chapter  5
26 Pages

AN ASSESSMENT OF SECTIONS 35–35B AND 322A OF THE COMPANIES ACT 1985 AND THE PROTECTION OF THIRD PARTIES DEALING WITH COMPANIES

1 INTRODUCTION

This essay will examine the current state of the law governing the validity and effectiveness of contracts made or authorised by the board of directors (the directors) of a company.1 A company cannot, of course, ‘make’ a contract for itself since it does not physically exist. Its existence is a legal fiction and ‘its’ actions can only be those actions of its directors or other agents purporting to act on its behalf which, in the circumstances, the law attributes to the company.2 In the United Kingdom’s unitary board system of corporate governance,3 the directors are the principal agent of the company in charge of the management of its affairs and, therefore, the principal repository of the power to make contracts attributable to the company. They are supposed to exercise their powers of management in the best interests of their company, which usually means maximising the overall financial return to the company’s shareholders, or ‘shareholder value’, although the directors do have some discretion to balance the interests of shareholders against those of other ‘stakeholders’ in the company such as its employees and creditors.4