Ostensible authority times two Two cases relating to debentures have confirmed that ostensible authority is sufficient to debar a company from challenging the validity of a debenture and the powers vested in it.
In the first case, In the matter of Carson Country Homes Ltd, the company entered into a guarantee and debenture over its assets with its bank. One of the two directors of the company (A) dealt with all the financial issues for the company and had, on occasions, and with the knowledge of the other director (B), replicated B's signature on financial documents. B had condoned this practice so long as he was kept informed of what his signature was being put to. The guarantee and debenture were entered into and bore both directors' signatures. The bank subsequently exercised its right under the debenture to appoint an administrator. B challenged the validity of the appointment on the basis that he had not been aware of nor signed either document. A admitted forging his signature but alleged he had explained the effect of the documents to B.
The court preferred B's evidence and held that no discussions as to the documentation had taken place and therefore A did not have express or implied authority to sign B's name. Forged documents could, however, still have legal effect. They are not a nullity for all purposes and a company could be estopped from disputing their validity. Here, A had signed the documentation as director and company secretary. For years A had dealt with all the company's financial issues with B's agreement and, on that basis, A had the ostensible authority of the company. The bank was entitled to rely upon the documentation as having been entered into in accordance with the company's correct procedures and to treat the signatures as genuine. The appointment of the administrator under the debenture was valid.
In the second case, Ford v Polymer Vision Ltd, a debenture by way of fixed and floating charges over the defendant's assets and undertakings was issued in the claimant's favour. It was executed purportedly under the authority of a resolution of the defendant said to have been passed at a meeting of its directors held at the defendant's premises and attended by the chief executive officer (CEO) in person and the chairman (C) of the board of directors by phone. A dispute later arose as to whether the board meeting approving the debenture (among other things) had been validly convened so that the CEO and E had been authorised to execute them. The claimant sought a declaration confirming its validity.
The court found that the meeting had not been validly convened in accordance with the defendant's articles of association and therefore the resolutions to grant the debenture (and a subsequent option agreement) would not bind the defendant. However, provided a director had the company's actual or ostensible authority to sign agreements on its behalf, the resulting instruments were binding on the company. Further, under the Companies Act 2006 s 40, so long as the claimant acted in good faith, the transaction could be validated. The CEO and C had not misused their powers as directors in granting the debenture, notwithstanding the procedural defects. The debenture was therefore valid and binding on the defendant.
Since commenting on this case, we have ascertained that s 40 of the Companies Act 2006 is not yet in force. This case should not therefore be relied upon in relation to s 40 but the point made regarding actual or ostensible authority remains good.
Things to consider
These decisions have the benefit of providing legal certainty and represent commercial reality where third parties, such as banks, have inherent difficulties in securing information about the validity, and therefore the enforceability of important documents.