“You Get What You Pay For”: Obligations and Director’s Authority

Posted: November 6, 2006

Download Full Article: You Get What You Pay For.pdf

This article is reproduced with the permission of W Green & Son Ltd (law publishers).

Introduction
The law in relation to the authority of a director to represent and act for a company, while easy to define by reference to established principles, has always been a grey area where the particular representation or act is on the boundaries of the duties and functions normally performed by a director. Hopkins offers a fascinating insight into how a company can be hijacked by a rogue director as well as useful clarification of the law on actual and ostensible authority in the context of company directors.

The Facts
The action was brought in strange circumstances by H, who took an assignment of causes of action by the liquidator of a company, TTG, in relation to written obligations granted in TTG's favour by T, deputy managing director of the defendant DC, an insurance broking company in relation to goods supplied by TTG to a third party. H paid £1,000 for a claim valued at close to £1 million. The background to the written obligations is itself extraordinary.
T, for unexplained reasons, had developed a close business relationship with D, TTG's managing director and had become involved in murky international trade and shipping deals which he contracted on DC's behalf, even though it was outside their normal area of operations. TTG exported goods and one of its customers was M. For reasons which were tied up in T's unorthodox business relationship with M, T in 1995 signed two letters on behalf of DC, in which in consideration for goods and finance supplied by TTG to M, DC gave unconditional undertakings to TTG to pay £372,000 in 1996. The only connection between DC and TTG was T, and the two companies had no business dealings apart from the undertakings. No payments were made by DC nor did TTG demand payment at any time before it went into creditors' voluntary liquidation in March 2002.
The relevant wording of the letters was: "In consideration for goods and finance provided by T.T.B. to M we, [DC], waiving all our rights of objection and defence arising from the said credit relationship, hereby irrevocably undertake to pay to TTG immediately upon its first demand, a total sum of £372,000.00 (three hundred and seventy two thousand pounds sterling only) including principal, interest, and all other charges. The above sum is of £372,000.00 is payable in two instalments of £186,000.00 (one hundred and eighty six thousand pounds sterling only) one on 30/6/96 and the other on 31/12/96."
The undertakings were given without any reference to DC's board of directors. DC knew nothing of the letters until the action was raised in 2003.

(Continued. For full article please download using link at the top of the page.)