20 Jul 2016

Mr Aidiniantz (Mr A) founded the Sherlock Holmes Museum in London. Mr A was the sole owner of the Sherlock Holmes International Society Limited (the Company).

In July 2014, Mr A presented a petition to wind up the Company on the grounds that it was insolvent. The Company's sole director instructed a firm of solicitors, Pinder Reaux and Associates (PR), to act on behalf of the Company to oppose the petition. The director then resigned and a Mr Riley was appointed as sole director of the Company.

Mr Riley's appointment as a director expired on 31 December 2014. The former directors continued to instruct PR to act on the Company's behalf. On 16 October 2015, Mr A sent a letter to PR questioning Mr Riley's status as a director of the Company. Subsequently, Mr A successfully applied for a declaration that Mr Riley's appointment as a director had expired on 31 December 2014.

Mr A sought to recover his costs of obtaining the declaration from PR on the grounds that they had purported to act for the Company from 1 January 2015 without appropriate authority.

It was held that:

  • PR gave a warranty in conducting litigation on behalf of the Company until Mr Riley's status as a director was brought into question in October 2015; and
  • PR ceased to give any warranty as to their authority after Mr A's assertion that Mr Riley was not a director of the Company in October 2015.

Mr A was not awarded his costs as – even if PR's warranty had proved to be accurate - he would never have been able to recover his costs against the Company. The usual measure of damages in such a claim would be the costs that had been wasted as a result of the breach of warranty of authority; a claimant would be over compensated if an order for costs would put a claimant in a better position than if the warranty had been true.

The judgment examined the defences to a claim for breach of warranty of authority.

Ostensible authority

PR were ostensibly authorised to act for the Company. It was held that ostensible authority provides a defence to a claim for breach of warranty of authority, if and to the extent that the ostensible authority puts the claimant into the same position he would have enjoyed had there been actual authority.

In this claim, if Mr Riley had remained a director of the Company, there would have no been no breach of warranty of authority as PR would have been instructed by an agent for the Company. Mr A would have had no reason to query Mr Riley's status as a director or to apply for a declaration that Mr Riley's appointment had expired.

However, it was held that the costs of the dispute were incurred as a result of Mr A wanting to establish that the warranty was false, as he perceived that establishing its falsity would place him into a better position. The costs of the action were not occasioned by the fact that PR did not have actual authority.

S161 of the Companies Act 2006

S161 of the Companies Act 2006 states that "the acts of a person are valid notwithstanding that it is afterwards discovered . . . that he had ceased to hold office."

The judgment examined whether PR could use s161 of the Companies Act as a defence by arguing that Mr Riley's instructions were valid despite the fact that his appointment as a director had ceased in December 2014.

PR were only entitled to rely on s161 as providing a defence to the claim for breach of warranty of authority during the period before the expiry of Mr Riley's appointment was discovered. Once PR was put on notice of the defect, the defence ceased to apply.

The judge additionally held that s161 validates unauthorised actions in favour of those dealing with a company but does not validate hostile actions which persons dealing with a company do not want validated e.g. litigation against them.

Comment

The judgment in this case serves as useful clarification as to when a solicitor is in breach of warranty of authority.

The case highlights that damages will not be granted if doing so would place the Claimant in a more favourable position than if the warranty had been accurate.