Smith v Henniker-Major & Co

A director who is personally responsible for acting beyond limits imposed by the company’s constitution cannot invoke Companies Act 1985, section 35A to validate that act against a genuine third party. The provision protects persons dealing with the company, not a director seeking to rely on his own constitutional error.

Ratification requires adoption of the whole unauthorised transaction. A later instrument which changes the consideration for an assignment is not a retrospective ratification of the original assignment. In any event, retrospective ratification is unavailable where delay and resulting prejudice make reliance on it unfair. A court may refuse a late amendment even where it may concern substantially the same facts, particularly where it would unfairly deprive the defendant of an accrued limitation defence.

Mr Smith claimed, as assignee of Saxon Petroleum Developments Ltd (SPDL), that the respondent solicitors had breached duties owed to SPDL. His claimed title derived from an assignment signed after an inquorate meeting at which he was the only director present.

Rimer J refused permission to amend the particulars of claim and entered summary judgment under CPR Part 24. Before that hearing, SPDL executed a further deed which purported both to ratify the earlier assignment and to make a fresh assignment.

The appeal concerned whether section 35A protected the 1998 assignment, whether the 2001 deed retrospectively ratified it, and whether the claim could be amended after expiry of the limitation period.

1. Appeal dismissed. Lord Justice Robert Walker would have allowed the appeal on the section 35A issue. Lord Justices Carnwath and Schiemann held that the provision did not assist Mr Smith, and their view prevailed. The court was unanimous in rejecting the ratification and amendment grounds.

2. Section 35A of the Companies Act 1985 protects a person dealing with a company against limitations on the board’s powers. Its purpose, and that of Article 9 of the First Directive, is protection of third parties. A director who was himself responsible for exceeding the constitutional limitation could not rely on his own honest mistake to transform his unauthorised act into an act of the board, as against the solicitors. The solicitors, rather than Mr Smith, were the relevant third party.

3. The 2001 deed was not a true ratification of the 1998 assignment. Ratification is equivalent to prior authority and has retrospective effect, but it requires adoption of the transaction in its entirety. The 2001 deed supplied new and more favourable consideration for SPDL. The transfer of the chose in action could not be separated from the consideration for which it had originally been made.

4. Robert Walker LJ further held that, had ratification otherwise been available, the delay would have made retrospective ratification unfair. Presentaciones Musicales SA v Secunda [1994] Ch 271 established that limitation expiry does not automatically prevent ratification of proceedings. It did not remove the broader requirement that ratification must not unfairly prejudice a third party. The age of the allegations, the death of a material witness, delay, and costs were sufficient prejudice.

5. The court refused the renewed application to amend. Although it doubted whether the proposed reliance on the 2001 deed necessarily fell outside the same-facts condition in section 35 of the Limitation Act 1980, it upheld Rimer J’s discretionary refusal. In the exceptional circumstances, permitting amendment after limitation had expired would be unfair.

• Court of Appeal (Civil Division): Appeal dismissed: [2002] EWCA Civ 762 . The court upheld the dismissal of the claim and refusal of amendment.

• High Court, Chancery Division (Rimer J): On 17 October 2001, refused permission to amend the particulars of claim and entered summary judgment under CPR Part 24 on the basis that the claim had no real prospect of success.