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Smith v Henniker-Major & Co

[2002] UKHL 28

Case summary last updated at 22/01/2020 14:17 by the Oxbridge Notes in-house law team.

Judgement for the case Smith v Henniker-Major & Co

C 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. C called meeting to pass resolution, but other director did not turn up. C, 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:
1)     A sole director is capable of dealing with the company
2)     If that was case, whether what is now section 40 operated to make decision that of a ‘board of directors’
Held:
 
First Instance
Rimer J
·     Director is capable of dealing with a company.
·     Quorum provision is not a limitation on board’s power
Ø Rather it is precondition of board’s existence.
·     Thus if there is no quorum, section 35Adoes not save transaction.
 
Court of Appeal
 
·     A director is capable of ‘dealing with’ the company.
 
i)         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.
Ø Could be concluded from this that where there is an innocent mistakeas to quorum, is still a valid board
Ø here, even if meeting lacks quorum the third party is entitled to treat as valid contracts entered into at such meetings
Ø thus a lack of quorum is simply a ‘limitation’ for purposes of section 40
 
·     However on facts, the director was involved in the decision
Ø Therefore it was his duty to ensure that constitution was applied
·     Thus here, C cannot rely upon his own mistake under section 35A
Ø 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
 
ii)       Schiemann LJ
·     C 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
Ø i.e. Schiemann simply believes that it would be wrong for C to rely on his own mistake to sue solicitors
 
iii)     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
Ø 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
Ø More serious; person dealing with company cannot rely on s.40
Ø Less serious; person dealing with company can rely on s.40

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