A company owns a valuable property. You negotiate its purchase with someone who introduces himself as a director. He attends the meetings. He negotiates the price. He signs documents on behalf of the company. Everything appears legitimate.
Then the company says: “We never authorised him to sell that property.”
The purchaser responds: “But he is your director!”
But is the title “Director” enough? NOT NECESSARILY.
The Supreme Court of Zambia considered important questions of corporate authority in Cowlyn Travel Limited and Others v ERZ Holdings Limited and Another [2010] ZMSC 19. The case provides an important lesson for directors, shareholders, investors, banks, property purchasers and commercial lawyers: The fact that someone holds an important position in a company does not necessarily give that person unlimited authority to bind the company.
A COMPANY CAN OWN PROPERTY — BUT IT CANNOT PHYSICALLY SIGN
A company is a separate legal person.
Therefore, it can:
- own land;
- borrow money;
- enter contracts;
- sue;
- be sued.
But a company cannot physically pick up a pen and sign an agreement. Human beings must act for it. Those people may include:
- Directors;
- Employees;
- Company Officers; or
- Agents
The critical legal question is: What authority does this individual have to act for this particular company in this particular transaction?
That question becomes especially important when substantial company assets are being sold.
THE COWLYN TRAVEL PROBLEM
The dispute concerned the purported disposal of company property. At the centre of the transaction was an alternate director. The Supreme Court considered whether that individual possessed the necessary authority to dispose of the property. The Court concluded that he did not have the required authority. That finding had major consequences for the transaction.
It demonstrates why a purchaser should never stop due diligence after confirming: “Yes, the company owns the property.” It also gives rise to a second question: Does this particular person have authority to sell it?”
COMPANY PROPERTY DOES NOT BELONG TO THE DIRECTOR
This sounds obvious but in closely held companies, the distinction is frequently blurred. Suppose Mr Banda owns 80% of ABC Limited. ABC Limited owns an office building.
Mr Banda may understandably think: “It’s basically my building.”
Legally, that can be a dangerous way of thinking because the building belongs to: ABC Limited and not personally Mr Banda. This because the law identifies the company as a separate legal entity. Therefore, company assets should be dealt with through the appropriate corporate processes. Not even a shareholder, director or senior company official cannot simply treat company property as personal property to dispose of as they please.
WHAT DOES “AUTHORITY” MEAN?
In commercial transactions, authority can become technically complex. There may be questions concerning:
- actual authority;
- apparent or ostensible authority;
- corporate resolutions;
- delegated authority;
- the company’s governance arrangements.
But the practical question is simple:
WHAT GIVES THIS PERSON THE LEGAL POWER TO SIGN THIS TRANSACTION FOR THE COMPANY?
The answer to the question should be capable of verification.
THE BIGGER THE TRANSACTION, THE MORE IMPORTANT THE DUE DILIGENCE
Imagine purchasing a company-owned property worth ZMW30 million. The director says:
“Don’t worry about the paperwork. I have authority.”
Should that be enough? A prudent purchaser may want to establish:
- who owns the property;
- whether the title is valid;
- whether the property is mortgaged;
- whether the company approved the sale;
- whether a board resolution exists where required;
- whether the person signing has authority;
- whether any additional corporate approvals are necessary.
The point of all this is not to create paperwork for its own sake. THE POINT IS TO ENSURE THAT THE PURCHASER RECEIVES A LEGALLY EFFECTIVE TRANSACTION.
SHOW ME THE AUTHORITY
This may be one of the most useful phrases in corporate transactions.
If someone says: “I am authorised to sign.”
The lawyer should ask: “Please show us the authority.”
That might involve reviewing the relevant corporate documents and transaction approvals. The person making the request is not being difficult. They are merely protecting the transaction.
THE LESSON FOR DIRECTORS
Directors should equally avoid assuming: “I am a director, therefore I can sign anything.”
Authority may depend upon:
- the nature of the transaction;
- the company’s governance arrangements;
- applicable corporate approvals;
- resolutions;
- signing mandates.
Before executing a major transaction, establish that the appropriate authority exists. Where board approval is required, obtain it. Where another signatory is required, obtain that signature. Document the authority.
THE LESSON FOR BOARDS
Boards should establish clear delegations of authority.
For example:
- Transactions below ZMW100,000: Department Head.
- Transactions between ZMW100,000 and ZMW1 million: Managing Director.
- Transactions above ZMW1 million: Board approval.
The actual legal arrangements will differ between organisations, but the governance principle is useful. Employees and directors should know: Who can approve what? This is because unclear authority creates risk. Risk that can be avoided by simply determining the scope of authority yielded by all parties encompassed in the transaction.
BANKS SHOULD CARE ABOUT AUTHORITY TOO
The principle extends beyond property sales. Suppose a company instructs a bank to transfer ZMW10 million. The instruction comes from a director.
The bank should still consider:
Does this person have authority under the company’s mandate?
That takes us back to another case in the DAC series—BARCLAYS BANK ZAMBIA PLC V CHIPEPA—and the broader importance of mandates and authority. Different areas of commercial law often return to the same fundamental question:
- Who authorised this transaction?
- Lawyers Should Keep the Evidence of Authority
A commercial transaction file should not simply contain the final signed agreement. Where authority is material, the file should also contain the documentation establishing it. This is so, because if years later, someone asks:
“Why did you accept this person’s signature?”
The lawyer will be able to point to the evidence relied upon. That is good transaction management.
THE COST OF GETTING IT WRONG
Failure to verify authority can produce extraordinary consequences.
The purchaser may:
- pay money;
- take possession;
- invest in improvements;
- obtain financing;
only to discover that the underlying transaction is being challenged.
The cost of checking authority before signing is usually tiny compared with the cost of litigating authority afterwards. That is why due diligence should be viewed as an investment in certainty, not simply a legal expense.
THE DAC VIEW
At Dzekedzeke and Company, we believe Cowlyn Travel Limited and Others v ERZ Holdings Limited and Another contains one of the most practical lessons in corporate transactions: NEVER CONFUSE CORPORATE OFFICE WITH UNLIMITED CORPORATE AUTHORITY.
For purchasers: Check the property—and check the person selling it.
For directors: Know the limits of your authority before signing.
For boards: Create clear approval and delegation systems.
For lawyers: Verify authority and keep the evidence on the transaction file.
The crux of this article can be narrowed down to THREE EXCELLENT QUESTIONS:
- Does the company own it?
- Does this person have authority to sell it?
- Are the necessary company approvals in place?
At DAC we urge all parties in a given commercial transaction to understand that he word “Director” on a business card may tell you someone’s position, but it does not necessarily tell you the extent of their legal authority. For a major transaction, there is a better approach: “SHOW ME THE AUTHORITY”
For legal advice on company law, property transactions, directors’ authority, due diligence and commercial disputes, contact Dzekedzeke and Company.
Based on Cowlyn Travel Limited and Others v ERZ Holdings Limited and Another (Appeal No. 74 of 2008) [2010] ZMSC 19 (6 August 2010).
