Rolled Steel Products (Holdings) Ltd v British Steel Corporation and Others: CA 1986

The plaintiff company had guaranteed borrowings, using powers within the memorandum of association, but for purposes which were held to be improper, because they were 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 as against the defendant companies who 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’. Complaint was also made as to the judge’s eight month delay in handing down his judgment.
Held: The court related six principles: ‘(1) The basic rule is that a company incorporated under the Companies Acts only has the capacity to do those acts which fall within its objects as set out in its memorandum of association or are reasonably incidental to the attainment or pursuit of those objects. Ultimately, therefore, the question whether a particular transaction is within or outside its capacity must depend on the true construction of the memorandum. (2) Nevertheless, if a particular act (such as each of the transactions of 22 January 1969 in the present case) is of a category which, on the true construction of the company’s memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires the company merely because in a particular instance its directors, in performing the act in its name, are in truth doing so for purposes other than those set out in its memorandum. Subject to any express restrictions on the relevant power which may be contained in the memorandum, the state of mind or knowledge of the persons managing the company’s affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity. (3) While due regard must be paid to any express conditions attached to or limitations on powers contained in a company’s memorandum (e.g. a power to borrow only up to a specified amount), the court will not ordinarily construe a statement in a memorandum that a particular power is exercisable ‘for the purposes of the company’ as a condition limiting the company’s corporate capacity to exercise the power; it will regard it as simply imposing a limit on the authority of the directors: see the David Payne case [1904] 2 Ch 608. (4) At least in default of the unanimous consent of all the shareholders (as to which see below), the directors of a company will not have actual authority from the company to exercise any express or implied power other than for the purposes of the company as set out in its memorandum of association. (5) A company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by its memorandum of association. Unless he is put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume that its directors are properly exercising such powers for the purposes of the company as set out in its memorandum. Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature. (6) If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction.’
Lawton LJ discussed the proper approach where it was questioned whether a case was being run on the pleadings: ‘I wish however to add a comment about the pleading points which have had to be considered in this appeal. 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.’
Slade LJ criticised the tests set out by Eve J, which: ‘. . should in my opinion, now be recognised as being of no assistance, and indeed positively misleading, when the relevant question is whether a particular gratuitous transaction is within the company’s corporate capacity.’

Slade LJ, Browne-Wilkinson LJ
[1986] Ch 246
England and Wales
CriticisedIn Re Lee, Behrens and Co Ltd ChD 1932
The Court was asked whether an agreement by the company to pay an annuity to the widow (a shareholder) of a former managing director of the company was ultra vires.
Held: Eve J set out three applicable tests: ‘But whether they be made under an . .

Cited by:
CitedCriterion Properties Plc v Stratford UK Properties and others CA 18-Dec-2002
The parties came together in a limited partnership to develop property. The appeal was against a refusal to grant summary judgment on a claim that one party had been induced to enter the contract by a fraudulent misrepresentation.
Held: In . .
CitedCriterion Properties Plc v Stratford UK Properties Llc and others ChD 27-Mar-2002
Criterion sought to set aside a shareholders agreement. Their partner had said they were concerned that another party was taking Criterion over and that this would put at risk their working relationships. The agreement sought to add a poison pill to . .
CitedProgress Property Company Ltd v Moorgarth Group Ltd SC 8-Dec-2010
The appellants appealed against rejection of their claim that there had been an unlawful distribution of capital when the appellant had sold the share capital of a subsidary at an undervalue to the respondent purchaser. The valuation had . .

Lists of cited by and citing cases may be incomplete.

Company, Litigation Practice

Updated: 05 January 2022; Ref: scu.194959