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11 January 2018

Q&A: Where do property buyers stand in relation to the Companies Act 2009?

Question

My client is buying a property from a receiver appointed under an equitable charge granted by a company which has become insolvent. The charge gives a receiver a power of sale and contains a power of attorney. Will the receiver be able to sign all the necessary documents to allow the transaction to proceed to completion?

Answer

A receiver is usually the agent of the chargor, so he will be able to sign the contract. But he will only be able to sign the transfer if the charge was executed as a deed. However, if the company goes into liquidation the agency will end and the receiver will not be able to sign any documents on the company’s behalf.

Explanation

You say the company is insolvent, but do not say that it is the subject of any formal insolvency process other than the appointment of a receiver, so we assume that it is not (yet) in liquidation.

The fact the charge is an equitable charge raises a number of questions as to why it only takes effect in equity and is not a legal charge. It may, for example, have been impossible to register what was expressed to be a legal charge due to a prior mortgagee’s restriction, in which case the charge document is likely to have been a deed. Alternatively the charge may have been signed without the necessary formalities for a deed.

A receiver is generally the agent of the chargor (not the lender), and in this case that can be inferred from the existence of the power of attorney, so she or he will be able to sign the contract in accordance with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989: section 2(3) provides that the contract document or documents are to be signed by or on behalf of the parties.

On completion, the transfer will have to be executed as a deed. The formalities for the execution of deeds by companies are set out in sections 44 to 47 of the Companies Act 2009. A deed may be executed either by affixing the company’s seal, or be signed by two authorised signatories (defined by section 44(2) as the directors and company secretary) or by one director whose signature is attested by a witness (section 44(3)).

In addition, section 47 provides that a person may execute a document on behalf of the company under a power of attorney, but only if the attorney was appointed by the company under an instrument executed as a deed. So if the charge was contained in a deed then the receiver would also be able to execute the transfer on behalf of the company.

On liquidation, the receiver’s agency will end and she or he will continue to act as a principal. He would not then be authorised to sign either the contract or the transfer.

Question

I have signed a contract to buy some land from a private limited company. The directors have fallen out with each other and some of them are arguing that the board meeting approving the sale of the land to me was not properly constituted and so they are not bound by the contract. Are they right?

Answer

If the formalities of the company’s decision-making processes to call a meeting and reach a decision have not been complied with, the decision to sell to you will not bind the company. However, section 40 of the Companies Act 2009 may operate to give effect to the decision.

Explanation

Section 40 of the Companies Act 2009 provides “in favour of a person dealing with the company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.”

Blackburn J considered section 40 in Ford v Polymer Vision Ltd [2009] EWHC 945 (Ch). There were two board meetings of the company a few days apart to consider the terms of funding to be provided by Mr Ford. At the first meeting the company resolved to provide him with debentures by way of fixed and floating charges over the company’s assets and undertakings; and at the second a 10-year option to purchase its assets and undertaking “at a price that would enable all of the company’s creditors to be repaid in full”. Both transactions were duly documented and the further advances made.

In a dispute over whether the transactions were enforceable against the company, Blackburn J decided that the board meetings were not validly convened in accordance with the company’s articles of association. Consequently, the resolutions to grant the debenture and option agreement and to authorise anyone directed to execute them on the company’s behalf could not bind the company.

In principle, both transactions fell within the scope of section 40. The judge considered whether Mr Ford had acted in bad faith and whether the directors were making improper use of their powers. He concluded that it was not a misuse of the directors’ powers to grant Mr Ford a debenture for the monies he advanced to the company to enable it to continue in operation. However, it was at the very least arguable that committing the company to the disposal of all its assets and undertakings by entering into the option agreement had been an improper exercise of the directors’ powers.

So, if the procedural requirements for convening the meeting and deciding to sell the land to you were not complied with, section 40 may enable you to enforce the contract provided that you acted in good faith and that the decision was within the directors’ powers.


This article was written by Louise Clark and Geoffrey Zelin (Enterprise Chambers). For more information please contact Louise on +44 (0)20 7203 5017 or louise.clark@crsblaw.com.

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