on the facts
Ratification: 3 key points 2. Who is affected? Distinguish between the external and internal consequences of the exercise of the power, and of ratification. External: concerning the effect of the transaction on third parties. Internal: relating to the affairs of the company and its directors. 3. Principles of agency apply. Ultimately affects questions of ratification.
External issues External issues are of limited relevance owing to statutory intervention. An absence of capacity by a company or its directors generally will not affect the validity of the act in issue: See ss.39 42 Companies Act 2006 (E&W) S.28 Cayman Islands Companies Act (2021 Rev) S.29 BVI Business Companies Act 2004 Similar approach is taken in cases of defective appointment, or subsequent disqualification of directors: S.161 Companies Act 2006 S.73(2) Cayman Islands Companies Act (2021 Rev); Table A Para 87 Ss.31, 117 BVI Business Companies Act 2004 Query where there is no attempt to appoint?
Internal issues Much more common in litigation: usually concerns absolving the wrongdoing. Ratification by resolution (written or in meeting). In E&W, s.239 CA 2006 sets out steps for ratification, including former and shadow directors, by resolution director and associates cannot vote. Preserves the validity of unanimous consent of the members. Does not affect acts incapable of ratification.
Unanimous consent Re Duomatic defence informal unanimous consent or authorization for a particular transaction so as to excuse director of liability. Not enough that members would have ratified had they thought about it: Re D Jan of London [1994] 1 BCLC 561 But where it would be unconscionable for shareholders to remain silent, silence itself might be enough: Sharma v Sharma [2014] BCC 73
Unanimous consent Whose consent? Where in reality it is a UBO taking all the decisions as regards relevant transactions, it is the decision of the UBO which counts: Ciban v Citco [2020] UKPC 21 (BVI). Exceptions to ratification: Ultra vires acts, i.e. those outside corporate capacity (but rare in practice in modern companies at least) or involve illegality, e.g. the return of capital. Where the act is a fraud on the company, the minority or creditors. Where the company is insolvent or of doubtful solvency.
Ratifying the act Where the transaction or act is the focus of ratification, who can ratify? Single director acting in excess of authority: was the matter within the powers of the board? If yes, the board. If no, members. Shareholder or third-party purports to act for company but has no (ostensible) authority to do so? Potentially the board, depending on powers. E.g. New Falmouth Resorts Ltd v International Hotels Jamaica Ltd [2013] UKPC 11 (Jamaica).
Ratifying the act Acts which solely fall within the remit of the board, but where the board has acted improperly in exercising power? The members. Why? Because ultimately a company acting by its members can ratify any exercise of a power which is intra vires the powers of the company: Bamford v Bamford [1970] Ch 212. Arguably comes back to the laws of agency and explains why even where there are no directors appointed, a company might validate an act or transaction purportedly entered into.
if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been done all right from the beginning. I cannot believe that that is not a commonplace of company law. It is done every day.
Trusts 1. Defective appointment: trustee de son tort 2. Lack of unanimous exercise of trustees powers
1. Defective appointment: trustee de son tort Re BB [2011] JRC 148 a freewheeling power of ratification under the inherent jurisdiction? Re Z Trust [2016] JRC 048 3 types of ratification Re C Trust [2019] SC (Bda) 44 Civ type 3 ratification comes to Bermuda Re O Trust [2019] JRC 220A hold your horses
1. Defective appointment: trustee de son tort Re Z Trust [2016] JRC 048 3 types of ratification 1. Retrospective ratification 2. Same conclusion, new act ratification 3. Three wise monkeys ratification
1. Defective appointment: trustee de son tort Re BB [2011] JRC 148 a freewheeling power of ratification under the inherent jurisdiction? Re Z Trust [2016] JRC 048 3 types of ratification Re C Trust [2019] SC (Bda) 44 Civ type 3 ratification comes to Bermuda Re O Trust [2019] JRC 220A hold your horses
2. Lack of unanimous exercise Messeena v Carr (1869-70) LR 9 Eq 2601 approval and sanction of payments made by acting trustee Gilbey v Rush [1906] 1 Ch 11 consent must be given at same time, and must be given by both trustees Libby v Kennedy [1999] Pens LR 143 full body of trustees able to ratify decision made by minority previously Hansard v Hansard [2014] NZCA 433 approval of trust accounts = ratification?
2. Lack of unanimous exercise A retrospective assent from one trustee, purporting to approve what has already been done by the others without it, will not do. But all the trustees may collectively ratify what has been previously done by some only of them, presumably on the footing that they are entitled to avoid the circuity of seeking to set aside the prior purported exercise only to exercise the power again in the same way. For ratification to be effective, there must be more than a passive acquiescence in a decision taken by another trustee: the trustees ratifying must know the essential nature of the act or decision in question and must consider the exercise of their powers and consent to the action taken. Lewin, 29-102
