Table of Contents
Class 1: Introduction to the Corporation and Incorporating Under Australian Law ... 1
Class 2: Different Forms of Business Associations ... 7
Class 3: The Implications of Separate Legal Personality ... 10
Class 4: The Corporate Constitution and Decision Making by the Board of Directors ... 15
Class 5: Decision Making by the General Meeting ... 17
Class 6: Contractors Without Outsiders ... 19
Class 9: Directors Duties Under Statute and Common Law ... 28
Class 10: Director Duty to Act in Good Faith and For a Proper Purpose ... 36
Class 11: Director Duty of Care ... 47
Class 12: Director Duty to Avoid Conflicts ... 63
Class 13: Other Directors’ Duties ... 79
Class 14: Remedies and Enforcement... 99
Class 15: Statutory Derivative Actions ... 108
Class 16: Winding Up and Administration ... 114
Class 17: Corporate Liability ... 123
19 - 1. Obligation is not to give every piece of information that would be required
o a. Indicate the information which director thinks shareholders should have, plus information which it would be obvious to the average commercial reader that they should have (Buttonwood Nominees Pty Ltd v Sundowner Minerals NL)
o b. Adequacy is assessed in a practical & realistic way having regard to the complexity of the proposal (Frazer v NRMA Holdings
- 2. Information cannot be “tricky” such as misleading or deceptive
o a. Information presented must be ‘fairly presented, reasonably accurate and not misleading’ (Bancorp Investments Ltd v Primac Holdings Ltd)
o b. An expression of an honest opinion does not amount to a misrepresentation or even to inaccuracy if the opinion, even if objectively wrong, is stated as an opinion (Peters’ American Delicacy Co Ltd v Heath) o c. Information will be misleading if whilst the information is literally true, it is framed to misleading readers
as to their meaning or effect (Baillie v Oriental Telephone and Electric Co Ltd) - 3. There are more onerous obligations when the directors stand to benefit
o a. Where directors have an interest in the subject matter of the resolution or may derive a benefit form its passing they must make full and true disclosure of benefits which any director may derive(Chequepoint Securities Ltd v Claremount Petroleum)
- 4. Information must be clear and intelligible
o a. Information must be of a clarity and intelligibility that “those who run may read it” – the ordinary reader who scans or ready quickly will be fully informed as to the matters on which they are asked to vote (Alexander v Simpson; Re Marra Holdings)
i. Shaped by audience – e.g. different standards may apply to a small & financially sophisticated shareholder group than one with a large membership with mixed financial & business experience.
o b. Where information is complex it may be necessary to be selective and only present information which is likely to be useful (Fraser v NRMA Holding)
Class 6: Contractors Without Outsiders
The Authority of Corporate Agents to Bind the Company Problems Facing Those Who Deal with Companies
- Persons acting under the express or implied authority of a company can contract in the name or on behalf of the company in the same manner as if that contract were made by a natural person (s 126)
- When an organ (i.e. director or general meeting) contracts in the name of the company, its act is the act of the company itself which contracts directly by its organ
o Comparatively, when the company contracts through an agent whose act is an act for, BUT not of, the company
- The four doctrines/provisions that provide the foundation of corporate liability in this context are:
o The doctrine of actual authority;
o The doctrine of ostensible authority;
o The indoor management rule; and o Sections 128-129 of the Act
o Note: The protection or authority provided under each of the four doctrines is cumulative so that the absence of one species of authority will not preclude recovery upon another ground
The statutory scheme DOES NOT supplant general law doctrines but provides a complementary body of agency authority
Actual Authority
- Actual authority may be express OR arise by implication
o Implication arises by the appointment to a particular corporate office (e.g. that of managing director, secretary or sales manager) (Northside Developments Pty Ltd v Registrar-General, 205)
o The implied actual authority deriving from appointment to a corporate office may be diminished or even negated by express limitations
o Conversely, the implied authority of office may be expanded by:
Express grant; or
The conduct of the parties to the agency (Hely-Hutchinson v Brayhead Ltd)
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd Principles Diplock LJ
- Actual authority and apparent authority co-exist and coincide
o However, either may exist without the other and their respective scopes may be different
- An ‘actual authority’ is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties
20 o Its scope is ascertained by applying ordinary principles of construction of contracts (including any proper
implications from the express words used, the usage of the trade, or the course of business between the parties)
o If an agent enters into a contract pursuant to ‘actual’ authority, it creates contractual rights and liabilities between the principal and contractor
- In ordinary business dealings, the contractor at the time of entering into the contract, can in the nature of things hardly ever rely on the ‘actual’ authority of the agent
o The contractor’s only information about the agent’s ‘actual authority’ is from the representation of the principal (i.e. apparent authority) or the representation of the agent (i.e. warranty of authority’)
This is because only the agent and principal know what the agent’s actual authority is
Hely-Hutchinson v Brayhead Ltd
Facts - S was chair and MD of Perdio and held substantial equity in the company
o When Perdio was seeking financial assistance, Brayhead acquired shares and injected funds into it. S also joined Brayhead’s board
- R (the chairman of Brayhead) later urged S to put more money into Perdio. S agreed on the basis that Brayhead provide him an indemnity and guarantee
o The indemnity and guarantee were provided in letters signed on Brayhead’s behalf by R o However, letters were NOT given pursuant to a board resolution
- Perdio went into liquidation and Suirdale claimed both indemnity and the guarantee
o Brayhead denied liability, alleging that R had no authority to write the letters and S, being a Brayhead director, had notice of that want of authority
Reasoning Lord Denning
- Actual authority may be express OR implied
o It is express when it is given by express words
For example, when a board of directors pass a resolution which authorises two of their number to sign cheques)
o It is implied when it is inferred from the conduct of the parties and the case’s circumstances For example, when the board of directors appoint one of their number to be MD
• They impliedly authorised him to do all such things as fall within the usual scope of that office
- Actual authority (express or implied) is binding as between:
o The company and the agent; and
o The company and others, whether they are within the company or outside it
- Held that R had actual authority, such authority being implied from the circumstance that the board knew of and had acquiesced in his acting as their chief executive and committing Brayhead to contracts without the necessity of sanction from the board
o Implied authority thus not from the nature of R’s office as chairman but from acting as de facto MD and CEO
Ostensible Authority
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd
Facts - K agreed with H to form a company for property development, which K and H were to subscribe in equal shares o K and H were to be directors together with a nominee each
o Despite these formal arrangements, the parties regarded the transaction as a loan by H to K
- H went abroad before the incorporation of the company and after incorporation, many board meetings were held without H
- K later instructed the plaintiffs (a firm of architects) to assist professionally in developing the estate
o Despite H’s return to the country, he was not consulted about the decision and there was no minute of any board resolution authorising the plaintiff’s employment
- On the face of it, they were acting for K personally
o However, the plaintiff’s evidence indicated they were instructed by K on behalf of the defendant company
Reasoning Diplock LJ
- An ‘apparent’ or ‘ostensible’ authority is a (1) legal relationship between the principal and the contractor (2) created by a representation, made by the principal to the contractor, intended to be and (3) in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of the kind within the scope of ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract
o For ostensible authority, the agent may be aware of the principal’s representation but must not purport to make the agreement as principal himself
21 o The representation, when acted upon by the contractor by entering into a contract with the agent,
operates as an estoppel, preventing the principal from asserting that he is not bound by the contract o Irrelevant whether the agent had actual authority to enter into the contract
- The commonest form of ostensible authority is representation by conduct, which occurs by permitting the agent to act in some way in the conduct of the principal’s business with other persons
o The principal represents to anyone who becomes aware that the agent has authority to enter on the principal’s behalf into contracts with other persons of the kind which the agent has usually ‘actual’
authority to enter into
- Under the doctrine of ultra vires, the limitation of the capacity of a corporation by its constitution to do any acts is absolute
o A representation of ostensible authority thus cannot be relied upon by an outsider to estop the
corporation from denying the agent’s authority to act on the corporation’s behalf as the corporation had no such power in the first place
o Note: For companies incorporated under CA, primary limitations are memorandum and articles of association
- A corporation cannot do any act, and that includes making a representation, except through its agent
o Thus, to create an estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his ‘apparent’ authority MUST BE MADE by some person(s) who have ‘actual’ authority to make the representation
o Where the agent upon whose ‘apparent’ authority the contractor relies has NO ‘actual’ authority to enter into a particular kind of contract with the contractor on the corporation’s behalf, the contractor cannot rely upon the agent’s own representation as to his actual authority
- Four conditions must be fulfilled to entitle a contractor to enforce against a company a contract entered into on its behalf by an agent who had no actual authority to do so, which are:
o That a representation that the agent had authority to enter on the company’s behalf into a contract of the kind sought to be enforced was made to the contractor;
o That such representation was made by a person(s) who had ‘actual authority’ to manage the company’s business either generally or in respect of those matters to which the contract relates’
o The contractor was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and
o That under its memorandum or articles of association, the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent
Note: this has been eroded by statute
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd
Facts - CV sued ADMA for damages for breach of contract from alleged sale of printing machine to ADMA
- The contract was alleged to be in writing and consist of ADMA’s printed order form requesting CV to supply the machine for the price of $211,000
- The order form, which was acceptance of an earlier written offer by CV, was headed with ADMA’s name and at the bottom bore B’s printed signature but the signature of P (B was described on the form as ‘public officer’)
o B Jr was the MD of ADMA and B Sr was the chair of directors
o However, Peter (the signee) had been a director but had resigned following his bankruptcy - SC found Peter had no actual authority to make the contract on behalf of ADMA
o Additionally, found that it impossible to suppose that a director with no designated appointment but acting as one of the company’s three principal executives could have inherent authority to purchase a press costing over $200,000
Reasoning Gibbs, Mason and Jacobs JJ
- A person with no actual, but only ostensible, authority to do an act or to make a representation cannot make a representation which may be relied on as giving a further agent an ostensible authority
o The person(s) making the representation must have actual authority to make the representation - Because B Jr on his own had no actual authority to make the representation that Peter had ostensible authority,
the only question is whether the board gave Peter authority
o This is not the case as B Sr didn’t hold out his sons as having full executive power or make any representation that Peter had authority
Indoor Management Rule
- Rule protects third party contractors from the effect of irregularities in the company’s internal management Royal British Bank v Turquand
Facts - P lent money to D on the security of a bond signed by two directors and bearing the company’s seal
22 o The company’s deed of settlement authorised directors to grant bonds only when authorised by a
resolution of the general meeting
o The company pleaded that there had been no such resolution Reasoning Jervis CJ
- Dealings with these companies are not like dealings with other partnerships parties dealing with them are bound to read the statute and the deed of settlement (but no more)
o However, a party, on reading the deed of settlement, would NOT find a prohibition from borrowing, but a permission to do so on certain conditions
o Finding that the authority might be made complete by a resolution, parties have the right to infer the fact of a resolution authorising that which on the face of the document appeared to be legitimately done - Persons dealing with a company has constructive notice of the requirements of its memorandum and articles of
association
Northside Developments Pty Ltd v Registrar-General
Facts - ND (appellant) incorporated for the purpose of holding certain land and was the registered proprietor of this land - Appeal concerned a mortgage made in favour of Barclays to secure a loan to companies owned or controlled by
ND’s director (R)
o The mortgage was executed under common seal of R and his son (G), who purported to sign as company secretary
o ND had no interest of any kind in those companies
o Following default, Barclays sold the land to a third party who became the registered proprietor - ND sued RG for damages under s 127 of the Act by way of compensation for loss of its estate or interest in the
land on the ground that it did not execute the mortgage instrument
- Articles of the association said the seal must be kept safely and should be used only in the presence of directors with their approval and should be countersigned by the secretary or a second director. Articles not complied with in two respects:
o Directors had not by resolution at a meeting authorised the affixing of the seal to the instrument of mortgage or delegated power to R
o G was not in fact the company secretary Reasoning Mason CJ
- According to the rule in Turquand’s case (i.e. the indoor management rule), persons dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and are not bound to inquire whether acts of internal management have been regular
o The ambit of the rule’s operation is to be ascertained by reference to the actual or ostensible authority of the agent who purports to act on the company’s behalf
o In applying the rule, account must be taken of the doctrine of ultra vires and the company’s constitution and the contents of its public documents as they may affect the actual or ostensible authority of those who purport to act on the company’s behalf
Thus, if according to the company’s constitution, the agent cannot exercise the relevant authority, his act cannot bind the company
- Affixing the company’s seal is a corporate act, having similar effect to a signature
o Consequently, if the person dealing with the company receives a document to which the common seal has been affixed in the presence of individuals designated in the articles of association, he is entitled to rely on its formal validity
- The Turquand’s rule CANNOT be invoked if the claimant is put upon inquiry
o If the nature of the transaction is such as to excite a reasonable apprehension that the transaction is entered into for purposes apparently unrelated to the company’s business, it will put the person dealing with the company upon inquiry
o Circumstances that may put an individual on inquiry include:
The powers of the company (if relevant);
The nature of its business;
The apparent relationship of the transaction to that business;
The actual or apparent authority of those acting or purporting to act on the company’s behalf;
and
The representations about the transaction made by such persons Dawson J
- The indoor management rule DOES NOT APPLY where:
o There are suspicious circumstances sufficient to place a person dealing with the company upon inquiry;
or
o A document sealed or signed on the company’s behalf is forgery
23 Relevant forgery is where the company’s authentic seal is affixed without authority (actual or ostensible)
- The indoor management rule can only be used if it can be established independently that the person purporting to represent the company had actual or ostensible authority to enter into the transaction
- The existence of an article under which authority might be conferred, IF IT is known to the outsider, is a
circumstance to be taken into account in determining whether that person is being HELD OUT as possessing that authority
o There must, however, be something more than the mere existence of a power within the articles upon which to base an apparent exercise of authority which will bind the company
The company will hold the person out as having the authority to act as agent if it either expressly represents that he is so authorised or permits him to act as if he were so authorised, particularly where it permits him to act in a position which ordinarily carries such authority with it
o Knowledge on such an article is not essential for the application of the indoor management rule where apparent authority can be established without reliance upon it
- Indoor management rule does not apply to forgery that involves a counterfeit signature or seal
o The indoor management rule applies only to irregularities that otherwise might affect a genuine transaction
o Nevertheless, if a company represents that a counterfeit signature or seal is genuine, it may be estopped from denying its authenticity
- Authority to affix the seal is NOT the same thing as authority to determine the documents to which the seal should be affixed
o The document will be forgery if individual does not have the latter authority Ostensible Authority
- The secretary’s authority ordinarily extends to countersigning the affixation of the company’s seal pursuant to a resolution of the board
o They have no apparent authority to enter into commercial transactions upon their own decision, save for transactions of an administrative kind required for the day to day running of the company’s affairs - A managing director may have wide powers, actual or ostensible
- An ordinary director does not have ostensible authority to bind the company
The Statutory Assumption Protecting Those Dealing with Companies
- While the coverage of the statutory provisions substantially overlaps with the general law doctrines, they are not identical in their coverage and effect and do not displace the operation of these doctrines where they are not expressed in the statutory rules (Australian Capital Television Pty Ltd v Minister for Transport and Communications, 525)
- Section 129 states ASSUMPTIONS that contractors (persons dealing with a company or acquiring title to property from it) are ENTITLED to make:
o Entitles a contractor (person dealing with a company) to assume that, at all relevant times, the company’s constitution and any replaceable rules that apply to the company have been complied with (s 129(1)) o Entitles a contractor to assume that a person who appears from returns lodged with ASIC to be a director or
secretary has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director or secretary of a similar company (s 129(2))
To obtain the assumption’s benefit, not necessary that the contractor consult and rely upon the returns (Lyford v Media Profile Ltd)
Where a director or secretary resigns, they must give written notice of the fact to ASIC (s 205A) The company must also lodge with ASIC notice of such changes within 28 days (s 205B) and update annually the publicly available information held by ASIC (CH 2N)
o Entitles a contractor to assume that a person who is held out by the company to be an officer or agent of the company has been duly appointed and 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 (s 129(3)) S 129(3) does not require the holding out to be by a contractor (although it ordinarily will be) o Entitles contractors to assume that the company’s officers and agents properly perform their duties to the
company (s 129(4))
Restates general law presumption of the regular and proper performance of directors’ acts
Powers must be exercised honestly in furtherance of the purposes for which they are given (Richard Brady Franks Ltd v Price, 142)
o Entitles a contractor to assume that a document has been duly executed by the company if it bears what appears to be an impression of the company seal and the sealing appears to have been witnessed by two directors or by a director and secretary (s 129(6)); and
o Entitles a contractor to assume that an unsealed document has been duly executed by the company if it is signed in accordance with s 127(1) (i.e. two directors or a director and secretary) (s 129(6))
24 o Entitles a contractor to assume that a contractor or company agent who has authority to issue a document or
a certified copy of a document on behalf of a company also has authority to warrant that the document is a genuine or a true copy (s 129(7))
The company will thus be unable to escape liability for a false document issued by an officer or agent whom it has authorised to issue another document since the contractor is entitled to assume a warranty of authenticity by the officer
- S 128 details individual’s entitlement to making assumptions under s 129
o The company is not entitled to assert in proceedings in relation to the dealing that any s 129 assumption is incorrect (s 128(1))
The concept of having dealings with the company embraces purported dealings and does not apply only to situations where the person representing the company has actual authority (Story v Advance Bank Australia Ltd, 733)
However, the person must at least have authority to undertake some negotiation or other steps so that they are considered to be dealings with the company
o The assumption may be made even if the company officer or agent is acting fraudulently or forges a document in connection with the dealing (s 128(3))
o A person is not entitled to make an assumption if, at the time of the dealing, they know or suspected that the assumption was incorrect (s 128(4))
The material time for applying s 128(4) is when the transaction was made (Barclays Finance Holdings Ltd v Sturgess, 662)
For s 128(4), actual knowledge or actual suspicion is necessary (Soyfer v Earlmaze Pty Ltd, 662) S 128(4) places the burden on the company to establish the person’s subjective knowledge or suspicion that the s 129 assumptions relied on were incorrect (Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd, [178])
In this context, a suspicion that something exists is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’ (Queensland Bacon Pty Ltd v Rees, 303)
- The Court may TAKE INTO ACCOUNT what a hypothetical reasonable person in the same position would have drawn from the facts known and then PRESUME that the actual person relying on the assumptions in s 129 would have reached the same conclusions (Eden Energy Ltd v Drivetrain USA Inc, [85]) (i.e. objective element)
o Where opportunity for knowledge on the part of D are proved and there is nothing to indicate that there are obstacles to the person acquiring the relevant knowledge there is some evidence from which the court can conclude that such a person has the knowledge (RCA Corporation v Custom Cleared Sales Pty Ltd, 126) o However, conclusions using this principle may be EASILY overturned by (RCA Corporation v Custom Cleared
Sales Pty Ltd, 126):
A denial on D’s part of the knowledge, which the court accepts; or
A demonstration that D is properly excused from giving evidence of his actual knowledge
- The CL doctrine of constructive notice of registered company documents is abolished except for documents relating to a registrable charge given by the company (s 130(2))
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
Facts - A deed was executed under seal by B&P to company O, which guaranteed repayment of moneys advanced to a related company by O
o The seal was attested by two directors, G (MD) and F, with the latter saying they were secretary as the B&P’s constituted required a director and a secretary
F had not been appointed secretary
O was aware that F’s name was not showing as secretary on the ASIC company notice but received verbal assurance from D that F had been duly appointed
o The deed’s execution had taken place without knowledge of other directors and without any board consideration of the transaction
- B&P tried to argue that the agreement was unenforceable by reason of its irregular execution Reasoning McGarvie, Marks and Beach JJ
Holding Out
- An ordinary individual director of a company does not have ostensible authority to bind the company o However, G had actual authority in accordance with the Hely-Hutchinson principle
- In remaining silent when D gave the assurance that F was secretary of all guarantor companies, G is to be regarded as concurring in assurance on behalf of all guarantor companies on whose behalf he had power to concur
Assumption a Director
- In relation to s 128(4), what amounts to ‘actual knowledge’ is largely dependent on the facts and circumstances in a particular case and the inference they allow
- The s 129(6) assumption is discrete and confined to due sealing
25 o The legislature could not be taken to have intended that an assumption as to due sealing is not available
in circumstances where there was actual knowledge of non-compliance with articles not concerned with authority to fix the company seal and attest it
- The mere fact that D signed as ‘secretary’ when they were not, may not in all circumstances shut out entitlement of a party to rely on the fact that he was a director according to the notice for ASIC for the purposes of assumption in 129(6)
o The mere presence of the word ‘secretary’ opposite the signature of a person known not to be secretary DOES NOT necessarily mean that the document has not been duly sealed and that a party seeing it thereby has ‘actual knowledge’ that the assumption is incorrect
o The criteria of the s 129(6) assumption do not include any requirement that a signatory must fit his or her description on the document
o A party may be entitled to make the s 129(6) assumption if the criteria are met notwithstanding the presence of a wrong designation of the post held by a signatory
The wrong designation is still relevant as It may establish ‘actual knowledge’ within the meaning of s 128(4) that the document had not indeed been ‘duly sealed’
Validation of Directors’ Acts Under Defective Appointments
- The Act provides that an act done by a director or secretary is effective even if their appointment or its continuance is invalid because the company or director did not comply with the company’s constitution or the Act (ss 201M, 204E)
o The subsection validates acts, but not the defective appointment itself
o The act must have been done before discovery of the fact that there is a defect AND the person relying on the section must have acted in good faith and not have been put on inquiry
o The section cannot be invoked if there has been no purported appointment at all (Morris v Kanssen)
- The kinds of acts validated by these sections are those that are legally effective only if the person performing them is a director or secretary
o The provisions do not deal with the question of whether an effective act by a director binds the company in its dealings with other people or makes the company liable to another person (ss 201M(2), 204E(2))
These questions are instead decided by reference to ss 128 and 129 and the general law
TLDR: Need to prove legality of act per s 128/s 129/general law before turning to these principles
PQ Structure for Company’s Liability for Contracts STEP 1A: Was the Contract entered by the Company?
- A company has the legal capacity of an individual, & has body corporate powers which allow it to (s 124(1)):
o a) Issue and cancel shares in company (unless it is limited by guarantee) o b) Issue debentures
o c) grant options over unissued shares
o d) distribute company’s (financial) property among members o e) give security by charging uncalled capital
o f) grant floating charge over company’s property
o g) arrange for company to be registered/recognised as a body corporate anywhere outside juris o h) do anything that is authorised to do under any law (includes foreign laws)
- Execution of documents by the company must follow the following protocol:
o If there is no common seal, it must be signed by (s 127(1)): 2 directors, 1 director + the secretary or for proprietary companies with a sole director who is also the only secretary, that person.
o If there is a common seal. The seal must be fixed to the document and the fixing of the seal must be witnessed by (s127(2)): 2 directors, 1 director + the secretary or for proprietary companies with a sole director who is also the only secretary, that person
o If executed as a deed, the document must be expressed to be executed as a deed and comply with s 127(1) or (2).
STEP 1B: Was the Contract Entered by an Agent?
Substep 1A: Did that Person Have Express Actual Authority?
- EXPRESS: where principal has given consent to agent to act for the principal o 1. Through a board resolution; or
o 2. Through execution of a deed
o 3. This authority can also stem directly from statute or any adopted constitutional rules
The actual authority to act for a company is derived from an organ of the company, & thus the board of directors is the ultimate decision maker (s198A)
For matters outside the board’s authority in the CA or constitution, the ultimate decision maker is the General Meeting of Members (GM can also act as an organ of the company)
26 Express Actual Authority for Directors in Different Types of Corproations
- Proprietary company with one director who is the only shareholder
o The sole director/shareholder can exercise all powers of the company except any CA rules of constitutional rules that require a GM (s 198E(1)) – note, cannot be replaced by constitution
o Extent of the authority
Authority to enter transaction only if it is for the conduct of company’s business
o Includes power to appoint other persons to act for company unless CA/Constitution require director to act personally
- Proprietary company; 1 director; not the only shareholder:
o Sole director will derive power from s 198A (board is the ultimate decision maker) or from a replacement provision in the constitution adopted by co.
- Proprietary company with more than one director and PUBLIC COMPANIES
o The transaction of the board must be one required for the conduct of the company’s business & affairs &
the board is denied any powers in which the CA requires a general meeting (s 198A)
o If company has >2 directors, they must exercise their power collectively If company has several directors, individual directors have no usual authority to bind Company Northside; Brick and Pipe Industries
Express Actual Authority for Special Positions Within the Company
- Managing Director (director and employee of the company (e.g. CEO)) (authority over day to day management) o MD has usual authority over: Entwells Pty Ltd v National and General Insurance Co Ltd (1991)
Day-to-day management (s126) Supervision of Co
Supervision of other managers & general operations
The nature of the Co determines the precise ambit of the usual authority. Nature includes:
(Entwells; Northside)
• Co’s size and
• Type of business o Examples:
MD can engage others to provide services for company (Freeman & Lockyer) MD can authorize agents to perform acts that MD could make (Crabtree-Vickers) MD can borrow on Co’s behalf only if the borrowing for ordinary trading activities
• MD NOT have authority to borrow if it is NOT for day-to-day business activities (Tummon;
Green v Meltzer; Northside)
• NO authority for personal borrowings (Tummon; Northside)
• NO authority for significant loans outside of day-to-day activities (Green v Meltzer) - Chairman (only has authority of individual director)
o Likely have the same authority as a mere individual director (Hely-Hutchinson) o Examples:
Usual authority NOT include individually making business operations/making contracts (Hughes v NM Superannuation)
If company has no MD:
• May have greater authority if Co does not have a MD (Camelot Resources v McDonald)
• May have implied authority as agent if Co always acts according to chair’s wishes o Chairing board meetings & GMs. Sometimes PR work (AWA v Daniels)
- Secretary (make admin contracts)
o Usual authority to sign contracts of administrative nature (Panorama Developments v Fidelis) o NO authority to manage Co [even if Co has no board] (Club Flotilla v Isherwood)
o Cannot institute legal proceedings (Club Flotilla v Isherwood) - Other Executives
o Some people below board level may have implied actual authority (see below) arising from the usual authority attached to their office (AWA v Daniels)
o May also arise from course of prior dealing, conduct (Hely-Hutchison)
Substep 1B: Did that Person Have Implied Actual Authority? (inferred from the conduct of parties and the circumstances of the case)
- Acquiescence: of individual board members and evidence of communication by words or conduct of respective consents to one another and to the agent (Freeman & Lockyer, Hely-Hutchinson). Some examples include:
o Small Co has limited operations and no need for a MD. Person may have implied authority to act as MD (Fiberi)
o Board has become accustomed to allowing the DIR to make decisions (Lockyer)
27 Implied Powers for Different People
- A director in a company with multi directors
o A director by themselves, in a company with multiple directors, has no power to sign a contract o Two directors signing a contract have the power to bind a company
o A director’s power can be expanded or limited by the Company Constitution - Managing Director
o S126: managing director has implied power to sign a contract that deals with the day-to-day management of the company (see also S198(c))
o The managing director’s employment contract and the Company Constitution can limit or expand the managing director’s power
- Company Secretary
o A company secretary has implied power to sign any contract that deals with administration of the company o This can be limited by the Company’s Constitution
- Head of Marketing Department
o Able to sign any contract regarding marketing o This can be limited by the Company’s Constitution - Head of the Financial Department
o Implied authority to sign any contract regarding financial matters o This can be limited by the Company’s Constitution
Substep 1C: Did the person have ostensible authority?
- Three conditions must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent (Freeman v Lockyer) (ss 124-125 of CA), which are:
a. A representation (by someone with actual authority) that the agent had authority to enter into a contract on behalf of the company;
o Express statements
o Silence in relevant circumstances (e.g. remaining silent when knowing that person assumes that they have authority)
This requires that the company had actual knowledge (subjective, but can be inferred from facts) and did not do anything (ascertained by the course of dealings) – wilful blindness not sufficient b. Made by a person/persons with “actual” authority to manage business (Crabtree Vickers v ADMA); AND
o BOARD: board has actual authority to manage business generally. This includes authority to make a representation vis-a-vis management activities
o GM: Members have authority to represent if the rep does not relate to management (Mahony v East Holyford;)
o DELEGATE / AGENT: Agent can make representations about a person’s authority
ONLY IF they have ACTUAL authority to represent, and NOT if they have mere ostensible authority (Crabtree-Vickers)
c. Inducement (requires detrimental reliance – look to facts)
o (the contractor) was induced by such representation to enter into the contract (induced by the person with actual authority e.g. board)
- Note: the fourth element does not apply from Freeman does not apply anymore. It has been eroded by statute (ss 124 – 125)
o Today, a company can enter into any kind of contract regardless of the company’s articles of association or memorandum
Step 2: Consider Whether All Internal Processes Have Been Complied With?
Substep 1A: Indoor Management Rule – Common Law
- Under the general law, a person dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular (Turquand’s case)
o Hence, where a representor represents to the representee that a certain state of things exist, they are estopped from denying that the state of affairs exist
- However, there are cases in which the common law indoor management rule does not apply, including:
o Acts beyond corporate power
o Where the person has actual knowledge of the irregularities (Howard)
o Where the person ‘put on inquiry’ (i.e. the transaction created a reasonable apprehension that it was unrelatedto the business) (Northside)
o Where the transaction requires satisfaction of a Corporations Act requirement and it is possible to get information from ASIC (e.g. GM resolutions) (Irvine) – this abolishes the “closed door” principle – no access to minutes and other internal records
28 - NOTE: at common law, if a seal or signature is counterfeit, the indoor management rule may apply, unless the party
should have been ‘put to inquiry’
Substep 1A: Indoor Management Rule – Statute Law
- Note, that these do not replace the common law assumptions (Australian Capital TV). Under the CA, the following assumptions exist (s129):
o 1. Constitution & replaceable rules complied with
o 2. Directors and secretaries noted in ASIC register are duly appointed with the relevant authority to perform their customary duties 3rd party may rely on the assumption even if he did not in fact rely upon the fact that register recorded the officer’s appointment
o 3. A person held out by the company as an officer or agent will be duly appointed with relative authority to exercise customary powers
a. Holding out may not be TO the person having dealings with the company, but has to be BY the company
b. May cover actual implied authority by previous acquiescence and holding out o 4. Officer and agents properly perform their duties
o 5. Without seal, signing under s 127(1) (execution of document) has been duly executed o 6. Common seal, under s 127(2) is duly executed
o 7. Officer or agent with authority to issue document can warrant that copy is true - HOWEVER: - does not apply if contractor knew or suspected non-compliance
o A person is not entitled to make assumption under s 129 if at the time of dealing they ‘knew or suspected’
that the assumption was incorrect (s 128(4));
• OLD LAW: Prior to s 128(4): ‘Ought to know’ – objective RP test (Bank of NZ)
• NEW LAW: Since s 128(4): ‘Knew or suspected’ – subjective test; suspicion = positive feeling of actual apprehension or mistrust – amounting to slight opinion but without sufficient evidence - At statute, s 128(3) allows assumptions, even if there is a forgery. Also in circumstances where an instrument bears a
genuine seal/signature, but is executed without due authority (valid resolution), it may be described as forgery but the indoor management rule applies (Story)
Step 3: Consider Defective Appointment of Directors
- An Act done by a director/secretary is effective even if their appointment or its continuance is invalid because they did not comply with the company’s constitution or the Act (ss 201M, 204E CA).
o However, this section does not validate defective appointments, only acts
o Acts in question must have been done before discovery of the fact that there is a defence and the person relying on the section must have acted in good faith
o This section cannot be invoked if there has been no purported appointment at all (Morris v Kanssen)
