The Doctrine of Ratification: Can Directors Ratify Their Own Acts?

Can you forgive yourself for your past mistakes? Many struggled but some moved on. However, for company directors, the law says you can!

A. Introduction

Recently, the High Court in Dato’ Shun Leong Kwong & Anor v Menang Corporation (M) Bhd & Ors [2021] MLJU 870 (“Menang“) held that directors could ratify their own mistake because it was a mere irregularity.

This is arguably against the core principle of doctrine of ratification, where only a principal can ratify the acts of its agents.

This article seeks to discuss the doctrine of ratification against the backdrop of company disputes.

B. Background

Two directors desperately tried to join an online board meeting conducted via Microsoft Teams (“Board Meeting”). As it turned out, the company secretary provided them with a wrong invite link. Meanwhile, in the Board Meeting, the other directors were fixing a date to convene an EGM. Ironically, the agenda for the said EGM was to remove the two excluded directors from the board of the company.

The two excluded directors were the Plaintiffs, while Menang Corporation (M) Bhd and the other directors were made the Defendants. The Plaintiff argued that the Defendants deliberately and intentionally excluded them from the Board Meeting. On the flip side, the Defendants contended that the exclusion was an inadvertent mistake and a mere irregularity.

Under the law, a proper notice of a board meeting must be given to all directors (Aik Ming (M) Sdn Bhd v Chang Ching Chuen [1995] 2 MLJ 770). Given that the invite link was inaccessible, there was arguably a failure to provide proper notice. Hence, the decision made during the Board Meeting was susceptible to challenge. A Director’s Circular Resolution (“DCR”) was subsequently issued by the Defendants to ratify the decision made during the Board Meeting.

C. Overview: The Background of the Doctrine of Ratification

Where an act was done by an agent on behalf of the principal, but without his knowledge or authority, the principal may choose to ratify or to renounce the act. If the principal chooses to ratify an agent’s act, the principal will then be bound by it (Hong Leong International Hotel (Singapore) Pte Ltd v Chotek (Pte) Ltd [1995] 2 SLR 649). This is commonly known as the doctrine of ratification. The doctrine was best explained in Wilson v Tumman (1843) 6 Man & G 236, where the UK Court of Common Pleas stated that:

“an act done, for another, by a person, not assuming to act for himself, but for such other person, though without any precedent authority whatever, becomes the act of the principal, if subsequently ratified by him.”

Essentially, the doctrine allows a principal to validate an agent’s act, be it a wrongdoing or an act done beyond his powers. However, ratification cannot be treated as a get-out-of-jail-free card. In the case of a company, the following non-exhaustive list of examples are circumstances where ratification was not allowed by the courts:

• When there was an allotment of shares by the directors for a collateral or an improper purpose (JD Hannes & Ors v MJH Pty Ltd & Ors (1992) 7 ACSR 8).
• When the directors misappropriated the assets of a company (Cook v GS Deeks & Ors [1967] 2 AC 134).
• When the directors attempted to dissipate available assets of insolvent companies (Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 10 ACLR 395).
• When the directors were negligent and benefited from it (Daniels v Daniels [1978] 2 All ER 89).

D. Can Directors Ratify Their Own Acts?

Conceptually, ratification is only plausible when there is a principal and an agent. Reference is made to the following trite principles regarding the doctrine of ratification:

• The act purported to be ratified must be on behalf of the principal (Keighley, Maxsted & Co v Durant [1901] AC 240).
• The principal must be in existence and have the capacity (Foster v Bates (1843) 12 M & W 226).
• The principal must be ascertainable (Boston Fruit Co v British and Foreign Marine Insurance Co [1906] AC 336).

All these principles show that there is a clear conceptual delineation between a principal and an agent. Logically and legally speaking, the principal and the agent cannot be the same person, and one cannot ratify his own acts. Simply said, the purported act to be ratified must be done on behalf of someone else.

However, the High Court in Menang opined otherwise. In the Menang case, the Plaintiffs posed two main questions regarding ratification.

First, whether the Defendants could ratify their own acts. Second, whether the exclusion was deliberate and intentional. The Plaintiff took the stance that both questions must be answered in favour of the Defendants for the Plaintiffs’ case to fall.

Instead of addressing the first question, the High Court had jumped the gun and decided against the Plaintiffs on the second question. The High Court held that the exclusion was not deliberate and unintentional and thus, it was a mere irregularity which could be validly ratified by the Defendants. But to even consider this point, the Court must first be satisfied that the Defendants could ratify their own acts.

Quizzically, this pertinent question was left unanswered.

Since the company is the principal and the directors are its agents, it only sensible for the shareholders to ratify the acts of directors. All in all, an act of all shareholders is in law an act of the company itself (Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258). One of the many precedents would be UK House of Lords decision of Spackman v Evans (1868) LR 3 HL 171:

“The forfeiture of the shares under the Spackman arrangement being beyond the powers of the directors, the transaction could only be made good by the consent of all shareholders at the time, or by their ratification of it afterwards.”

E. Conclusion

The High Court in Menang did not satisfactorily address the question of law on unilateral ratification by directors. The unbridged gap does not bode well with the doctrine of ratification. It creates a dangerous precedent that allows directors to sidestep the mandate of shareholders regarding decisions made on behalf of the company.