(1)In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution.
(2)For this purpose—
(a) a person “deals with” a company if he is a party to any transaction or other act to which the company is a party,
(b)a person dealing with a company—
(i)is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,
(ii)is presumed to have acted in good faith unless the contrary is proved, and
(iii)is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company's constitution.
(3)The references above to limitations on the directors' powers under the company's constitution include limitations deriving—
(a)from a resolution of the company or of any class of shareholders, or
(b)from any agreement between the members of the company or of any class of shareholders.
(4)This section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors.
But no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company.
(5)This section does not affect any liability incurred by the directors, or any other person, by reason of the directors' exceeding their powers.
(6)This section has effect subject to—
section 41 (transactions with directors or their associates), and
section 42 (companies that are charities).
Cases considering section 40 (21)
[2022] EWCA Civ 22 · 14 January 2022
Cited only.
The provision expressly preserves directors’ liability arising from exceeding their powers. It therefore prevented the statutory protection for company transactions from defeating the company’s breach-of-duty claim (see paras [47]-[48]).
[2026] EWHC 2292 (Comm) · 4 September 2026Interprets
Section 40 was interpreted as protecting good-faith dealings with the directors as a body from constitutional limitations. It did not displace common-law ostensible authority or permit reliance on a single director’s presumed authority. (see paras [45]-[48])
[2025] EWHC 1083 (Ch) · 15 May 2025Limits
Section 40 protected the transfer of the Bubble City share because Mr Sachdeva and Bubble City dealt in good faith and could rely on the managing director’s actual or apparent authority. It did not validate the separate transfer of the Subscriber Share, which was made in bad faith with knowledge of breach. (see paras [138]-[145])
Section 40(1) was applied to uphold the apparent authority supporting the transfer of the Bubble City share, but it did not protect the bad-faith transfer of the Subscriber Share. (see paras [141]-[145])
The statutory presumption of good faith was considered in assessing whether the counterparty could rely on section 40. The presumption did not assist where the court found that Mr Sachdeva knew of the breach and acted dishonestly. (see paras [138], [143]-[145])
The court considered the rule that knowledge that an act exceeds directors’ powers does not alone establish bad faith. On the facts, however, the finding was of actual knowledge of breach and dishonest conduct, not knowledge alone. (see paras [138], [143]-[145])
1 more judgment, and what each says about section 40, are in the
case-law panel in the full Act.
125.This section provides safeguards for a person dealing with a company in good faith and restates section 35A and 35B of the 1985 Act. The power of the directors to bind the company, or authorise others to do so, is deemed not to be constrained by the company’s constitution. This means that a third party dealing with a company in good faith need not concern itself about whether a company is acting within its constitution.
126.Subsection (2)(b)(i) of the section replaces part of section 35B of the 1985 Act: an external party is not bound to enquire whether there are any limitations on the power of the directors. The first limb of section 35B (which refers to the memorandum) has not been carried forward. This is concerned with restrictions in a company's constitution that limit a company’s ability to act and consequently the powers of the directors to bind the company (the so called "ultra vires rule"). Under the Act, the objects no longer affect the company's capacity to act and so this limb is not necessary.