After the Hong Kong incorporation of company, an agent will be considered to be possessing apparent authority if third party thinks that the person contracting or acting on behalf of the company has the authority to act or transact on behalf of the company. Basically, apparent authority of the agent is what other perceives of and there is no usual authenticity of it. Referring to the case of Freeman you will better be able to understand the issue of apparent authority after the Hong Kong incorporation of company. Diplock LJ in this case outlined principles upon which, apparent authority of the agent could be ascertained:
Diplock LJ has elaborated the concept of apparent authority in a quite extensive way. One can excerpt the summary of his principles in a way that: apparent authority is basically the understanding and relationship between the principal (the company) and the third party, agent shall be a stranger to this relationship between the principal and the third party and he/she does not need to be aware of this understanding or such relationship. One can clearly conclude that this definition is totally opposite to how actual authority is defined. In the actual authority, relationship exist between the principal and the agent while in apparent authority, agent is a silent character and relationship would exist between third party and the principal. The concept of apparent authority of the agent is basically of estoppel nature and this ultimately prevents principal from the liability to be bind to the transaction or contract.
To prevail the contracting in corporate world after business registration Hong Kong and to authorize the corporate contracting there is the suggestion or advice for the agents having apparent authority. Where the agent holds the apparent authority, it is advised for him/her to delegate authority to further some person so that company be made liable or bound by the transaction or contract. But there is one technicality in here, it is mandatory that third party be made sure that the authority is actually being exercised by the principal agent through the appointee or nominated agent of principal agent.
Representation or Holding out for the Establishment of Apparent Authority
Basically, representation is something which makes apparent authority to exist and thus representation is supposed to take many forms.
If after business registration Hong Kong principal establish express representation then third party would get the message that this particular person has the authority to contract for the company but most common form of representation is the representation through the conduct. Let us again refer to the remarks of Diplock LJ in the case of Freeman & Lockyer where the honorable judge communicated that:
Agents are allowed to act in some ways in the business of the principal with any third party. In such scenario, principal has implicitly given authority to the person acting or transacting on the behalf of principal and if there is so, then third party must be satisfied that if agent is acting in such capacity then he/she is authorized to exercise such authority. Hence, no question on the authority of the principal should be raised.
Case of Freeman & Lockyer serves as pioneer case in this matter because this is the case where Diplock LJ underlined principles of apparent authority, so understanding this case would be analogous to understanding the principles and in-depth knowledge of the apparent authority. So now let’s see what does circumstances of the case report. In this case, Mr. Kapoor was the director of property company, he was although not formally appointed as the managing director of the company, but other directors were in knowledge of him acting and conducting in this capacity and exercise of authority as of a managing director by the Mr. Kapoor was in the knowledge of company’s director. Mr. Kapoor in this capacity, hired architects to provide services to the company and when the architects claimed for their unpaid dues, company refused to pay claimed amount, on the basis of the arguments that there was no express authority awarded to the Mr. Kapoor to act or contract on behalf of the company. However, English Court of Appeal communicated that:
Although there was no express authority, but Mr. Kapoor had the apparent authority because board was aware of acting and managing affairs of the company in the manner, managing director shall do. This communicated the message to the third parties that Mr. Kapoor holds the usual authority as that of a Managing Director.
The usual authority of the managing director of the property company allows managing director to seek the services of architects to plan and develop the land. As Mr. Kapoor entered into contract in this authority, hence company is bind to the terms of contracts and liable to the architects for their unpaid dues. Court of final appeal clarified that there was no implied actual authority in this case hence outcome of this case will be contrary to the outcome of case of Brayhead Ltd. The difference between both cases is very simple and of extent which not only defines the difference of this case but also cast the distinction between implied actual authority and the apparent authority. The difference is as:
The main difference which maintains the distinction between them is, where the person acts in some capacity and the role of other directors is of a silent spectator and there is no communication and consensual understanding between the each other and with agent, then such authority will better fall into the jurisdiction of Apparent Authority rather than the Implied Actual Authority.
To make sure that no ambiguity shall remain, representation of apparent authority should be unequivocal, clear and to properly ascertain the extent of clarity and unequivocal, reference to practical realities would be made. One example could be the case of Hua Rong Finance Ltd where there were total three directors in the company, each holding equal shares of the company. One director purportedly approached plaintiff to obtain loans by giving security of the flats owned by the company, other two directors were kept unaware of these proceedings. Plaintiff enforced mortgage and loans against the company on the basis of the argument that; director who took the loan, had the apparent authority as he holds the one third shares of the company and the articles of the company allows him to borrow loans and to delegate authority of signing on the seal of the company, to one director. So, in lieu of this, director had access to the seal and the company chop and had the authority to sign deeds of the flats and that she used the company’s address. The Court of Appeal rejected these arguments of the plaintiff on the basis of the fact that these arguments of the plaintiff, whether taken separately or combine, does not legitimately amounts to the apparent authority of the director and held director to obtain loan or to mortgage the company’s property, on company’s behalf.
Let’s refer to another case; case of Thanakharn Kasikorn presents of the situation where CEO of the Company (Akai Holdings Ltd) in Hong Kong holding company formation caused company to obtain the loan and to issue assets of the company as a guarantee for the loan to benefit another company (Singer) who had the common controller and the common shareholder. The goal of the loan was to pay the liabilities of the Singer, which were owed to the same lender. It was very well established that CEO of the company does not holds the actual authority to act in this way, but the question was still there that, does CEO holds the apparent authority to bind company to the transactions or loan agreement? Court answered this. Hon’ble Court accepted that; the person appointed as the chief executive officer of the company, has the wider scope of apparent authority but no representation in this regard was furnished by the company to enter into transaction, specifically in this case. This was quite significant from the presented circumstances that Akai do not have any benefit in the transaction because Akai did not have any equity interests in the Singer and CEO was the only person who has a conflicting interest in this case, on the basis of his common management position in both company and status of being the common shareholder and controller of both companies. All these facts were known to lender and because lender knows of all these circumstances hence, lender does not hold the legitimate right to bind company to the transaction and this outcome would have been different, if lender is unaware of the fact that; CEO is acting for some personal purpose and not for the benefit of the company.
It is another aspect to which Diplock LJ shed light in his principles to determine the validity and credentials to enforce apparent authority. This aspect generally discusses the reliance by the third party on the representation and this aspect diverts our attention towards the fact that; apparent authority of the agent is the sub category of the representation by the estoppel.
Reliance by the third party shall only be presumed where it has been established that; company has held out the agent to have the authority to bind the company to abide by the terms of contract and where the third party has entered into transaction with the alleged agent.
For the situation where the third party knows that the agent does not holds any authority then in this case, third party would not be entitled to rely on the representation by the company, about the authority of the agent. Case of Thanakharn Kasikorn presents of the situation where Court communicated that;
Third party will also not be held to rely upon the representation of the authority if there is the evidence of the irrationality of the intention of the third party. For the situation where third party was found to be reckless in its reliance upon the representation of the authority then this matter shall be subjected to the notion of irregularity in the context, being presented.
It must be noted that, it would be unjust and illegal to deprive third party merely on the ground that situation could have been much better if third party has investigated and discovered the truth by the exercise of the reasonable care. Same is what happened in the case of Akai Holdings which is an example of Hong Kong holding company formation where lender knew that the loan being provided is not for the purpose or benefit of the company, rather for the benefit of other company and lender was also aware of the conflicting interest of the CEO. Irrationality of the lender is also evident from the departure of the lender from the conventional corporate practice of obtaining approval of board through resolution, where board authorizes the contract or transaction, especially where transaction is of such large extent.