UTLC LC-2022-000705 - [2023] UKUT 141 (LC)

My conclusion in relation to Ground 1 means that it is not strictly necessary to deal with Ground 2. As I read Paragraph 5.15, the Judge relied upon Section 44(5) as an additional ground for concluding that the Appellant was bound by the Payment Agreement, if he had been wrong to conclude that the Appellant was bound by the Payment Agreement by reason of the Representations. If the Judge was wrong in his analysis of Section 44(5), this does not affect his reasoning, in Paragraph 5.14, based upon the Representations. In deference however to Ms Lyne’s submissions on Section 44, I will set out my views on the argument in support of Ground 2.

The starting point is the rule of common law, established in Turquand’s case (Royal British Bank v Turquand (1856) 119 ER 886), to the effect that a third party dealing with a company is not concerned to inquire into the regularity of the internal proceedings, or indoor management of a company. A person dealing with the company in good faith, without notice of an irregularity, is entitled to assume that the internal regulations of the company have been observed, when entering into a transaction with the company; see Palmer’s Company Law, at 3.331-3.335.

It was this rule which Lord Loreburn LC articulated in Ruben, at 443. I have set out above the relevant extract from Lord Loreburn’s speech, but I set it out again for ease of reference:

“I cannot see upon what principle your Lordships can hold that the defendants are liable in this action. The forged certificate is a pure nullity. It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management, and will not be affected by irregularities of which they had no notice. But this doctrine, which is well established, applies only to irregularities that otherwise might affect a genuine transaction. It cannot apply to a forgery.”

As Lord Loreburn stated in Ruben, this rule did not apply in the case of a forgery, where the relevant document was a pure nullity.

While I am concerned specifically with Section 44(5), it is convenient to set out the entirety of Section 44, which provides as follows:

“(1)

Under the law of England and Wales or Northern Ireland a document is executed by a company–

(a)

by the affixing of its common seal, or

(b)

by signature in accordance with the following provisions.

(2)

A document is validly executed by a company if it is signed on behalf of the company–

by two authorised signatories, or

every director of the company, and

Section 44(5) thus deems a document to have been duly executed by a company if it purports to be signed in accordance with subsection (2). The deeming is in favour of a purchaser, who must be a purchaser in good faith for valuable consideration.

The Judge considered that the Respondent was a bona fide purchaser for valuable consideration. The Judge also considered that the Payment Agreement purported to be signed in accordance with Section 44(2). As such, so the Judge reasoned, the Payment Agreement was, by virtue of Section 44(5), deemed to have been duly executed by the Appellant. In reaching this conclusion the Judge relied upon the reasoning of Davis J in Lovett.

This reasoning is to be found in the penultimate part of the judgment of Davis J in Lovett, at [98]-[102]. As Davis J noted, this part of his judgment was obiter, because he had already concluded, in the part of his judgment which I have considered in the previous section of this decision, that Mr Jewson had had the ostensible authority of the company to warrant to the bank that all formalities had been dealt with in relation to the approval and execution of the debenture and guarantee; see [96] in the judgment. Davis J commenced his analysis in the following terms, at [98].

“98.

That conclusion makes it unnecessary to reach a conclusion on the issue of whether the bank could still rely on s.44(5) even if there were neither actual nor ostensible authority conferred by CCH on Mr Jewson. It seems to me that so to conclude would undoubtedly be a departure from the principles established by Ruben. The question thus is whether Parliament has by s.44(5), reflecting broadly s.36A of the Companies Act 1985 before it, made such departure.”

The judge continued his analysis in the following terms, at [99]:

“99.

As may be gathered from some of my earlier comments, I see much force in the submission that it has. Such a conclusion would by no means be lacking in purpose or sense. On the contrary, it might be said in modern times to be promotional of the interests of commerce––notwithstanding, for example, the current position with regard to bills of exchange––and to be an acknowledgement of the difficulties for banks and other third parties (provided, crucially, they are purchasers as defined) realistically making enquiries as to the validity of signatures and so would be a further protection in addition to those offered by, for example, s.161 of the 2006 Act. Further, such a conclusion at least reflects the actual wording used and would give rise to a degree of certainty. “Purport” is a word of wide ambit and it is rather difficult to see why as a matter of language it should, for example, extend to the genuine signature of a person having no authority as director but not extend to the forged signature in the name of a person who is a director. In other words, why, as a matter of language, “purport” should be taken to cover some defects but not others is not obvious. Putting it another way again, the argument that s.44(5) does not extend to forgeries in effect requires a starting presumption that the decision in Ruben is taken as still to be intended to apply and thus then requires a notional writing in of such an exception into s.44(5). But it is not at all obvious why or how such a proviso could or should be so written in as a matter of statutory implication: and that is so even assuming, which itself may be a matter of debate, that the word “forgery” is itself sufficiently precise.”

Davis J then went on, at [100] and [101], to consider the Consultation Paper and Law Commission Report (1998, Law Com.253) on the Execution of Deeds and Documents by or on behalf of Bodies Corporate. This consultation paper was said by counsel for the bank to negate the conclusion suggested by the judge at [99]. The judge was not convinced that this consultation paper was persuasive, in considering whether Section 44(5) extended to cases of forgery. Ultimately however the judge did not reach a conclusion on this question. He expressed his final thoughts in the following terms, at [102]:

“102.

Since any view I express on this point would necessarily be obiter in the light of my prior conclusions, I think on the whole it would be better if I did not express any concluded view on this particular point. All I would say is that having regard to the actual wording of s.44(5), the matter is to my way of thinking by no means concluded by the points advanced in the Law Commission Consultation Paper or the Report itself.”

Lovett does not therefore contain even an obiter decision that Section 44(5) can be relied upon by a purchaser in good faith for valuable consideration in a case where the signature or signatures on behalf of the company, which appear on the relevant document in apparent compliance with the requirements of Section 44(2), have been forged. The most that can be said is that Davis J had an open mind on the point, while possibly leaning towards the view that Section 44(5) could be relied upon in such a case.

In my view Section 44(5) was not intended to operate, and does not operate in a case of forgery of the kind which I have identified in my previous paragraph. My reasons for reaching this conclusion are essentially those upon which Ms Lyne relied in support of her arguments on Ground 2. I summarise those reasons in the following terms.

First, if Section 44(5) was capable of applying in the case of a forged document, this would produce a surprising, and apparently unjust result. This is the point made by the editors of Bowstead & Reynolds, at 8-041. I have already quoted the relevant extract, but I repeat the same for ease of reference (with my underlining added):

“Forgery

As under apparent authority generally, ²⁵¹ the company can be bound, though the agent effects a forgery in the sense of executing an unauthorised signature. But an actual counterfeit signature would simply be a nullity. ²⁵² There may, however, be an estoppel against setting up a forgery in either sense, if the elements of a holding out and reliance can be established. ²⁵³It has also been suggested, in relation to companies, that s.44 of the Companies Act 2006 might give effect to forged signatures.²⁵⁴ In particular, s.44(5) provides: “[i]n favour of a purchaser a document is deemed to have been duly executed by a company if it purports to be signed in accordance with subsection (2)”. Forged directors’ signatures do purport to be official signatures. However, this would lead to the most surprising, and not very just, conclusion that a company could be bound by forged signatures that were placed on a document by persons who had no connection whatsoever with the company. It is difficult to believe that this outcome was contemplated by the section.²⁵⁵”

The point made by the editors of Bowstead & Reynolds seems to me to be a compelling one. If Section 44(5) can apply in a case of forgery, this would mean that a company could be bound by forged signatures on a contract in circumstances where, although the signatures appeared to be those of persons required to sign the relevant contract for the purposes of satisfying the requirements of Section 44(2), the persons forging the signatures had no connection with the company whatsoever. Put more simply, the relevant company could find itself bound by a contract of which it knew nothing, containing signatures forged by persons with whom it had no connection and over whom it had no means of control. This strikes me as an unjust result. I say this in particular because, in a case such as Lovett, where it could legitimately be said that the company was responsible for allowing its business with the bank to be conducted without regard for the required formalities, the doctrine of ostensible authority was available to prevent the company from escaping the terms of the debenture. The doctrine of ostensible authority prevented the company from relying upon the forged signature on the debenture; being a forged signature for which it was reasonable to require the company to take responsibility. It seems to me that the doctrines of ostensible authority and estoppel are a much fairer means by which to decide whether a company should be bound by a forged contract than a bald application of Section 44(5).

Second, if the reach of Section 44(5) is this wide, this would constitute a reversal of the common law position, not just in relation to Section 44(5), but also in its statutory predecessor, Section 36A of the Companies Act 1985 (in its original and amended versions). This common law position was well settled for decades prior to the introduction of Section 36A of the Companies Act 1985; see, but only by way of example in this instance, Ruben.

Ms Lyne drew my attention to an extract from Bennion, Bailey and Norbury on Statutory Interpretation (Eighth Edition) at 25.3, where the following principle is stated:

“Where an Act operates in the context of a particular area of law, such as property, tort or contract, the assumption is that it is intended to be informed in its construction and otherwise operate in the context of existing rules and principles making up that area of law. Similarly, the interpretation of an Act may be informed by relevant general legal principles such as agency.”

Later in the same extract, the editors comment as follows:

“There are also many instances where the general law operating in a particular area will impliedly qualify the operation of an enactment expressed in absolute terms. Legislation takes much for granted.”

Moving on to 25.6 in Bennion, the following presumption is stated:

“Presumption against changes to the common law

(1)

In accordance with the doctrine of parliamentary sovereignty, the Parliament of the United Kingdom may abolish, modify or displace any existing common law rule. A devolved legislature may do likewise, within its competence.

(2)

But there remains a general presumption that the legislature does not intend to make changes to the common law.”

The editors comment further, at 25.6, in the following terms:

“The influence of the presumption against changes to the common law is apparent in the many of the examples considered elsewhere in this chapter. But its importance should not be overstated. It is clear that an Act may abolish, modify or displace existing common law rules, expressly or by implication. The overriding consideration is, as always, to ascertain the legislative intention.”

“Presumption of minimum change to common law

Where some change is clearly contemplated by an Act but the presumption is not entirely rebutted, the courts will seek to minimise the degree of legislative interference, for example by preferring to treat an Act as regulating rather than replacing a common law rule. As Lord Reid said in Black-Clawson International Ltd v Papeirwerek Waldhof-Aschaffenburg AG, Parliament “can be presumed not to have altered the common law farther than was necessary.”

I agree with Ms Lyne that Section 44(5) and its statutory predecessors must be construed against the relevant common law background, which is exemplified by the decision in Ruben. It seems unlikely to me that Parliament intended to change this common law position when it enacted Section 44(5) and its statutory predecessors.

As I understood Ms Lyne’s submissions, she did not challenge the decision of the Judge, at Paragraph 5.15, that the Respondent qualified as a purchaser in good faith for valuable consideration, within the meaning of Section 44(5). Her submission was that the Judge had been wrong to decide that Section 44(5) could operate, so as to deem the Payment Agreement to have been validly executed by the Appellant, in circumstances where the signature of its director on the Payment Agreement had been forged.

I accept this submission. For the reasons which I have stated, I respectfully disagree with the Judge in his (admittedly obiter) decision in Paragraph 5.15 that Section 44(5) could operate so as to deem the Payment Agreement to have been validly executed by the Appellant, in circumstances where the signature of its director on the Payment Agreement had been forged. In my view the Judge was wrong, as a matter of law, in this decision.

If therefore Ground 2 had been a live ground of appeal, I would have decided that Ground 2 succeeds. Given my decision on Ground 1, the fact that I disagree with the Judge in his decision on the application of Section 44(5) in the present case is not material to the outcome of the Appeal.