Companies Act 2006, section 42

Constitutional limitations: companies that are charities

Part 4 A company's capacity and related matters

(1)Sections 39 and 40 (company's capacity and power of directors to bind company) do not apply to the acts of a company that is a charity except in favour of a person who—

(a)does not know at the time the act is done that the company is a charity, or

(b)gives full consideration in money or money's worth in relation to the act in question and does not know (as the case may be)—

(i)that the act is not permitted by the company's constitution, or

(ii)that the act is beyond the powers of the directors.

(2)Where a company that is a charity purports to transfer or grant an interest in property, the fact that (as the case may be)—

(a)the act was not permitted by the company's constitution, or

(b)the directors in connection with the act exceeded any limitation on their powers under the company's constitution,

does not affect the title of a person who subsequently acquires the property or any interest in it for full consideration without actual notice of any such circumstances affecting the validity of the company's act.

(3)In any proceedings arising out of subsection (1) or (2) the burden of proving—

(a)that a person knew that the company was a charity, or

(b)that a person knew that an act was not permitted by the company's constitution or was beyond the powers of the directors,

lies on the person asserting that fact.

(4)In the case of a company that is a charity the affirmation of a transaction to which section 41 applies (transactions with directors or their associates) is ineffective without the prior written consent of—

(a)in England and Wales, the Charity Commission;

(b)in Northern Ireland, the Department for Social Development.

(5)This section does not extend to Scotland (but see section 112 of the Companies Act 1989 (c. 40)).

Read section 42 in the full Act → Definitions (2) Cases (4)

Definitions used in section 42

company

“company” means a company formed and registered under this Act, that is—

(a)

a company so formed and registered after the commencement of this Part, or

(b)

a company that immediately before the commencement of this Part—

(i)

was formed and registered under the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)), or

(ii)

was an existing company for the purposes of that Act or that Order,

(which is to be treated on commencement as if formed and registered under this Act).

Defined in s.1(1) · see it in the full Act

(4) In this section and that Schedule “company” includes any body corporate.

Defined in s.1159(4) · see it in the full Act
director

In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.

Defined in s.250 · see it in the full Act

Cases considering section 42 (4)

The David Roberts Art Foundation Ltd v Riedweg

[2019] EWHC 1358 (Ch) · 6 June 2019

Section 42(1) partially disapplies the company-capacity protections for charitable companies, subject to protection for a person giving full consideration and lacking specified knowledge. The claimant was not permitted to rely on the provision because it was not part of the pleaded case. (see paras [32]; [79]; [102]) Section 42(3) places the burden of proving lack of constitutional permission or excess of directors’ powers on the person asserting it. The court did not apply the provision because section 42 had not been pleaded. (see para [33]; [79]; [102])

Abdelmamoud v The Egyptian Association In Great Britain Ltd

[2015] EWHC 1013 (Ch) · 17 April 2015

Applied as the relevant exception to the protection in section 39. A lender dealing with a charity is protected where he gives full consideration and does not know that the borrowing is constitutionally impermissible or beyond the directors’ power. (see paras [64]-[65]) Applied to place the burden of proving the lender’s relevant knowledge on the Applicants. The evidence did not come close to discharging that burden. (see paras [64]-[65])

Friends of Burbage School Ltd. v Woodhams

[2012] EWHC 1511 (QB) · 31 May 2012Limits

The court held that section 42 imposed constitutional limitations on a charitable company. Even so, the trustees’ informal unanimous release of the auction bidder could be recognised, since relying on the technical limitation would be inequitable in the circumstances. (see paras [14], [67]-[69])

What each judgment says about section 42 is in the case-law panel in the full Act.

Explanatory note

130.This section restates section 65 of the Charities Act 1993. It is a qualification of the rules in sections 39 and 40.

131.It provides that the protection afforded to an external party by sections 39 and 40 will not apply where the company in question is a charity, unless:

  • the external party was unaware (at the time that the act was done) that the company was a charity; or

  • the company has received full consideration in respect of the act done, and the external party was unaware that the act in question was beyond the company’s capacity or beyond the powers of the directors.

132.Corresponding provisions for charities that are registered in Scotland can be found in section 112 of the Companies Act 1989 (see subsection (5)).

All the explanatory notes for the Act

Amendments and notes

3 notes from legislation.gov.uk

Modifications

  1. C78S. 42 applied (with modifications) (1.10.2009) by The Unregistered Companies Regulations 2009 (S.I. 2009/2436), regs. 3-5, Sch. 1 para. 3(c) (with transitional provisions and savings in regs. 7, 9, Sch. 2)
  2. C79S. 42(4) applied (1.10.2009) by The Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 (S.I. 2009/1941), art. 6(1) (with art. 10)
  3. C80S. 42(4)(b): transfer of functions (N.I.) (19.1.2013) by Charities Act (Northern Ireland) 2013 (c. 3 (N.I.)), ss. 5(2), 10(1) (with s. 6)