Section 154 of the Companies Act 1997 is the last provision of the enforcement Part, and it is narrower than it first appears.
Section 154(1) — the power
The purported exercise by a director or the board of a power vested in the shareholders or any other person may be ratified or approved by those shareholders or that person in the same manner in which the power may be exercised.
Section 154 applies to the purported exercise of a power vested in the shareholders or any other person — that is, the board doing something that was not its to do.
It does not apply to a director’s breach of duty. A breach of section 112 (good faith and best interests), section 115 (care and diligence) or section 123 (use of company information) is not the exercise of a shareholder power, and section 154 says nothing about it.
The ratification must meet the same threshold as the original decision would have. So a board that entered a major transaction without shareholder approval can only have it ratified by special resolution under section 88(1)(c) — not by an ordinary resolution, and not by acquiescence.
Note that the power may be vested in “any other person”, not only the shareholders. Where a constitution gives a class, or a named shareholder, the right to make a decision, that person is the one who may ratify.
Section 154(2) — retrospective validity
The purported exercise of a power that is ratified is deemed to be, and always to have been, a proper and valid exercise of that power.
The deeming is complete and retrospective: “and always to have been”. The intervening period is not a period of invalidity that is later cured; it is treated as never having been irregular at all. That protects the counterparty, the company’s books, and any further steps taken on the strength of the decision.
Section 154(3) — but the Court’s powers survive
The ratification or approval under this section does not prevent the Court from exercising a power which might, apart from the ratification or approval, be exercised in relation to the action of the director or the board.
In a company where the wrongdoers control the votes, ratification would otherwise be a complete answer to any complaint: the majority approves what the majority did. Section 154(3) prevents that.
So notwithstanding ratification, the Court may still —
- grant leave for a derivative action under section 143, including on the ground in section 143(3)(b) that the conduct of the proceedings should not be left to the determination of the shareholders as a whole;
- make orders on a section 152 application — and note that under section 152(4) a failure to comply with sections 45, 47, 51, 57, 63, 98 or 110 is unfairly prejudicial conduct, whether or not it was ratified;
- make an order under section 148 or 150 requiring a director or the board to act; or
- entertain a personal action under section 147 or 149.
Section 154(4) — the general law is untouched
Nothing in this section limits or affects any rule of law relating to the ratification or approval by the shareholders or any other person of any act or omission of a director or the board.
So section 154 is not a code. The general law rules about what shareholders can and cannot ratify continue to apply alongside it — including the principle that a fraud on the minority, or conduct that would leave the company unable to pay its creditors, is not capable of ratification by the majority.
What ratification cannot achieve
| Matter | Why not |
|---|---|
| A breach of sections 112 to 116 | Not the exercise of a shareholder power; s 154 does not reach it, and the duties are owed to the company |
| An improper distribution | Section 54 gives recovery rights to the company; and a section 89 unanimous approval brings its own shareholder liability under s 89(5) |
| Insolvent trading or failure to keep accounting records | Sections 348 and 348A protect creditors, who are not parties to any ratification |
| An offence — ss 112(5), 114(2), 115(6), 118(4), 123(4), 126(2), 127(6) | Shareholders cannot forgive a criminal offence |
| A voidable transaction in a later liquidation | Sections 340 to 346 operate for the benefit of creditors through the liquidator |
| An indemnity outside section 140 | Section 140(2) makes it void — and “indemnify” includes relieve or excuse from liability |
A resolution “releasing the directors from all liability” is not ratification under section 154 — it is an indemnity, because section 140(9) defines “indemnify” to include relieve or excuse from liability, whether before or after the liability arises. Unless it falls within the narrow categories section 140 permits, it is void.
Doing a ratification properly
- Identify the power. Was it a power vested in the shareholders or another person? If it was a duty, section 154 does not apply.
- Use the correct majority — the same as would have been needed to exercise the power, which for the section 88 matters is a special resolution.
- Disclose fully. A ratification obtained without disclosure of the material facts invites a section 152 application, and section 152(5) treats a certificate signed without reasonable grounds as unfairly prejudicial in any event.
- Consider section 89 instead where all shareholders will agree. It expressly covers action “which has been taken or is to be taken”, and deems it validly authorised notwithstanding the constitution.
- Do not assume it ends the matter. Section 154(3) preserves every power the Court would otherwise have.
Sources
- Companies Act 1997 — ss 45, 47, 51, 54, 57, 63, 88, 89, 98, 110, 112–116, 118, 123, 126, 127, 140, 143, 147–154, 340–346, 348, 348A
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.