Agency and Partnership Law

• Citation: (2020) 21 SAL Ann Rev 87
• Published date: 01 December 2020
• Publication year: 2020
• Date: 01 December 2020

I. Companies and agency

3.1 The High Court decision of Blasco, Martinez Gemma v Ee Meng Yen Angela1 (“Blasco”) raised a number of important issues regarding the application of agency principles to corporate agents, specifically the managing director.

3.2 It is banal to state that companies, being persona ficta,2 cannot properly function as legal entities except through agents. This truism renders the law of agency an indispensable part of the rules that govern the operations of companies. In Meridian Global Funds Management Asia Ltd v Securities Commission,3 Lord Hoffmann referred to the principles of the law of agency as “general rules of attribution”. These general rules of attribution, together with the company's primary rules of attribution as stipulated in its constitution, operate within the framework provided by company law “to tell one what acts [are] to count as acts of the company”.4

3.3 The question that arose in Blasco was whether the acts of a director who had been appointed as the company's “acting chief executive officer” could bind the company to a loan transaction.

3.4 The facts may be briefly stated. The plaintiffs had decided to invest in Epicentre Holdings Ltd (“EHL”), a company listed on the stock exchange. The “investment” initially took the form of loans to Broadwell Ltd (“Broadwell”), a British Virgin Islands company. The loan agreements

with Broadwell provided that the loan moneys would be deployed towards “the investment in the shares, and the funding of the projects” of EHL.5 These agreements were entered into on Broadwell's behalf by its sole shareholder, Lim, who was also a director on the EHL board and who was, at all material times, the executive chairman and acting chief executive officer of EHL. When the loans matured, they were renewed on substantially the same terms. In 2019, when the Broadwell loans matured for the second time, they were rolled over and renewed, not as debts owed to Broadwell, but as debts owed by EHL, even though no fresh loans were made to EHL. The new agreements (“the EHL agreements”), again on substantially the same terms as the agreements with Broadwell, were similarly executed by Lim, purportedly on EHL's behalf. EHL was subsequently placed in judicial management and the plaintiffs submitted proofs of debt for the loans disbursed to Broadwell and the interest thereon which the plaintiffs asserted were liabilities owed by EHL. The judicial managers rejected the proofs and the plaintiffs brought the present proceedings to reverse that decision.

3.5 The plaintiffs' case was premised entirely on the EHL agreements and the validity thereof. This in turn depended on whether Lim had the requisite authority to commit EHL to the agreements.

A. Actual authority

3.6 It was not disputed that the board of EHL had not expressly authorised Lim to enter into the EHL agreements. The plaintiffs argued that Lim nevertheless had implied actual authority to commit EHL to the agreements by virtue of his position as the executive chairman and acting chief executive officer of EHL. The court disagreed with the plaintiffs and held that Lim did not have the implied authority as asserted by the plaintiffs. Kannan Ramesh J stated:6

There was nothing on the evidence before me that suggested that as the Executive Chairman and Acting CEO of EHL, Lim automatically had the authority borrow money or to give security on EHL's behalf.

3.7 Within the corporate structure, s 157A of the Companies Act7 dictates that the board of directors should, subject to the constitution, reign as the supreme “agent” where management matters are concerned. However, corporate constitutions typically empower the board to

delegate its powers of management to a “managing director”,8 who is broadly considered the “chief executive” of the company.9 As the chief executive, the managing director is generally assumed to possess the broad authority to run the company's everyday business.

3.8 Lim was not explicitly stated as having been appointed EHL's “managing director”, nor was it made clear on the facts that EHL's constitution permitted its board to delegate its powers and functions to a managing director duly appointed. Nevertheless, the fact that he was appointed to the EHL board and placed in the chief executive role suggested that his position was likely to be equivalent to that of a managing director. In Smith v Butler,10 Arden LJ specifically noted that “[t]he holder of the office of managing director might today more usually be called a chief executive officer in (at least) a public company”.11 Indeed, both the learned judge and counsel had proceeded on that basis.12 The question then is whether it fell within the scope of the managing director's authority to commit the company to agreements like the EHL agreements pursuant to which the company assumed the loan liability of another company (namely Broadwell in the present case).

3.9 Ramesh J first considered whether a managing director had, simply by virtue of his position, the implied authority to borrow funds on the company's behalf and to encumber the company's assets by way of security. His Honour concluded that there was no such general rule, and opined that it was “difficult to accept … as a general or universal proposition”13 that such authority resided in the office of a managing director. His Honour stated:14

This must, at best, be a context-driven inquiry depending on a variety of factors such as, for example, the constitution of the company, the nature of the company, the nature of the transaction, and the conduct of the company. It seemed to me that it would be more reasonable to say that lenders should require, as a matter of proper due diligence, express evidence of authorisation, such as a resolution of the board of directors, to enter into borrowing arrangements with a company.

3.10 The learned judge considered that this approach cohered with “commercial reality, where lenders generally expect authorisations of the

board of directors of the debtor company to be furnished before entering into loan agreements” [emphasis added].15 Further, his Honour posited, in the case of listed entities which are subject to strict regulatory and governance structures, that it would be “incorrect” to suggest that the managing director and chief executive officer should generally possess, ex virtute officii, the implied authority to borrow and to give security on behalf of the company as a matter of ordinary business practice.

3.11 With respect, it is difficult to appreciate why extant commercial practice of lenders and the need for commercial prudence on the lender's part should be relevant in circumscribing the implied authority of a managing director. The actual authority of an agent is a function of the relationship between the principal and the agent. This truism was recently affirmed by the Court of Appeal in Alphire Group Pte Ltd v Law Chau Loon16 where the court noted in an ex tempore judgment that:17

… [u]ltimately, the cornerstone of both express and implied actual authority is a consensual agreement between the principal and the agent, the latter of which may be implied from the words and conduct of the parties.

3.12 The power to appoint a managing director, and to confer upon him any of the powers exercisable by the board even to the exclusion of its own powers,18 has been a feature in successive versions of the model constitution provided by the Legislature since at least 1967.19 There should therefore be no doubt that the office of the managing director is designed to stand apart from normal directors, and, as Arden LJ noted in the English Court of Appeal decision of Smith v Butler, the clear intention is that some powers should be implicitly delegated to this office.

3.13 The cases have mostly proceeded on this basis. In Hely-Hutchinson v Brayhead Ltd,20 Lord Denning had opined that a person in the position of a managing director would have the “actual authority to manage”.21 Somewhat more explicitly, Ipp J had described, in the Western Australia decision of Entwells Pty Ltd v National and General Insurance Co Ltd,22 the functions of a managing director as follows:23

The task of a managing director is to deal with every day matters, to supervise the daily running of the company, to supervise the other managers and indeed, generally, be in charge of the business of the company. It is a characteristic of the power of a managing director that he is given powers of day to day management which are exercisable without reference to the board.

3.14 It should also be noted that although the Companies Act does not provide a definition of “managing director”, it does provide for a separate definition of “chief executive officer” in s 4 which states as follows:

[A]ny one or more persons, by whatever name described, who —

(a) is in direct employment of, or acting for or by arrangement with, the company; and

(b) is principally responsible for the management and conduct of the business of the company, or part of the business of the company, as the case may be.

This definition lends some support to the view that the chief executive officer has the usual authority to manage the ordinary day-to-day operations of the company.

3.15 There is “surprisingly little”24 authority on the usual powers that are attached to the managing director's office. Nevertheless, it does not appear controversial that borrowing in the course of the company's normal business, whether on a secured or unsecured basis, is very much a matter of management. By logical extrapolation, therefore, such powers should fall within the managing director's normal scope of authority. This does not, however, necessarily mean that a managing director should be able to bind the company to...