Corporations Law 1: Authority to act

Corporations Law 1:Authority to act CEP Val HaynesMay 2004

Introduction • How do companies enter into contracts? • Directly • Indirectly • Who has authority to act for a company? • Officers of company • Other agents

How companies contract: Indirectly(through an officer or other agent) Directly(by company through its Organs, eg s198A) Actual authority Apparent(ostensible) authority With seal Without seal Express Implied

Direct contracting: Directly(by company through its Organs, eg s198A) With seal Without seal Substantive validity Formal validity (s127(2) and s129(6)) Substantive validity Formal validity (s127(1) and s129(5))

A Company’s Organs (single director/shareholder proprietary companies) s198E Powers of single … companies (1) The director of a proprietary company who is its only director and only shareholder may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. The business of the company is to be managed by or under the direction of the director.

A Company’s Organs (More than one Director and Public Companies) s198A Powers of directors (1) The business of a company is to be managed by or under the direction of the directors. (2) The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting.

How does a company directly make a contract ? • Traditionally: by using its “common seal” • Seal no longer required • Three ways possible now: • execute the document with seal, and necessary witnesses - sec 127(2) • execute the document without seal - signed as required by sec 127(1) • use procedure set out in constitution

Execute document with seal and necessary witnesses - s127(2) • The seal is fixed to the document and is "witnessed" by: • (a) two directors; or • (b) a director and a company secretary; or • (c) if it is a proprietary company that has a sole director who is also the sole company secretary - that director.

Execution of document with seal (ctd) • The word "witnessed" probably should be interpreted as involving the officers signing next to the seal, as well as watching the fixing of the seal.' • A contract entered by a company directly using its seal, would have a clause ("attestation clause") at the end:

A company seal (CA s123(1), s149):

Execution with seal, and necessary witnesses - s127(2)

Execution of document without common seal - signed as required by s127(1) • A company (whether or not it has a seal) can execute a document by having it signed by: • (a) two directors; or • (b) a director and a company secretary; or • (c) if it is a proprietary company that has a sole director who is also the sole company secretary- that director.

Use procedure set out in constitution: • The constitution for example may state that 3 directors and company secretary must sign all documents • Note that s127 is an irreplaceable rule so that contract will be valid (as far as outsiders are concerned) if execution complies with s127 even if it does not comply with company’s constitution

How does a company directly make a contract? (cont) • As well as proper signing/sealing procedure, there must also be authority for the company to enter the contract • normally comes from the board • resolution # 1 approves company entering the contract (“substantive authority”) • resolution # 2 authorises the execution of the documents in a specified way (“formal authority”)

Statutory Assumptions s128-129 • Document sealed with company seal only prima facie valid in favour of outsiders • Company may show that seal affixed without its authority or in breach of s127 of its constitution • Statutory assumptions may assist

Statutory Assumptions s128-s129 (ctd) • Person dealing with company allowed by s128-s129 to make, under certain conditions, an assumption not contestable by company that a document has been duly executed by a company unless person knew or suspected, at time of dealing, that it had not been duly executed.

Statutory Assumptions s129(6) (ctd) • Section 129(6) states two conditions for the assumption of due execution: • (1) Seal appears to have been fixed in accordance with s127(2) • (2) Fixing of seal appears to have been witnessed in accordance with s127(2)

Forged sealings (apart from statutory assumptions) • Forgery. Nullity. Turquand’s case does not apply. • Affixing of seal without authority. Northside Developments v Registrar-General case

Indirect contracts: Indirectly(through an officer or other agent) Actual authority Apparent(ostensible) authority Express Implied

Actual authority: Indirectly(through an officer or other agent) Actual authority Express Implied Appointment to particular position in company; s129(2) Resolution of Board Special authorisation? From words or conduct of company

Corporations Act, s126(1) • Agent exercising a company’s power to make contracts “(1) A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal. “

Who has authority to act for a company? • A person has authority to act for a company if she or he has: • Actual authority • express, or • implied • Apparent authority

What is actual authority? • Where the principal has actually agreed that the agent can act on the principal’s behalf • Express actual authority • can arise from a provision in the Corporations Act 2001 or the company’s constitution - eg s198A • can also arise when a company agent (eg the board) who has actual authority delegates some of their own actual authority

What is actual authority? (ctd) • Implied actual authority • actual authority can arise by implication from things the principal says and does • eg appointing someone to a certain position • CEO - carries with it the implied actual authority to do all things that fall within the usual scope of that office • other executive officers • a director, acting alone - no implied actual authority to bind the company in contracts • chairperson - same as director acting alone (but check whether chairperson is also an executive officer) • company secretary - administrative matters

What is actual authority? (ctd) • Implied actual authority • Can also arise from other conduct - eg “acquiescence” • If board knows that someone is purporting to represent the company, and does nothing to stop that, then board has “acquiesced” • If the person has been doing “CEO type” things, then will probably have the implied actual authority of a CEO in a similar company: “de facto CEO” • Brick and Pipe v Occidental

What is apparent authority? • Can arise even where the principal has not in any way (words or conduct) agreed that the agent can act on the principal’s behalf • Three requirements (at common law): • a “holding out” (or “representation”) - can be words or conduct • by someone with actual authority - apparent authority not enough: Crabtree-Vickers • reliance - outsider must be “induced”

Enforcing defective contracts • Where company denies it is bound by a contract due to some lack of authority or defect in procedures • Policy issue: Need to balance the competing interests of • outsiders dealing with companies; and • innocent shareholders and creditors of companies

How companies contract: Indirectly(through an officer or other agent) Actual authority Apparent(ostensible) authority Express Implied Resolution of Board Special authorisation?

Where defective contract made through an agent • Situation: Purported agent either: • has no express actual authority, or • has express actual authority that is too narrow for this contract • What can outsider do? • At common law: • Did the purported agent have enough (i) implied actual authority, or (ii) apparent authority? • Will “indoor management rule” assist?

Where defective contract made through an agent (ctd) • What can outsider do? (ctd) • Can any of the “statutory assumptions” be made? - s128, s129

At common law • Indoor management rule • outsider can assume that: • no procedural defects in appointment of directors • board meetings have been properly called and held • any board or general meeting approval required under constitution/replaceable rules has been obtained • but probably cannot assume that a single director has been appointed CEO - need a representation

At common law (ctd) • Exceptions to indoor management rule: • “actual knowledge” • “put on inquiry” • has outsider failed to make inquiries that would usually be made by someone in their position? • would a reasonable person in outsider’s position have been put on inquiry and investigated? • Northside Developments v Registrar-General • Story v Advance Bank Australia Ltd

Northside Developments Northside (owner of land) Barclays Bank Mortgage - to secure loans to Sturgess companies loans Sturgess companies [ No benefit to Northside from the loans]

Story v Advance Bank Australia Ltd(1993) 31 NSWLR 722; 10 ACSR 699; 11 ACLC 629 Fleetwood Star (owner of property) Advance Bank Mortgage - to secure loan to Mr Story loan Mr Story [ Fleetwood Star received part of loan proceeds, through Mr Story ]

The statutory assumptions • s128, s129 • Overlap to large extent with common law agency principles and indoor management rule • s129(2) • Assumption about authority of certain officers • s129(3) • Assumption about apparent authority

The statutory assumptions • s129(2) Director or company secretary “(2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.”

The statutory assumptions • s129(3) Officer or agent “(3) A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.”

The statutory assumptions (ctd) • s129(1) • The statutory indoor management rule • Constitution and replaceable rules complied with “(1) A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.”

The statutory assumptions (ctd) • Limitation on statutory assumptions where outsider “knew” or “suspected” assumption was incorrect - s128(4) “(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.” • probably narrower than the common law “put on inquiry” exception - where outsider had no subjective suspicions, and was just negligent

Where defective contract made by company directly • What can outsider do about defect in “formal authority”? • Where common seal has been used - s129(6) • Where no use of seal - s129(5) • What can outsider do about defect in “substantive authority”? • s129(5), s129(6) will not assist • use common law agency principles or statutory assumption in s129(3)

Defective contract made directly • Document duly executed without seal “(5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.”

Defective contract made directly • Document duly executed with seal “(6) A person may assume that a document has been duly executed by the company if: (a) the company’s common seal appears to have been fixed to the document in accordance with subsection 127(2); and (b) the fixing of the common seal appears to have been witnessed in accordance with that subsection.”

Defective contract made directly • Document duly executed with seal (ctd) “For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.”

Corporations Law 1: Authority to act