ACCA F4 - Corp and Business Law (ENG)

280 18: Company directors  Part F Management, administration and regulation of companies

7.1 Agency and the CEO/MD

The directors are agents of the company, not the members. Where they have actual or usual authority

they can bind the company. In addition a director may have apparent authority by virtue of holding out.

Holding out is a basic rule of the law of agency. This means, if the principal (the company) holds out a

person as its authorised agent they are estopped from denying that they are its authorised agent. They are

bound by a contract entered into by them on the company's behalf.

Apparent authority is the authority which an agent appears to have to a third party. A contract made

within the scope of such authority will bind the principal even though the agent was not following their

instructions.

Therefore if the board of directors permits a director to behave as if they are a CEO or MD duly appointed

when in fact they are not, the company may be bound by their actions.

A CEO or MD has, by virtue of their position, apparent authority to make commercial contracts for the

company. Moreover if the board allows a director to enter into contracts, being aware of their dealings and

taking no steps to disown them, the company will usually be bound.

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964

The facts: A company carried on a business as property developers. The articles contained a power to

appoint a Managing Director but this was never done. One of the directors of the company, to the

knowledge but without the express authority of the remainder of the board, acted as if he were Managing

Director. He found a purchaser for an estate and also engaged a firm of architects to make a planning

application. The company later refused to pay the architect's fees on the grounds that the director had no

actual or apparent authority.

Decision: The company was liable since by its acquiescence it had represented that the director was a

Managing Director with the authority to enter into contracts that were normal commercial arrangements,

and which the board itself would have been able to enter.

Situations where the facts are similar to the Freeman & Lockyer case often occur in law exams so be

prepared to spot them.

In the Freeman & Lockyer case, the Judge laid down four conditions which must be satisfied in claiming

under the principle of holding out. The claimant must show that:

(a) A representation was made to them that the agent had the authority to enter on behalf of the

company into the contract of the kind sought to be enforced.

(b) Such representation was made by a person who had 'actual' authority to manage the business

of the company.

The board of directors would certainly have actual authority to manage the company. Some

commentators have also argued that the CEO/MD has actual or apparent authority to make

representations about the extent of the actual authority of other company agents. (However a third

party cannot rely on the representations a CEO/MD makes about their own actual authority.)

(c) They were induced by the representation to enter into the contract; they had in fact relied on it.

(d) There must be nothing in the articles which would prevent the company from giving valid authority

to its agent to enter into the contract.

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