Smith v Henniker-Major & Co Ltd [2002] EWCA Civ 762

Mr Smith sought to pursue claims against solicitors on behalf of a company (SPDL) after purportedly assigning the company's causes of action to himself at an inquorate board meeting he alone attended. The Court of Appeal considered whether section 35A of the Companies Act 1985 could validate such a transaction and whether subsequent ratification was effective.

Facts

Mr Geoffrey Smith was a shareholder and director of Saxon Petroleum Developments Ltd (SPDL). Following disputes with other directors regarding alleged sharp practice, Mr Smith sought to pursue claims against the solicitors Henniker-Major & Co on behalf of SPDL. On 12 August 1998, Mr Smith convened a board meeting which only he attended, despite the company’s articles requiring a quorum of two directors. At this meeting, he purported to authorise an assignment of SPDL’s causes of action against the solicitors to himself personally. The assignment was executed on 14 August 1998.

The solicitors challenged the validity of this assignment on the ground that the board meeting was inquorate. Mr Smith subsequently executed a further deed on 31 August 2001 (the ‘2001 deed’) purporting to ratify the earlier assignment, by which time the limitation period had expired.

Issues

The Section 35A Issue

Whether section 35A of the Companies Act 1985 could operate to validate the 1998 assignment despite the inquorate board meeting, and whether Mr Smith, as the director responsible for the procedural defect, could rely on that provision.

The Ratification Issue

Whether the 2001 deed effectively ratified the 1998 assignment with retrospective effect, or whether it constituted a new transaction taking effect only from August 2001.

The Amendment Issue

Whether Mr Smith should be permitted to amend his particulars of claim to plead the 2001 deed as a fresh assignment, given the expiry of the limitation period.

Judgment

Section 35A Issue

The Court of Appeal was divided on this issue. Robert Walker LJ held that section 35A could in principle apply where there was a genuine decision taken by persons who could on substantial grounds claim to be the board acting as such, even if procedurally irregular. However, he ultimately concluded that Mr Smith could not benefit from section 35A because the legislative purpose was to protect third parties, not the very director responsible for the procedural breach.

Carnwath LJ agreed that section 35A did not assist Mr Smith, stating:

I do not see how he can rely on his own error to turn his own decision, which had no validity of any kind under the company’s constitution, into a decision of the Board. I see nothing in section 35A, however purposefully interpreted, to give it that magical effect.

Schiemann LJ concurred, observing:

I have not heard of any possible policy reason for enabling a director in A’s position to rely on his own mistake vis a vis C. I can see none for myself.

Ratification Issue

The Court unanimously held that the 2001 deed did not constitute a valid ratification of the 1998 assignment. Robert Walker LJ explained:

Any true ratification in this case would therefore have required SPDL to manifest an intention to adopt the 1998 transaction in its entirety, including the modest consideration to be found in clause 6 of the 1998 assignment. But it is obvious from a reading of the 2001 deed that SPDL was not doing that.

The 2001 deed provided new and different consideration, which was inconsistent with adoption of the original transaction in its entirety.

Amendment Issue

The Court held that even if Mr Smith could satisfy the requirements of section 35(5)(a) of the Limitation Act 1980, the judge’s exercise of discretion to refuse the amendment should not be disturbed. The long delay and prejudice to the solicitors, including the death of a key witness, made it unfair to permit the amendment after the limitation period had expired.

Implications

This case provides important guidance on the scope of section 35A of the Companies Act 1985. While the provision is designed to protect third parties dealing with companies in good faith, it does not enable a director who is personally responsible for a constitutional irregularity to rely on that provision against genuine third parties. The case also clarifies that ratification must adopt a transaction in its entirety, including the original consideration, and that amendments introducing new causes of action after limitation periods have expired will face significant scrutiny.

The decision demonstrates the courts’ reluctance to allow insiders who have caused procedural defects to benefit from statutory protections designed for innocent outsiders, reflecting the common law principle expressed in Morris v Kanssen that those responsible for ensuring proper corporate governance cannot rely on presumptions of regularity in their own favour.

Verdict: Appeal dismissed. The Court of Appeal held that Mr Smith could not rely on section 35A of the Companies Act 1985 to validate the inquorate board meeting, that the 2001 deed did not constitute effective ratification of the 1998 assignment, and that permission to amend the pleadings should be refused.

Source: Smith v Henniker-Major & Co Ltd [2002] EWCA Civ 762