Author: Kitaka Aziz
The thumb rule is that no advocate can act for a client without receiving instructions from that client. This is expressly highlighted in Regulation 2(1) of the Advocates (Professional Conduct) Regulations which is to the effect that “No advocate shall act for any person unless he/she has received instructions from that person or his/her authorized agent.” A suit taken on by counsel without instructions from a company he or she is purporting to be representing can be rendered incompetent and dismissed for lack of instructions from the competent directors of the company. In Kabale Housing Estate Tenants Association v. Kabale Municipal Local Government Council (S.C Civil Application No. 15 of 2013) Hon. Justice Kitumba held that “a suit brought without instructions is incompetent. Counsel must appear in court with full instructions and authority from his client. Failure to do so, an advocate will be acting on his own and will not be entitled to costs.” The Hon. Justice quoted the case of Danish Mercantile Co. Ltd v. Beaumont & Anor [1951] where Jenkins L.J at page 687 stated that, “I think the true position is that a solicitor who starts proceedings in the name of a company without verifying whether he has proper authority to do so or under an erroneous assumption of authority does so at his own peril…. And the action is not properly constituted…and it is a nullity and can be stayed any time…”
Company Instructions
Companies faced with complex legal issues always instruct advocates to tackle them on their behalf in court. However, advocates have the discretion to either accept or refuse such instructions.
Order 19 Rule 1 of the CPR provides that pleadings for a suit by or on behalf of a corporation may be signed on by the secretary or any director or other principal officer of the company.
The ultimate questions:
If counsel is accepting or refusing instructions from a company, what are the guiding principles to be followed? Should counsel be concerned with the capacity of the person giving him or her instructions on behalf of the company? How does court determine whether counsel was given instructions from a company or not? What follows when counsel receives and accepts instructions from a client company?
Receipt and acceptance of instructions by counsel constitutes a binding contract between the client and counsel.
Having seen that receipt and acceptance of instructions by counsel constitutes a binding contract, resort can be made to Section 50(1) of the Companies Act, 2012 which provides that a company may make a contract, by execution under its common seal or on behalf of the company, by a person acting under its authority, express or implied.
A thumb rule of contract law is that a contract can either be in writing or made orally. Are instructions to counsel required to be in writing? No! There is no law which says that instructions to counsel should be in writing. Counsel can receive instructions orally as long as it can be proved that he was duly given instructions.
“A person dealing with the company”
A person deals with a company if he/she is a party to any transaction to which the company is a party and is presumed to have acted in good faith. It follows therefore that “Counsel’s acceptance of instructions from a company amounts to counsel becoming a party to a transaction with the company.”
Before acting for a company, should counsel first enquire whether the directors giving him/her instructions are authorized by the company’s constitution to do so?
The proper answer to this question can be found under Section 52 and 53 of the Companies Act which shows that the powers of directors to bind the company or authorize other persons to bind the company in favor of a person dealing with the company, shall not be limited by the company’s memorandum.
However, if one is to invoke the “Indoor management rule”, counsel need not enquire whether the company director(s) who gave him instructions were actually permitted by the company’s memorandum of association to do so. Section 53 of the Companies Act shows that a party is not bound to enquire as to the capacity of a company or any limitation on powers of the directors to bind the company. It follows therefore that if counsel acts for a company in good faith on instructions given to him/her by any of the company directors, any argument to the effect that counsel was not instructed to act for the company can be overpowered if counsel invokes the indoor management rule. In CTM v. Allmus(2018) court noted that “it would make business very difficult if persons dealing with the company in good faith would have to ascertain that the internal procedures of the company have been complied with.”
Who can bind a company for purposes of giving instructions to counsel?
Any person acting under the express or implied authority of the company E.g., Director who may be an Actual director (one listed as a director in form 20), De-facto director (one not appointed but runs the company as director), or Shadow director (runs the company behind scenes), or a Company Secretary, or any person with implied authority to handle legal matters for the company.
There is no requirement for a company to first pass a resolution to authorize counsel to take on a matter on its behalf. This position was set in Kasaala Growers Co-operative Society v. Kakooza & anor (Supreme Court Civil Application No.19 of 2010) where the court said that, “A resolution of the board of directors of a company is not necessary for the institution of a suit in the name of the company. Any director of the company who is competent to exercise the powers vested in the board of directors can give instructions for filing a suit in the name of the company.”
The person who gives instructions to counsel must be regarded as “competent” to do so on behalf of the company. The Supreme Court in Kasaala Growers case pointed out that ‘any director who is competent to exercise the powers vested in the board of directors can give instructions for filing a suit in the name of the company.’
Who is a ‘competent’ and ‘non-competent’ director?
Much as a company may have directors, not all directors are competent. It should be noted that much as the law and cases set out the principles governing who has power in a company to give counsel instructions, it is prudent practice that counsel handles the cases on “a case by case basis” in order to find out whether or not the director giving instructions is competent to do so.
Counsel should always be kin to the fact that “when receiving instructions to represent a company itself, he/she must receive such instructions from the company directors on the Board of directors and not from the shareholders. In Foss v. Harbottle(1843) it was stated that, in order to redress a wrong done to the company, the action should be brought by the company itself and not the shareholders. This principle is in line with the rule in Percival v. Wright, that directors’ duties are owed to the company and not to the shareholders. It also embodies the Salomon v. Salomon ruling, that the company is a separate entity from the shareholders and thus has its own right to sue as itself (in its own name).
In Attorney General v. Goodman Agencies Ltd and others (High Court Civil Division Misc. Application No. 361 of 2015), the Attorney General brought the application seeking court’s guidance on who was entitled to receive payment for the previous judgement which Goodman Agencies had won. The shareholders and the directors could not agree on who was entitled to receive the payment. The shareholders had instructed a law firm to receive the payment. However, the directors had not instructed the said law firm since they had withdrawn instructions from them. Court held that the shareholders could not claim for the money as they did not have a right to. It was the company through the board of directors to claim for the money. The company had not instructed the law firm and this meant that the law firm was acting for the shareholders and not the company.
If counsel is approached by aggrieved company shareholders to pursue a suit on behalf of the company itself, counsel should decline to proceed with this approach and advise them to proceed with a “derivative suit” instead. Failure to do so can lead counsel to positioning himself in danger of being considered as acting without instructions. Derivative actions are the only way shareholders can proceed to make good the wrongs done within the company. In Awool v. Merryweather(1867) court explained that provided a decision not to sue has not been made by a majority of the company competent organ, individual shareholder may bring a derivative action in respect of a complaint in their capacity as members of the company where those in control are allegedly at fault.
Counsel should be cautious not to act on instructions from a person who might be passing off him/herself as a director. In City African Textile Shop Ltd v. Jan Mohamed Ltd (High Court Commercial Division Misc. Application 0437 of 2002), a person who passed off himself as the executive director had given instructions to counsel. Court held that the letter instructing counsel to represent the applicants was not signed by the real managing director but by a person whose name did not appear in the list of directors filed with the registrar of companies. The letter could not give authority to counsel to act.
HOW CAN COUNSEL PROVE THAT HE HAD INSTRUCTIONS TO ACT FOR THE COMPANY?
- Producing the contract for provision of legal services.
- Producing the board resolution extract showing the directors agreement to instruct counsel.
- Producing an instruction letter or email by a director or other authorized officer of the company
- Presence of the company director or officer in court can be a proper way to prove that counsel is under instructions to pursue the suit.
- A signature of a company director or other authorized officer on an affidavit or other pleadings produced in court can be good evidence to prove that counsel is acting on instructions
CONCLUSION: POINTS FOR CONSIDERATION.
- Counsel must get instructions from a director(s) or other principal officer who has express or implied authority.
- Shareholders have no locus standi to instruct counsel to sue on behalf of the company.
- A board resolution is not mandatory for valid instruction
- The indoor management rule is a doubled edged sword.