Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246
Citation:Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246
Link to case on WorldLII (reference).
Rule of thumb 1: Can companies dodge contracts their directors entered into on behalf of the company with third parties which were against company articles? Yes, third parties are expected to be aware of the company articles – these contracts can be annulled.
Rule of thumb 2: Can companies dodge contracts their directors entered into on behalf of the company with third parties when the director had a conflict of interest, or, they knew that they were grossly undervalue gratuitous alienations of company assets/bad-debt arrangements? Yes, these transactions can be annulled.
Rule of thumb 3: Where there are no primary facts related to a point in litigation, should the other side object? Yes, this is a standard point of procedure – if there are no primary facts related to a point being argued, then the other side should object and the Court should strictly uphold this.
Judgment:
In that case the plaintiff company had borrowed money, and given a guarantee, using powers within the memorandum of association, but for purposes which were held to be improper, because not in the interests of the plaintiff company itself. One issue was whether the receiver of the company could assert the invalidity of the transactions, against the defendant companies (Colvilles and its successor British Steel). Colvilles had been party to the proposals, and had full knowledge that they were "not entered into by the plaintiff for any purpose of the plaintiff but were a gratuitous disposition of the property of the plaintiff…". Since in that case the defendants had actual knowledge of the lack of authority, they acquired no rights under the transactions.
Ratio-decidendi:
‘The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company... The two badges of a transaction which is ultra vires in that sense are (1) that the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or not the third party had notice.... The signed minutes of the board meeting of that day, a copy which was subsequently supplied to Colvilles' solicitors (and indeed had been drafted by them), made no mention whatever of any declaration of a personal interest by Mr. Shenkman. Since Colvilles and its legal advisers must be taken to have had knowledge of the relevant provisions of the plaintiff's articles, they must also be taken to have known that the resolution could not have been validly passed unless Mr. Shenkman had duly declared his personal interest at that board meeting or a previous board meeting. If the defendants are to be allowed both to take and succeed on the Turquand's case point, this must mean that, in the circumstances subsisting in late January 1969, they were as a matter of law entitled to assume (contrary to the fact and without further inquiry) that Mr. Shenkman had duly declared his personal interest either at the board meeting of 22 January 1969 or at some previous board meeting of the plaintiff. This contention might well have been unanswerable if the rule in Turquand's case, 6 E. & B. 327 were an absolute and unqualified rule of law, applicable in all circumstances. But, as the statement of the rule quoted above indicates, it is not. It is a rule which only applies in favour of persons dealing with the company in good faith. If such persons have notice of the relevant irregularity, they cannot rely on the rule...’ Lord Browne Wilkinson
‘From the way they were raised by counsel and dealt with by the trial judge, I was left with the impression that neither the judge nor defending counsel appreciated as fully as they should have done the need for precision and expedition when dealing with pleading points. My recent experience in this court shows that some counsel and judges are not giving pleadings the attention which they should. Pleadings are formal documents which have to be prepared at the beginning of litigation, they are essential for the fair trial of an action and the saving of time at trial. The saving of time keeps down the costs of litigation. A plaintiff is entitled to know what defences he has to meet and the defendant what claims are being made against him. If the parties do not know, unnecessary evidence may be got together and led or, even worse, necessary evidence may not be led. Pleadings regulate what questions may be asked of witnesses in cross-examination. When counsel raises an objection to a question or a line of questioning, as Mr Morritt did on a number of occasions, the trial judge should rule on it at once. He should not regard the objection as a critical commentary on what the other side is doing. If the judge does not rule, counsel should ask him to do so. If a line of questioning is stopped because it does not relate to an issue on the pleadings, counsel should at once consider whether his pleadings should be amended. If he decides that they should, he should forthwith apply for an amendment and should specify precisely what he wants and the judge should at once give a ruling on the application. The principles upon which amendments should be allowed are well known and are set out in the current edition of the Supreme Court practice.’ Lawton LJ
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.