A company is bound by a director’s act if the director had actual authority (given by the articles, the board or a valid delegation) or apparent authority (where the company led the other party to believe the director could act). On top of the common law, section 40 of the Companies Act 2006 protects anyone dealing with the company in good faith by treating the board’s power to bind the company as free of any limitation in the constitution. The protection is weaker where the other party is a director or someone connected with one.

Where does a director’s power to act come from?

The starting point is the company’s capacity. Under section 31, unless the articles specifically restrict the company’s objects, they are unrestricted, and section 39 says the validity of an act done by a company cannot be called into question on the ground of lack of capacity because of anything in its constitution.

Power then flows from the articles to the board. Article 3 of the model articles for private companies says that, subject to the articles, the directors are responsible for managing the company’s business and may exercise all the powers of the company. Article 4 lets the shareholders, by special resolution, direct the directors to take or refrain from specified action, without invalidating anything already done. Article 5 lets the directors delegate their powers to any person or committee, by any means including a power of attorney, on such terms as they think fit, and revoke or alter the delegation.

The key point is that these powers belong to the directors acting together. Article 7 says the general rule is that directors’ decisions are taken by a majority at a meeting or unanimously under article 8. A single director in a company with several directors has no automatic power to commit the company. The exception is a company with only one director where the articles do not require more, where article 7(2) lets that director take decisions alone.

What is actual authority?

Actual authority is the authority the company has really given. Section 43 recognises that a contract may be made on behalf of a company by a person acting under its authority, express or implied. The ACCA guide to directors’ responsibilities explains that, because powers delegated by the constitution are usually given to the board collectively, individual directors have no actual authority to commit the company unless the articles or the board delegate it, for example to a managing director, another executive director or a committee. A board minute approving a transaction and authorising a named director to sign it is the clearest evidence of actual authority.

Directors must stay within that authority. Section 171 requires a director to act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred; see directors’ duties under the Companies Act.

What is apparent authority?

Apparent (or ostensible) authority arises where the company leads a third party to believe that someone is acting with its authority, whether or not that person actually has it. The ACCA guide summarises the conditions set out in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964):

  • there must be a representation, or “holding out”, that the person had authority, which can be by conduct rather than an express statement;
  • the representation must come from people who have actual authority to manage the business generally (usually the board) or the business in question; and
  • the third party must have relied on the representation in entering into the contract.

The representation must come from the company, not from the person claiming authority. A director who simply tells a supplier that he can sign does not create apparent authority by saying so. A board that lets a director act as managing director for years, and deals with suppliers on that footing, may well do.

The ACCA guide also notes the older common law rule from Royal British Bank v Turquand (1856) that a third party is not expected to check whether internal procedures, such as a quorum or board approval, have been followed.

How does section 40 protect people dealing with the company?

Section 40(1) provides that, in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution. Under section 40(2) and (3):

  • a person “deals with” a company if they are a party to any transaction or other act to which the company is a party;
  • they are not bound to enquire about any limitation on the directors’ powers;
  • they are presumed to have acted in good faith unless the contrary is proved;
  • they are not in bad faith merely because they knew an act was beyond the directors’ powers under the constitution; and
  • “limitations” include those in a shareholder resolution or a shareholders’ agreement, not just the articles.

The official explanatory notes say the section restates sections 35A and 35B of the Companies Act 1985 and means a third party dealing in good faith need not concern itself about whether the company is acting within its constitution.

Two related protections fill gaps. Section 161 says the acts of a person acting as a director are valid even if it is later discovered that there was a defect in their appointment, they were disqualified, they had ceased to hold office or they were not entitled to vote on the matter. And where a document is formally executed, section 44(5) protects a purchaser in good faith for value; see how a company executes documents and deeds.

What are the limits on that protection?

  • Members can act first. Section 40(4) preserves a member’s right to bring proceedings to stop an act beyond the directors’ powers, but not once the company is legally committed by a previous act.
  • Directors remain liable. Section 40(5) says the section does not affect any liability incurred by the directors, or anyone else, by exceeding their powers.
  • Insiders get less protection. Under section 41, where the other party includes a director of the company or its holding company, or a person connected with such a director, a transaction that depends on section 40 is voidable by the company. That party, and any director who authorised the transaction, must account for any gain and indemnify the company for any loss. A party who is not a director escapes that liability if they show they did not know the directors were exceeding their powers (section 41(5)).
  • The right to avoid can be lost. The transaction stops being voidable if restitution is no longer possible, the company is indemnified, avoidance would affect rights acquired in good faith for value by someone outside the transaction, or the company affirms it (section 41(4)).
  • Charities are subject to modified rules in section 42.

Connected persons have the same meaning as in Part 10, which is also used for directors’ conflicts of interest.

How does this work in practice?

Illustration only. Alder Ltd’s articles say the board must obtain shareholder approval for any borrowing over £250,000. Without that approval, the two directors pass a board resolution and sign a £400,000 facility with a bank.

  • The bank is protected by section 40. It did not have to read the articles, and even if it knew of the restriction, knowledge alone does not make it act in bad faith. The loan binds Alder Ltd.
  • The directors have breached section 171 and are exposed to a claim by the company under section 40(5), unless the shareholders ratify the breach; see ratifying directors’ breaches.
  • If the lender had instead been a company owned by one director’s spouse, the facility would be a section 41 transaction and voidable by Alder Ltd.

Now suppose Alder Ltd’s sales manager has for years signed customer contracts with the board’s knowledge, although the board never formally authorised it. A customer who relied on that pattern could argue apparent authority, because the board’s conduct created the impression of authority.

What should directors and the people dealing with them watch for?

  • For significant transactions, minute the board decision and name the person authorised to sign; that removes any argument about actual authority.
  • Check that the signatory appears as a director on the Companies House register; section 161 protects against defects in appointment, but not against dealing with someone who never acted as a director.
  • Where a director or a connected person is on the other side, expect the company to scrutinise authority under section 41 and the conflict rules.
  • Remember that “good faith” is presumed, not guaranteed. A party who colludes with a director to get round the constitution should not expect section 40 to help.
  • Directors who act beyond their powers can be personally liable even though the company is bound. People acting as directors without appointment can be treated as directors; see shadow and de facto directors.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.