Ford v Polymer Vision Ltd

Under section 40 of the Companies Act 2006, a person dealing with a company in good faith may rely on the directors’ power to bind the company, despite constitutional limitations. Good faith is presumed. Knowledge that the directors have exceeded their constitutional powers does not, by itself, establish bad faith.

Procedural defects in convening a quorate board meeting may fall within those constitutional limitations. The protection does not, however, validate a transaction where there is a real prospect that the directors exercised their powers for an improper purpose, or where the transaction’s propriety cannot fairly be resolved summarily.

The claimant had advanced substantial funds to the defendant company, which was in severe financial difficulty. He sought summary judgment declaring valid a debenture securing liabilities owed to him and an option agreement granting him a ten-year option to purchase the company’s assets and undertaking for an amount linked to its liabilities. He also sought specific performance of a further-assurance covenant requiring steps to perfect the security in the Netherlands.

The relevant board meetings had not complied with the company’s articles and shareholders’ agreement. The central issues were whether section 40 of the Companies Act 2006 protected the transactions, whether the claimant had acted in good faith, and whether the matters could be decided summarily.

1. The court granted summary judgment declaring the Ford debenture valid and binding on PVL. The validity of the Option Agreement and the requested further-assurance relief were not determined summarily and, if necessary, were to proceed to trial.

2. The board meetings were not validly convened. Notice should have been given to all Special Directors under clause 8.6.3 of the shareholders’ agreement, and the meetings were deemed to have taken place in the United Kingdom contrary to the articles. The resolutions therefore could not bind PVL under its constitution.

3. Section 40 of the Companies Act 2006 nevertheless applied. The debenture and option were transactions within its scope, and the defects were limitations under PVL’s constitution. The statutory touchstone was whether Mr Ford dealt with PVL in good faith. Good faith was presumed, and knowledge that the directors had exceeded their constitutional powers did not alone amount to bad faith.

4. The reasoning in Criterion Properties plc v Stratford UK Properties LLC & ors [2004] UKHL 28; [2004] 1 WLR 1846 confirmed the importance of actual or apparent authority, subject to the statutory protection. The discussion of Smith v Henniker-Major & Co (a firm) [2003] Ch 182 showed that the distinction between nullity and procedural irregularity was relevant to the statutory analysis.

5. The debenture secured money already advanced to PVL. Its terms were not shown to be unusual or unfair, and the directors’ decision to grant security for rescue funding was not an improper exercise of their powers. PVL therefore had no real prospect of defending the claim to validate the debenture.

6. The Option Agreement required closer examination. It committed PVL to dispose of all its assets and undertaking for up to ten years at a price limited to its liabilities, without evidence addressing the value of the assets, the commercial justification, or consultation with shareholders and other Special Directors. There was a real prospect that the directors had exercised their powers improperly, and the issue could not fairly be resolved on summary judgment.

7. The court declined to order execution of the proposed Dutch pledge or a power of attorney to procure it. Although clause 6 could in principle require further instruments to perfect security abroad, the scope and effect of the proposed instrument under Dutch law were insufficiently clear, and it appeared to go beyond the debenture.