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Duty to act within powers and for proper purposes - Coggle Diagram
Duty to act within powers and for proper purposes
Under s.171, directors have a duty to act within their powers in accordance with the company's constitution and should only exercise powers for the purposes for which they are given
A companys constitution is
Articles
Any resolution or agreement that must be filed at Companies House
A breach of the duty to act within their powers may arise where
An indvidual director or the board does something that is beyond the company's powers
An individual director or the board does something that is within the company's powers but not within their own powers
The directors general mananememtn powers under the articles may be subject to certain limitations in its constitution
If the directors act beyond the company's powers or their own powers and the company suffers a loss as a result of this breach of duty, the company can sue the relevant directors in order to recover that loss
Companies are no longer required to have an objects clause and if they do not have one their objects are deemed to be unresticted
Shareholders may prefer for companies to have an objects clause to prevent the directors from expanding into areas in which both they and the company have no experience
CA2006 provides that
the validity of an act done by a company shall not be called into question on the ground of any lack of capacity by reason of anything in the company's constitituion
In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company is deemed to be free of any limitation under the company's constitution
Section 40 of CA2006 says that a person with the company
is not bound to enquire whether they are any limitations in the company's constitution
is presumed to have acted in good faith unless proved otherwised
is not to be regarded as having acted in bad faith merely because they knew the act was beyond the powers of the directors
Third parties will generally be able to enforce a contract against the company even though it was illegal for the directors to enter in that contract on its behalf. These rules do not affect the potential liability of the directors to compensate the company for any losses arising from their breach of duty
A contract or arrangement entered into by the board with an individual director would not be protected because the director concerned would not be viewed as a person dealing with the company in good fiath
Directors must comply with any procedureal requirements set out in the articles. On its own a breach of procedural requirements will not necessarily give rise to any liability unless the company suffers a loss as a consequence of that breach
The directors must only exercise their powers for the purposes for which they are conferred, meaning that they must not exercise their powers for any collateral purpose other than the purposes for which the power was conferred
The duty to exercise powers for proper purposes has also been used to challenge directors decisions
On the forfeiture of shares
On the approval of share transfers
To enter into a management agreement that effectively deprived shareholders of their constitutional right to appoint new directors
To enter into a supplementary partnership agreement that exposed that company to a serious continent liability