Action commenced by company without authority – ratification by board resolution to validate action – ratification effective
D1 applied for the striking-out of the action of the plaintiff company (“C”) on the ground that those who caused the action to be commenced had failed to observe the provisions of C’s articles of association regarding the prior consent required for the commencement of actions, being the consent of a “lender director”, and were therefore incompetent to cause the action to be commenced. After the summons was issued, the directors of C passed a board resolution to ratify the commencement of the action. The Judge having refused to strike out the action, D1 appealed to the Court of Appeal against such refusal and, separately, against the order as to costs which the Judge made.
Held, dismissing both the appeal against the refusal to strike out and the appeal on costs, that:
- The ratification by board resolution was effective notwithstanding that the action had been commenced without the prior consent of the lender director whose prior consent C’s articles of association expressly made necessary, such consent being a procedural requirement and the prescribed procedure having been observed when such ratification was done.
- Moreover, since C could have appointed a lender director and secured his consent prior to commencing the action, it was a competent principal, and the ratification was effective on that basis too.
- The ratification by board resolution being effective, it was not necessary to address the effect of two resolutions of the two shareholders of C approving the commencement of the action.
- As to the argument that there was no evidence that the necessary consent preceded the ratification which took place on the same day, that fact was evidenced by the wording of the ratifying board resolution.
- The Judge had taken into account D1’s argument that the directors were in a position of conflict when the ratifying board resolution was passed, and had justifiably rejected it on the basis that the potential for conflict was more theoretical than real.
- Since the argument on conflict of interest was rejected, it was unnecessary to consider the question of whether D1 had locus to advance that argument.
- The foregoing arguments of C succeeding, there was no need to consider the point taken in the respondent’s notice that this was a mere irregularity which did not provide a basis on which the board’s decision to commence the action could be questioned.
- It was not demonstrated that the Judge had committed any error in her decision on costs.