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Authority of a Company to Enter into Contracts

Question:

Discuss About The Corporate Authority Dealings With Officers?

Although a company is a legal person[1], it is an entity that is abstract in form and its capacity to contract can only be through natural persons’ actions.[2] By virtue of section 126 of the Corporations Act[3], a company possesses the power to enter into contracts through the agency of persons who are acting upon either the implied or express authority of the company. Accounting, contracts are only binding upon a company if they are entered into by agents who have the company’s authority. Normally, parties to such contracts would seek to escape from liabilities that arise from the same. Therefore, it is important to establish that the persons acting as agents have ostensible or actual authority from the company for the contracts to be binding. The organic theory of company law largely governs these kinds of scenarios, which lie beyond the ambit of agency law. However, they draw from agency law.

Michelle and Tim both sign a contract for the purchase of a motorbike with Michelle as director and Tim as company secretary. Michelle wants to opt out of the contract. The issue is whether the contract is binding upon Motorbikes Pty Limited.

In most of the companies with multiple directors, the companies’ constitutions will confer upon the board of directors (collectively) with management powers. The actions of a single director with outsiders will usually not be binding on the company as he lacks implied actual authority.[4] By virtue of a mandatory rule contained in section 198E (1) of the Corporations Act, a proprietary company that has a single director or shareholder is conferred with all of that company’s powers. The company’s constitution can limit such sole director’s actual authority where he is not the sole shareholder. This actual authority is lessened despite the wide powers conferred by section 198A. However, the individual director may possess implied authority to do what a sole director normally does in such a situation. The result is that the implied authority of such a sole director may be wider than their actual authority.[5]  

The authoritative pronunciation in the Panorama Developments case was that company secretaries are not merely clerks any longer but are considered to be companies’ officers with extensive responsibilities and duties.[6] In that case, “chief administrative officer” was the new term that was used to refer to company secretaries. Their authority is implied and they can represent the company in certain matters such as entering into contracts involving internal administration but not management of the company’s daily business. In the celebrated case of Northside Developments Pty Ltd v Registrar-General, the Honourable Court held that the company secretary’s position is conferred with implied actual authority. Such authority is for countersigning the affixed seal of the company and witnessing the fixation of the common seal.

Implied Authority of Agents and the Organic Theory of Company Law

Motorbikes Pty Ltd is a proprietary company that has a single director, Michelle, who is the sole director, and a company secretary, Tim. The law confers upon Michelle as sole director all the powers of the company. Such power includes entering into contracts with outsiders. Tim, as company secretary, is also clothed with ample powers to sign contracts on behalf of the company under the law.

The contract signed by Michelle and Tim on behalf of Motorbikes Pty Ltd for the purchase of a Motorbike is therefore binding upon the company.  

Gerard, who is listed as the director of Cakes Pty Ltd, signs, witnesses and stamps with the company seal a contract to buy a cake shop from George. Sylvia is the other witness to this transaction. George wants to back out of the transaction and the issue is whether he is bound by the contract.

Section 129 (6) provides for the execution of documents with the company seal. It provides that an assumption may be made that a company duly executed a document if the common seal appears to have been affixed and the witnessing done according to the provisions of section 127 (2). This was the holding in the Belven case where the court held that the common seal must “appear to be fixed”.[7] For the assumption to be applicable, an outsider only needs to rely on the fact that the document was signed by the company officers. This was the holding in the MYT Engineering case.[8] In that case, the consent of the company was evidenced by the signature of the directors. In the case of re Efron’s Tie & Knitting Mills Pty Ltd[9] and in Mancini v Mancini[10], the Court held that a director of a company cannot attest to the taxation of a document in two different capacities. This holding as read with section 127 (2) requires two different directors to physically witness the signing of the seal. However, even where an outsider is aware that the company’s constitution was not complied with during the affixing of the seal, he can still make an assumption that the sealing was done accordingly.[11] This was the position in the celebrated deciding of Equiticorp Finance Ltd v Bank of New Zealand.[12]

The general rule is that a Principal is not bound by a contract in which an agent without authority entered as such a contract is absolutely void.[14] The Corporations Act makes provision for outsiders who correctly identify the officers of a company but incorrectly attribute their authority to transact. Sections 129 (2) and (3) provide for statutory assumptions where an outsider may assume that company officers who hold out as such or who are identified from the public record, have the implied authority that the position carries and are duly appointed. Section 201M further provides that mere defective appointments do not invalidate the acts of company officers. For outsiders dealing with officers, sections 198A and 198C are replaceable rules that confer actual authority to those officers. The company constitution also has a similar effect. It is important to note that by virtue of the Common Law doctrine of Constructive Notice, an outsider is expected to have knowledge of the company’s constitution. The implication is that the outsider is deemed to have knowledge of any express limitations on the authority of company officers. Although this rule operated against outsiders dealing with companies, the rule in Turquand’s case provides outsiders acting in good faith with protections in presuming that a company acted within the powers of its constitution without inquiring into the internal management.[15] In some instances, even after reading the constitution of a company, it may not be apparent to an outsider whether an officer of a company operated within his authority. Section 127 (4) provides that section 127 does not limit the manner in which a company executes a document.  

The Authority of the Sole Director and Company Secretary

The general rule is that where a director acts beyond the scope of the interests of the company, their authority of binding the company is affected.[16] The exception is where an outsider had knowledge of the fiduciary breach. Where an outsider knows the breach, then the effects of voidable contracts cannot be escaped even with assumptions of due execution.

Since the contract was signed by Gerard the director and witnessed by Sylvia who was neither the director nor company secretary, George ought to have had knowledge of this fact. Provided that Gerard signed and witnessed the contract and Sylvia also witnessed, she held out as a person in authority.

Hence, the contract is binding and George cannot opt out.

References

Belven Enterprises Pty Ltd v Lydham Pty Ltd (1996) 14 ACLC 1478

Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 6 ACSR 464 at 476

Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253

 Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952

Mancini v Mancini (1999) 17 ACLC 1570

MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 17 ACLC 861, 864

National Australia Bank v Sparrow Green Pty Ltd (1999) 17 ACLC 1,665

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711

 Re Efron’s Tie & Knitting Mills Pty Ltd [1932] VLR 8, 23

Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246

Royal British Bank v Turquand (1856) 6 E&B 327; 119 ER 886

Salomon v Salomon and Company

Statutes

The Corporations Act 2001, (Cth) Australia

Books and Journals

Baxter, C ‘Ultra Vires and Agency Untwined’ (1970) vol. 28 Cambridge Law Journal 280

Ford H, Ford's Principles of Corporations Law, 10th ed (Australia: Butterworths 2001)

Larelle Chapple and Phillip Lipton, Corporate Authority and Dealings with Officers and Agents, (Australia: CCH Australia Limited 2002)

[1] Salomon v Salomon and Company

[2] Larelle Chapple and Phillip Lipton, Corporate Authority and Dealings with Officers and Agents, (Australia: CCH Australia Limited 2002), p.1.  

[3] The Corporations Act 2001, (Cth) Australia.

[4] See Brick and Pipe Industries Ltd v Occidental Life Management Pty Ltd (1991) 6 ACSR 464 at 476.

[5] Ford H, Ford's Principles of Corporations Law, 10th ed (Australia: Butterworths 2001), p.658.

[6] Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711.

[7] Belven Enterprises Pty Ltd v Lydham Pty Ltd (1996) 14 ACLC 1478.

[8] MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 17 ACLC 861, 864.

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