COMMONS AMENDMENT (Hansard, 7 November 1989)

§ Lord Fraser of Carmyllie
My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 132, and coupled with that, Amendment No. 134. The government amendments resolve certain questions which have arisen on the 682 drafting of the new Section 35A. That section protects a person dealing with a company in good faith from limitations under the company's constitution on the power of the board of directors to bind the company or to authorise others to do so.
Amendment No. 132 provides for it to be presumed that a person is to be regarded as acting in good faith unless the contrary is proved. Such a presumption was inserted in the existing Section 35 of the Companies Act. If, as we wish, we are to protect persons dealing with a company, we think the onus should be on the person seeking to challenge the validity of an act to show that the other party was acting in bad faith.
Amendment No. 134 brings new Section 35A into line with the parallel provision in new Section 35 by providing that proceedings cannot be brought to restrain the doing of an act which is beyond the powers of the directors if the act is in fulfilment of a legal obligation arising from a previous act of the company. An example of such an act, as I have already indicated, might be one where a conveyance is carried out in fulfilment of an agreement to sell land.

§ Lord Wedderburn of Charlton
My Lords, I wish to ask the noble and learned Lord a question. We have no great objection to Amendment No. 132, unless it be that the last few words are surplus. The words, shall be presumed to have acted in good faith", seem enough. However, the paragraph which does not appear on the Marshalled List but which will remain in the Bill states: (b) a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company's constitution". The third party receives a double bonus. Once again all the presumptions are for the third party. He has the presumption of good faith, and even if he knows that the directors are acting contrary to their authority he is not thereby regarded as being in bad faith. On the new structure of the clause, will the noble and learned Lord give us art example of a third party who was in bad faith given that he is presumed to be in good faith and his knowledge of the lack of authority is not bad faith itself, other than someone who is merely out maliciously to injure the enterprise? The latter is not a very interesting situation. However, in an ordinary commercial situation, can the noble and learned Lord give me an example of bad faith?

§ Lord Fraser of Carmyllie
No, my Lords. I do not think I can give the noble Lord an answer to that. I think it is quite clear that there will be a large number of circumstances where there is bad faith. What is more important to determine are those circumstances in which a person is acting in good faith. I had anticipated that the noble Lord would be concerned about the fact that just because someone knows something it is not automatically to be assumed that he is acting in bad faith. An example 683 of that is where a person has been given some assurance that a necessary authorisation will be obtained, but it has not yet arrived, and ultimately it is not forthcoming.
Similarly, there may be circumstances where a large organisation is involved, although the term "a person" is used. One branch of that organisation may be presumed to have knowledge of the powers because it has a copy of the memorandum of the company, whereas it is another branch of the same organisation which is contracting. It would seem to me that rather than try to range extensively over what may amount to bad faith, it is more important to establish the limitations of good faith.

§ Lord Williams of Elvel
My Lords, before the noble and learned Lord sits down, will he answer the question that my noble friend put to him on why the last few words in Amendment No. 132 are necessary?

§ Lord Fraser of Carmyllie
My Lords, with the leave of the House, I should say that the provision states: a person shall be presumed to have acted in good faith unless the contrary is proved". I see what the noble Lord is driving at, but I should think in any circumstances it cannot be said that that creates any difficulty. It certainly does not cause any obscurity. However, I think that is a matter for the draftsmen. I cannot believe that the noble Lord is in any sense confused by what is provided.