Company Directors And Their Authority: Can An Outsider Sue The Company For A Contract Established By An Agent Director?

Can the outsider sue the company for the contract that is established by William?

If Harry was never appointed as Managing Director, will it affect the status of the contract that is entered by William?

A company is an entity which is established by registration under the statutory enactment and must comply with the Corporation Act 2001.  To run any business there is need of effective personnel’s. The need in the case of company further arises because a company is an artificial person who works  with the help of real persons[1].

The company Directors is the company officers who are assigned with the tasks of running the company and its smooth administration. The recognition to Directors is provided under section 9 of the Act and a person is a director who is placed at such a position. Shadow directors and de facto directors are also considered to be the company directors not because they are positioned at such a place but because they are carrying out all the duties and responsibilities that are associated with the seat of a director and is held in Natcomp Technology Australia Pty Ltd v. Graiche[2]. Thus, they are considered to be a deem director. But, no person who is bankrupt can be placed at a position of director under section 206B of the Act and is held in Re Ansett[3].[4]

Another director who is assigned to carry out the management of the company are called Managing Director of the company. Section 198A of the Act empowers the managing director to run the company. Section 198D of the Act also empowered the directors to delegate their duties to other directors or to any other person. So, managing director has the power to delegate his tasks to any other person who acts like an agent of the company and can establish contract on behalf of the company provides the tasks are delegated to him under section 198D of the Act.  and is held in Deputy Commissioner of Taxation v Austin[5].[6]

Thus, a person when designated with the directorial functions can bind the company if he posses authority to do so and is held in Hely-Hutchinson v Brayhead Ltd[7]. An authority that can be granted under section 198D can be of two kinds:[8]

When the principal assign the tasks to his agent expressly either by words or conduct or he may also assignee the tasks by conduct then such kind of delegation is called Actual authority that is posses by an agent through his principal. When the assignment of the authority is directly provided by a principal to his agent comes within the preview of this authority and is held in Bell v Australian Eagle Insurance Co. Ltd[9]

Relevant Law

When the principal dories not gave authority to an agent director but he makes a representation in front of an outsider which portrays an image that the person is the agent of the principal and is capable to establish a contract with him. This kind of authority is apparent or ostensible authority and any task that is undertaken under such authority is also binding upon the principal and is held in Thames Cruises Ltd v George Wheeler Launches & Another[10].

The contract are only binding providing the outsider is not aware of the defect if posed within the authority that is provided by the principal to an agent.

William is bankrupt as per the facts of the case and thus he is prohibited to become the company director under section 206B of the Act.

Harry is the Managing Director of the company and is authorized to govern the company as per section 198A of the Act. He is also authorized to delegate his tasks to any other person as per section 198D of the Act. He by pursuing his power under section 198D has delegated his power to make contract to William. Though William is not empowered to become the company director directly but is regarded as a company agent under section 198D of the Act.

Harry has delegated his power to William directly and empowered him to negotiate contract but does not enter into the contract. But he makes a representation in front of third party that William has power to make contract, thus, an ostensible authority is created by harry towards William in front of third party.

Now, William has established a contract with such third party and such contract is valid and enforceable under the ostensible authority of William.

If Harry was not the appointed Managing director of the company, however, he still can be presumed to be one as de facto directors are given recognition under section 9 of the Act. Since harry was carrying out all the tasks of an Managing director thus he will be a deem managing detector and the position of William and the contract established by him will not be affected by the deem position of Harry.

William has made a valid contract within his ostensible authority. The status of the contract and William will not be affected if harry is not a managing director as he will be considered as a deem managing director under section 9 of the Act.

Conclusion

The company once incorporated has to carry out various tasks and activities. These tasks and activities are carried out after complying with many internal proceedings and activities. When any contract is made by the company with the third parties then a third party or an outsider cannot check whether these internal regulations are met or not because they does not have access to the same. So, if any contract is made by the company director for which he is not authored or for which no required approval are met then such contracts will not be approved by the company and it will be a great setback for such third party.

So, to protect such third parties or outsider, the corporation Act 2001 has laid down few presumptions which can be availed by him. The same are:

1. Every outsider who is dealing with the company can make few assumptions which are mention under section 129 of the Act. this power is granted to an outsider under section 128 (1) of the Act and is held in Gye v McIntyre[11].
2. The assumptions under section 129 of the Act can even be availed if a forgery is committed by the officers of the company and this power is enshrined under section 128 3) of the Act and is held in South London Greyhound Racecourses Ltd v Wake[12]

• Section 12 assumptions can only be availed provided the same are assumed by an outsider in good faith and no knowledge of the discrepancies and is rightly held in section 128 (4) of the Act;

1. The assumptions under section 129 includes:
2. That all company provision must have been complied with (section 129 (1) of the Act);
3. That all officers and directors are duly appointed - section 129 (2) of the Act;
4. All formalities are met before an agent is appointed[13]- section 129 (3)-(4) of the Act.
5. If any document is signed by two directors or a secretary nd director with company seal or without company seal then the document are validly executed – section 129 (5) –(7).[14]

A company has two directors and shareholders, that is, Maria and David. Maria is in need of money so she desire to secure loan from Bank for worth $100,000. A guarantee has to be issue to bank, so, Maria forged the signature of David and put her own name and executed a guarantee in the name of the bank in order to obtain loan.

Now, the signature of David was forged. As per section 128 (4) the assumptions under section 129 can be made by bank even if the document is forged. So, since the guarantee is soigné by both the directors, so the bank can assume that the document must have been validly executed as per section 129 (5) –(7), so, the assumptions can held the document to be variedly executed.

The assumptions can not to be availed only when the outsider is aware that there is defect that is caused by the directors.

Conclusion

It is thus submitted that Maria has forged the guarantee by outing down his own name and the signatures of David. However, Bank can rely under section 128 (4) and section 129 (5)-(7) and hold that the guarantee is valid in nature and thus can sue the company for the recovery of loan.

Reference List

Books/Articles/Journals

Chapple, L & Lipton, P, ‘Corporate Authority And Dealings With Officers And Agents’,  The Centre for Corporate Law and Securities Regulation (2002).

Groves, M and  Lee.P. H, ‘Australian Administrative Law: Fundamentals, Principles and Doctrines’ (Cambridge University Press, 24-Sep-2007).

Top of Form

Bottom of Form

Latimer, Paul, ‘Australian Business Law 2012’ (CCH Australia Limited, 2012 ).

Plessis, Jean du, James McConvill, Mirko Bagaric, ‘Principles of Contemporary Corporate Governance’  (Cambridge University Press, 28-Jul-2005).

Case laws

Bell v Australian Eagle Insurance Co. Ltd , (1990).

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975).

Deputy Commissioner of Taxation v Austin (1998).

Gye v McIntyre (1991).

Hely-Hutchinson v Brayhead Ltd [1968].

Natcomp Technology Australia Pty Ltd v. Graiche (2001).

Pyramid Building Society v Scorpion Hotels Pty Ltd (1996).

Re Ansett (1991).

South London Greyhound Racecourses Ltd v Wake [1931;

Thames Cruises Ltd v George Wheeler Launches & Another, [2003]

[1] L. Chapple & P. Lipton, ‘Corporate Authority And Dealings With Officers And Agents’,  The Centre for Corporate Law and Securities Regulation (2002).

[2] Natcomp Technology Australia Pty Ltd v. Graiche (2001)..

[3] Re Ansett (1991).

[4] Paul Latimer, ‘Australian Business Law 2012’ (CCH Australia Limited, 2012 ).

[5] Deputy Commissioner of Taxation v Austin (1998).

[6] M Groves and  H. P. Lee, ‘Australian Administrative Law: Fundamentals, Principles and Doctrines’ (Cambridge University Press, 24-Sep-2007).

[7] Hely-Hutchinson v Brayhead Ltd [1968].

[8] Jean du Plessis, James McConvill, Mirko Bagaric, ‘Principles of Contemporary Corporate Governance’  (Cambridge University Press, 28-Jul-2005).

[9] Bell v Australian Eagle Insurance Co. Ltd , (1990).

[10] Thames Cruises Ltd v George Wheeler Launches & Another, [2003].

[11] Gye v McIntyre (1991);

[12] South London Greyhound Racecourses Ltd v Wake [1931.

[13] Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975)

[14] Pyramid Building Society v Scorpion Hotels Pty Ltd (1996)