Smith v Henniker-Major & Co [2002] UKHL 28

• Claimant was a director of company. Believed that two other directors had breached their duties by unlawfully diverting business from company towards themselves. Company had right of action against these two directors.

• By time this happened, both wrongdoing directors had resigned; was only one other director remaining. Claimant called meeting to pass resolution, but other director did not turn up. Claimant, not knowing that there was provision under articles requiring a quorum of 2 in directors’ meetings, passed resolution assigning company’s right of action to him.

• He then sued solicitors who had advised the two directors. 

• Under section 35A (which is now section 40), word ‘directors’ was replaced with ‘board of directors’. Thus issues were whether:

  • A sole director is capable of dealing with the company

  • If that was case, whether what is now section 40 operated to make decision that of a ‘board of directors’

First Instance - Rimer J

• Director is capable of dealing with a company.

• Quorum provision is not a limitation on board’s power

  • Rather it is precondition of board’s existence.

• Thus if there is no quorum, section 35A does not save transaction.

Court of Appeal

• A director is capable of ‘dealing with’ the company.

Carnwath LJ

• Purposive approach to section 35A suggests that where a document is put forward as decision of board by someone appearing to act on behalf of company, third party is entitled to take it as face value.

  • Could be concluded from this that where there is an innocent mistake as to quorum, is still a valid board

  • Here, even if meeting lacks quorum the third party is entitled to treat as valid contracts entered into at such meetings

  • Thus a lack of quorum is simply a ‘limitation’ for purposes of section 40

• However on facts, the director was involved in the decision

  • Therefore it was his duty to ensure that constitution was applied

• Thus here, Claimant cannot rely upon his own mistake under section 35A

  • I.e. if the person dealing with company is himself responsible for the breach of company’s constitution, cannot then rely on section 35A to save contract

Schiemann LJ

• Claimant should not be able to rely upon his own mistake vis-à-vis a third party (the solicitors).

• This argument does not even address wording of section 40

  • I.e. Schiemann simply believes that it would be wrong for Claimant to rely on his own mistake to sue solicitors

Walker LJ (dissenting)

• Key question is whether decision has been taken by a person or persons who can on substantial grounds claim to be the board of directors

  • Even if there are procedural irregularities with functioning of board.

• For purposes of this question, is a difference between:

  1. Nullity

     • Section 35A cannot be engaged

     • Is no ‘board of directors’ for purposes of section 35A

  2. Procedural irregularity

     • Section 35A can be engaged

     • Is a ‘board of directors’ for purposes of section 35A

• Distinction is not precise, and would have to be worked out on case by case basis.

• Thus on this view, whether lack of quorum makes section 40 inapplicable depends on how serious the lack of quorum is

  • More serious; person dealing with company cannot rely on s.40

  • Less serious; person dealing with company can rely on s.40