FINBARR O’CONNELL & Ors v LPE SUPPORT LIMITED (IN COMPULSORY LIQUIDATION)

A company is not bound by a transaction entered into by a director without actual authority where the transaction breaches the director’s duties and the counterparty knows, or is put on inquiry, as to that lack of authority. In those circumstances the counterparty cannot rely on apparent authority, and the transaction is void. Knowledge acquired by directors acting for both companies may be attributed to the counterparty company. A transaction may be ratified, but ratification requires full knowledge of the material circumstances and must be effected by an organ with power to ratify.

The administrators of London Oil & Gas Limited sought relief setting aside an assignment of its rights under an £8 million loan facility to LPE Support Limited for consideration of £1. The assignment had been executed by a director of London Oil & Gas without board authorisation. The transaction was unopposed.

The central issues were whether the director had actual or apparent authority, whether LPE Support had notice of any breach of duty, whether the relevant knowledge was attributable to LPE Support, and whether the assignment had been ratified. An alternative claim under section 238 of the Insolvency Act 1986 was not determined.

1. Disposition. The assignment was declared void for want of authority.
2. Under ordinary agency principles, a director lacks authority to bind a company in relation to an agreement entered into in breach of the director’s duties. A counterparty with notice that the director lacks actual authority, or with knowledge of circumstances requiring inquiry, cannot rely on apparent or ostensible authority: Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846 and Wrexham Association Football Club Ltd v Crucialmove Ltd [2007] BCC 130.
3. Following GHLM Trading Ltd v Maroo [2012] 2 BCLC 369, a contract entered into by a director in pursuit of personal interests, contrary to the company’s interests, is void where the other contracting party has notice of the breach of duty.
4. The court found that no board decision authorised the assignment. The executing director lacked actual authority, acted in breach of fiduciary duty, and knew that the assignment was contrary to London Oil & Gas’s interests. The co-director, who was also a director of LPE Support, knew those matters. That knowledge was attributed to LPE Support under Meridian Global Funds Management Asia Ltd v Securities Commision [1995] 2 AC 500. Apparent authority therefore did not arise.
5. Ratification requires the principal to have full knowledge of the material circumstances and may be express or implied. The court found no evidence that the assignment had been ratified. It was unnecessary to decide whether ratification would have fallen within the board’s powers: Suncorp Insurance and Finance v Milano Assecurazioni SpA [1993] 2 Lloyds Rep 225.
6. The alternative claim under section 238 of the Insolvency Act 1986 was not addressed.