Actual Authority of an Agent to Contract on behalf of Company in Hong Kong Company Formation Services

Issue of actual authority is not as simple as one may think. There are types of actual authority, but before getting into discussion of types of actual authority let’s first see what does actual authority implies?

An agent shall consider to be possessing an actual authority to enter into contracts on behalf of company after HK company formation if company has showed consent to give agent, such authority. It is not a relationship of some oral status, instead this is the legal relationship between the principal (company) and the agent as per the consensual agreement to which only company and agent is the party, alone. If we talk in company’s context then we will come to a conclusion that actual authority is conferred to the agent by the corporate organ, so that agent can act or do things, as permissible by the company’s constitution or by the person who, himself/herself has the proper authority to delegate these powers, from corporate organ. To clear this out, there are two types of actual authority namely as Express and Implied actual authority.

Express Actual Authority

The agent shall consider to be possessed an actual authority termed as express, if actual authority has been conferred directly to the agent. For example, consider the situation after HK company formation where company board of directors through the special resolution confers the right to contract on behalf of company to some person, then such person would be considered to have express actual authority to take part in the transactions on behalf of the company, as the agent of the company. Whereas the person or agent shall consider having an actual authority implied where such authority is inferred from the conduct of the parties or from the circumstances of the specific case. For example, consider the situation where there does not exist any consensual agreement which extends the authority to some specific person, but the words or acts of the principal or party(s) involved in the transactions, gives the message that this person is authorised to enter into transaction on the behalf of company then such person would have an actual authority termed as implied.

To properly assess the vulnerability and authenticity of the authority, it is advised to look into the nature of relationship between the company and the agent as well as the intensity of the agreement between the parties. It is not necessary for the third party to know of this agreement between the principal and agent, thus this gives us the message that; this agreement about the authority is exclusively the matter between agent and party or principal. For the duration of agreement and as long as the agreement exists, agent will be considered to be imposing rights and liabilities between the principal and the third party (with whom contract is being signed), irrespective of the knowledge of third party about any agreement between the principal and the agent.

Implied Actual Authority

As discussed above, implied actual authority of the agent will occur in the situation where, Board of Directors of the company appoints any person to enter into transactions on the behalf of the company or implies any such authority which falls with the usual scope of the position, he/she been conferred with. For example, consider the situation where company’s board of directors appoint any person as the managing director of the company, then it shall legitimately be considered that, this person holds the powers and authority as that of a managing director. About the scope of such implied authority, it is necessary to look into the scope and nature of the agreement or trade, upon which he/she has been conferred with such authority.

As per the Article 3 of Cap. 622H (Model Articles), directors can have such authority only when they deem to exercise this as board, provided board has passed the resolution in this regard. So, this has been established that any person who holds the office of company’s director cannot confer any authority impliedly or expressly to any other director, to enter into contract on the behalf of company. Let’s make it clear by referring to legal case; case of Zanda Investment Ltd indicates towards the situation where Justice Rhind communicated that:

Exercise of rights and powers by alternate director under the company’s constitution, on the same grounds as legitimate director of the company would exercise it, does not confers him/her the actual authority to carry out managerial affairs of the company such as endorsing the cheques on the behalf of the company.

One must not confuse this with the situation where there is only one director in the company in case of sole proprietorship HK or having sole director. It is so, because sole director is able to exercise the authority, vested in by the board of directors and on the legal authority of being the sole director of the company for the situation of sole proprietorship HK.

Now you may think that, if individual director can not exercise the authority then chairman being the head of board, can may be exercise such duty. But, as per the legal definition, although chairman of the board has some particular responsibilities such as presiding over the board meetings, formulation of board policy, selection of the matters to be taken into the notice of board, promotion of company’s business and communicating the company’s corporate terms with outside world. Prima facie chairman’s position is not much different from the position of rest of directors and usual responsibilities and duties of the chairman does not confers him/her the prerogative to enter into contracts on behalf of company or involve in corporate operations of the company.

But, exceptions are something which makes corporate world a sight to watch. So, courts have however accepted that usual authority of the company’s managing director is somehow broad than the authority of individual director. Legal commentators say that; usual function of managing director includes;

  • To deal with the day to day matters of the company.
  • To supervise the activities and working mechanism of company’s managers.
  • To be in-charge of the corporate performance of the company.

Courts thought of clarifying this issue and have remarked following to be included in the usual authority of the Managing Director:

  • During the time of company’s normal trading, his/her authority includes the borrowing of money and giving of security over the property of the company.
  • To give guarantees and indemnities on the behalf of company.
  • Has the authority to indulge in employment of staff, where required or needed, engage third party to provide services for the company.

The usual authority of the managing director to carry out corporate operations of the company must not be confused with the usual authority of the managing director to sale the company’s undertaking. So, although managing director of the company has the usual authority to govern the corporate matters of the company but such usual authority does not confers managing director, authority to sale company’s undertakings or assets.

As chief executive of the company is not the director of the company, hence authority of the chief executive of the company can be comparable to the authority of the company’s managing director. But, strictly speaking, company treats the authority of the chief executive different to that of a managing director because implied authority of the chief executive is less than the authority of the managing director. To know more, let’s refer to the case of Akai Holdings Ltd where Court of Final Appeal communicated remarks that:

In lieu with presented circumstances, the usual authority of the chief executive in this case (where company is a listed company), extends legitimately to enter into types of contracts including the types of contracts which would make company liable to the amount of $30 million.

This does not mean that only board has the authority to enter into contract on the behalf of the company instead company’s executive office holders and managers also has the usual authority to contract on the behalf of the company, in their own official capacity and within his/her area of responsibility. For instance, let’s refer to the remarks of Court of Final Appeal where court said that:

Business managers holds the authority to grant discounts and settling of accounts

If we refer to the situation in England, we will come to know that it has been said in England that; any employee of the company which holds the title of Sales Director, has the legitimate authority to enter into contract related to product selling and any arrangement of commission and holds the power to bind company to abide by the terms of contract.

While referring to the situation in Australia, we will come to know that; any person in Australia who holds the designation or official position of “Money Market Manager” holds the legitimate authority to enter into foreign currency contract on the behalf of company.

Other than executive office holders, usual employees of the company also have the authority to contract in the name of the company, in day to day corporate matters such as any sales staff of the company who operates the retail store of the company, will have the authority to sell company’s products to customers in the store.

Company secretary Hong Kong also has the usual authority to enter into contract which falls within the jurisdiction of day to day matters of the company, in the capacity of the administrative officer of the company. Example of which includes, employing any required staff or hiring or buying of cars for the use of company. But, it must be remembered that such exercise of authority by the company secretary Hong Kong is only confined to the administrative nature and secretary do not has any authority to intervene in the commercial affairs of the company neither holds the authority to institute the legal proceedings on the behalf of the company.

It is not necessary that implied actual authority shall only be conferred with some sort of appointment, instead such authority can also be inferred from the particular conduct of the company or if to be precise, then such authority can also be inferred from the particular conduct or act of those who has the authority to delegate these authorities to anyone. This can better be understood by referring to the case of Brayhead Ltd which presents of the situation where; Mr. Richard was the chairman of Brayhead Ltd and this company was a major shareholder of the Perdio Electronics Ltd. Mr. Suirdale (the plaintiff) guaranteed a loan which was provided to the Perdio Electronics by the money broker, who also agreed to inject loan funds into the Perdio Electronics, in return of this company would provide indemnity to the Mr. Suirdale for his liabilities that would result from the guarantee he provided, and would also provide guarantee for the loan to the Mr. Suirdale. These indemnities and guarantees were following by two letters signed by Mr. Richards in the capacity of the company’s chairman. When Perdio Electronics enter into liquidation and Mr. Suirdale asked for the promised indemnity and guarantee, company denied providing such liability on the basis of the argument that; Mr. Richards were not authorised by the company’s board to authorise such transaction. These arguments were somehow accepted by the English Court of Appeal that Mr. Richards do not possess any actual authority nor there was any authority which authorises Mr. Richards to provide indemnity and guarantee for the loan, using his position of company’s chairman. But court also communicated that, although there was not any actual authority possessed by the Mr. Richards, but he seems to have an implied actual authority, because he was not appointed as the managing director of the company, but he acted as if he had been the managing director or chief executive of the company. None of company’s board member objected such actions of Mr. Richards neither prior contracts or commitments of Mr. Richards required any endorsement of company’s board. Hence, court accepted that; such non-objective behaviour of the board, enabled agent to act as a de facto managing director of the company, and as managing director is authorised to provide indemnities or guarantees on behalf of the company, thus Company is bound to the abide by the terms of the contract.