Section 40 and 41 of the Companies Act its Effects on Third Party Rights

This paper focuses on section 40 and 41 of the Companies Act 2006 and its effects on the third party rights. It will assess the companies’ capacity to take action on various issues. Beside it will critically assess the extent to which the provisions of the Companies Act 2006 enable corporate bodies to freely embark on any activity without limitations. As this essay focuses on these two sections of the Act, it should remain clear that the United Kingdom falls in the category of the first ever countries to create regulations, which govern companies’ operations (Sheikh, 2008). These regulations are essential in setting up the system of corporate governance and company law, which provides the legal basis and specifications regarding formation and management of companies, and the general business operation (Kershaw, 2012). Following the rapidly occurring dynamics in the business environment, existence of such laws is, also, essential for creating harmony so that well established companies do not create obstacles for smaller private companies.

In the UK, the domestic development of corporate structures has, in the recent past, encountered limitations in regards to establishment of a framework for the adherence of all the companies. It was not until the 1990s that the UK developed a universal corporate governance regime (Ridley, 2013). This development was effected following the views that were collected in the titled Report of Cadbury Committee on the Financial Aspect of Corporate Governance.  Section 40 of Companies Act 2006 simplifies the powers company directors have regarding binding the company. The section restates section 35A and 35B of the 1985 Act, which guarantees an individual safeguards as long as his or her dealing with the company happens in good faith (Ridley, 2013). In this regard, the constitution of the company does not constrain the directors’ authority to bind the company. It is for this reason that any third party involved with the company does not have to worry about the ethical conduct of the company as long as it does so in good faith.     

The companies do not really have unlimited capacity to act as long as they do so in line with the constitution. Under section 40 of the Companies Act 2006, the legal powers bestowed upon the board directors of companies imply that they have the capacity to take action on behalf of the company (McLaughlin, 2013). This is because such powers are not separate from the company and can only support the activities, which the company can perform. This section of the Act has played an essential role by eliminating restrictions with regards to actions that the company may or may not pursue. Some of the restrictions, which this section eliminates, are, among others, the ultra vires rule implying that companies have the authority over activities specified in their constitutions (Sheikh, 2008).   The CA 2006 clarifies that the role of the constitution in respect to the powers bestowed upon a company should specify the kinds of restrictions to be implemented in regards to a particular company as it exercises an unlimited array of activities. Section 40 (5) provides that this section does not affect any liability incurred by directors, or any other person, by reason of the directors’ exceeding their powers (McLaughlin, 2013).

Section 35B of the 1985 is replaced by subsection (2)(b)(i) of section 40 of the CA 2006 where a third party does not have mandate to make enquiries regarding the availability of any kinds of limitations on the authority that the directors may have (Kershaw, 2012). This is in respect to the restrictions within the constitution of the company, which limit the capability of the company to take appropriate action, which may, also, limit the directors’ authority to bind the company. It is, also, worth noting that, under CA 2006, the objectives of the company do not in any way affect its capacity to take action (Kershaw, 2012). This, therefore, implies that in case one company raises restrictions against another company or the powers of its directors, then directors require observing such restrictions in the course of performing their responsibilities in the company. In most cases; however, the absence or presence of such constitutional restrictions do not have any effects on the third parties that may be, in one way or another, involved with the company.  

It is significant to note that section of 322A of the 1985 Act is restated by section 41 of the Company Act 2006 (McLaughlin, 2013). Its application covers a transaction whose validity is founded on section 40 and specifies that if the party is an insider that engages the company in a transaction, then the safeguards expected from section 41 will fail to apply. An example of this is where a company director or an individual has connections with such a director as highlighted by subsection (2) (b) (i) and (ii). Owing to the implementation of both section 40 and 41 of CA 2006, a lot of reinforcement has been witnessed particularly on the traditional common law (Ridley, 2013). This comes with the comprehension that the third party does not have to concern itself with the extent to which the company fulfills pertinent internal management requirements. This, also, implies that where third parties are involved with the company, they have the permission to expect that the company directors may get their company committed to a particular transaction. Even if individual directors do not actually have the express power to take action for a particular company, it is significant to note that the director of the company may have ostensible authority to act on behalf of their companies as agents. This is applicable where the third party gains the assurance that the actions of the company directors are reinforced by the principal, which is the company itself. 

The insider in conjunction with any other director, who approves the transaction, bears the liability to give account to the company for any gains realized from the transaction. Besides, the insider, also, has the responsibility to indemnify the company should there be any damage or loss experienced as a result of the transaction undertaken. However, in the event that the insider involved in the transaction is not one of the company directors, he or she can avoid liability so long as prove is provided indicating that he/she was unaware that the directors exceeded their powers at the time when the transaction was performed. In most cases, as McLaughlin (2013) asserts, the position, which directors always hold in the company is always fiduciary to the extent that they cannot draw profits from their activities in the company before having accounted to the company as well its shareholders regarding the way in which they gained those profits. This is the general indication that there is need to realize that, for a long time, equity has had an inflexible rule, which fixes directors in fiduciary position (Kershaw, 2012). Besides, the directors should account for the profits because they owe certain responsibilities to the company. It is, therefore, their duty to satisfy the best interests of the shareholders and the company itself in respect to all the tangible assets owned by the company including its money. This means that in the event that misapplication occurs in respect to the assets of the company, then the company directors who are the trustees have a responsibility to answer to the shareholders and the company. It is, also, worth noting that company directors have a duty to make voluntary reports whenever they find that their personal interests conflict with those of the company.    

In conclusion, having taken time to undertake a critical analysis of the impact and significance of section 40 and 41 of the CA 2006, it emerges that the sections specify and clarify the limitations of a company’s constitution in respect to its authority. Under section 40 of the Companies Act 2006, the legal powers bestowed upon the board directors of companies imply that they have the capacity to take action on behalf of the company. The absence or presence of such constitutional restrictions do not have any effects on the third parties that may be, in one way or another, involved with the company. This comes with the comprehension that the third party does not have to concern itself with the extent to which the company fulfills pertinent internal management requirements. It is the duty of company directors to satisfy the best interests of the shareholders and the company itself in respect to all the tangible assets owned by the company and its money.

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