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Company Law Question and Answer - Articles of Association
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Company Law – Articles of AssociationProblem Question:
Mistral Windpower Ltd is a manufacturer of wind turbines. Its articles of association are in
standard form except as follows：
a) The board of directors has no authority to secure a loan or borrowing beyond $1m in
value and;
b) Without the consent of shareholders in GM, the board has no authority to change the
nature of their business.
Although not appointed as MD, Barber to the knowledge and with full agreement of his co-
directors, Marty and Lambert carries out the day to day management of Mistral Windpower
Ltd.
Barber acting on behalf Mistral agreed that the company will manufacture and supply 300
gearboxes for Clutch Plc. To finance this operation he borrowed $3m from Diablo Bank plc
to enable Mistral to purchase the machinery to carry out this agreement. The loan was
evidenced by a debenture which was signed on Mistral Windpower’s behalf by Barber and
Lambert. Owing to serious mismanagement the company incurred considerable loss and
with only 150 gearboxes completed.
Diablo Bank did obtain a copy of the articles of association before the lending was
approved.
Discuss.
According to the question above, there are several issues on hand. Firstly, Barber carries out his
duty as managing director with the consent of Marty and Lambert although there were no formal
appointment. Secondly, Barber acting on behalf Mistral has agreed to manufacture 300 gearboxes
for Clutch plc. This is a breach of object clause as the company’s object clause is to manufacture
wind turbines. In order to change the object clause or divert to different business it must be
approved by shareholders, this is provided in the articles of association. Thirdly, Mistral obtained a
loan of $3m from Diablo Bank which is a breach of articles as there needs to be shareholder
consent for borrowings above $1m. And lastly, whether the loan still applies to Mistral since there
is a breach of articles.
Regarding to the position of Barber as the managing director, according to Diplock LJ's well-known
statement of the law on ostensible authority, a company is bound by a contract entered into on its
behalf by an agent who does not have actual authority if the third party relied on a representation
by a person with actual authority that the agent did in fact have the necessary authority. The
question therefore arises, Barber never had a formal appointment, does he has the authority to
represent the company. The facts of this case is similar to Freeman v Buckhurst Properties,
despite the fact that Mr Kapoor was never appointed as a managing director by the board, the fact
that he had acted as such within the knowledge of the directors of the defendant company is
sufficient. In the case of Panorama Development, the company’s secretary rented cars on behalf
of company but refused to pay as the secretary had no authority, The court held that it is
unreasonable as she had performed similar duties in the past. As long as there is implied consent,
she has the authority. On our facts, Barber undoubtedly has ostensible authority as he is held out
as a Managing Director with the consent of co-directors. Hence, Barber has the authority to
contract with Clutch plc to manufacture 300 gearboxes.
The next issue is manufacture gearboxes is breach of objects clause as Mistral is a wind turbine
manufacturer. A company’s constitution includes the articles and any resolutions and agreements
affecting the company’s constitution. Objects clause is clause within the company’s constitution
which states what is to be the purpose of the company.
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