The fundamental rule of law of agency

At common law, any person dealing with a corporation under the assumption that he or she is acting in good faith and without any knowledge about irregularity, such person is not required to make any inquiry about the formality of the internal proceedings of the corporation. Such person must assume that the company is acting in compliance with all the relevant by-laws and articles. This principle is called the ‘indoor management’ rule that was established in the landmark case of Royal British Bank v Turquand. The fundamental rule of law of agency states the actions of the agents bind the principal if such actions are within the apparent, deemed or actual authority of the agent.

Whether Two2’s Pty Ltd is bound by the contract made by Pauline

A contract has a binding effect on the parties signing the legal agreement and a valid contract is enforceable in the court of law.

According to section 125 of the Corporation Act 2001 (Cth) (CA 2001), expressly stipulates that the performance of an act, which includes entering into an agreement by a company, shall not be considered as invalid merely on the ground that it is beyond the power of the constitution of the company.

In Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103, the court observed that a contract shall be binding upon the company only if such contract is properly signed by both the directors of a company. A contract that is rendered as valid shall be enforceable in the court of law. A contract that is not valid shall not be enforceable in court of law and an invalid contract does not have a binding effect on the company signing such contract.

According to section 124 (2) of the CA 2001 states that the legal capacity of a company to enter into a contract is not affected by the fact whether such contract would be in the best interest of the company or not.

According to section 127(1) of the CA Act 2001, a company is entitled to execute a document without using a common seal provided such document have been signed by 2 directors of the company or a secretary and a director of the company. In case of a proprietary company having a sole director, who is also the company secretary, such director of the company may execute a document.  If a document is executed in the above manner, this would enable people to depend on the assumptions stipulated under subsection 129(5) with respect to dealings with the company.

Validity of a contract

As per section 127 (2) of the Act, a company with a common seal may execute a document if the seal is fixed to the document and the fixing of such seal should be witnessed by 2 directors of the company or a company secretary or a director of the company. In case of a proprietary company where the sole director is the secretary as well, such director should witness such fixation of seal. This would enable people to depend on the assumptions stipulated under subsection 129(6) relating to dealings with the company.

In Royal British Bank v Turquand (1856), the court ruled that any person who is dealing and entering into a contract with the company in good faith may make an assumption that such dealing or contract is consistent with the constitution of the company and within the powers as stipulated in the Constitution. 

Further, in the landmark case Northside Developments Pty Ltd v Registrar-General (NSW)(1990), it was held that a representation of authority is conferred upon a person by the company where such person is working on behalf of the company.

According to section 128 of the Act, a person is entitled to make the assumptions under section 129 with respect to dealings with the company. The company is not entitled to make assertions in proceedings with respect to the dealings stating that any of such assumptions were not correct.  

According to section 129(1) of the Act, a person is entitled to assume that the company has complied with the provisions of this Act and the constitution of the company that are applicable to this company as replaceable rules. Section 129 (2) of the Act entitles a person to assume that any person who is considered as a company secretary or a director of the company from the information that is available to the public from ASIC and has also been provided by the company, has been duly appointed. The person may also assume that such director or company secretary is authorized to exercise his or her respective powers and discharge the responsibilities that are usually performed by a director or a secretary of any similar company.

As per section 129(5) of the statute, a person may make assumptions about execution of a document by the company if the document has been signed in the manner prescribed under section 127(1) of the Act. In order to make such assumptions, a person may assume that any person who signs the document and states beneath their signature that they hold the position of a secretary and a sole director of the company are assumed to occupy both offices.

Legal capacity of a company to enter into a contract

Section 129 (6) of the Act states that a person may make assumptions regarding the execution of a document  if the common seal of the company is said to have been fixed to the document in the manner prescribed under subsection 127(2) of the Act. In order to make any assumption, a person is required to assume that any person who witnesses the fixing of the common seal and specifies next to the signature that they are the secretary and sole director of the company shall be assumed to hold both the offices.

On the facts here, the managing director of the Two2’s Pty Ltd is conferred with a broad power to the managing director by the Constitution of the Company. The managing director of the company can enter into a contract on behalf of the company provided the contract amount is not beyond $40000. However, in case the contract amount exceeds the stipulated amount at least two directors of the company must witness it in case the managing director is away on company business for more than 10 days. 

According to section 125 of the Act, if the company enters into an agreement it would amount to performance of an act which shall be valid and cannot be invalidated merely on the ground that it is beyond the power of the constitution of the company. Here, since Collin, the managing director, was away on company business for 15 days, Pauline being anther director signs a contract as director with IT Manufactures Pty Ltd for sum $74,000.

As per the constitution of Two2’s Pty Ltd, if the managing director is away then only two directors are empowered to sign any contract exceeding $40000 on behalf of the company. However, as per section 125 of the Act, the contract with IT Manufactures Pty Ltd is valid as it amounted to performance of an act, which cannot be rendered as invalid only for the reason that it is beyond the power conferred upon the directors by the constitution of the company.

Now, according to section 124 (2) of the CA 2001 states that the legal capacity of a company to enter into a contract is not affected by the fact whether such contract would be in the best interest of the company or not. On the facts here, Colleen is aware of the fact that Sue as the holder of the secretary of the company has signed the contract. Therefore, she is concerned with the fact that the contract with IT Manufactures is a good deal, as the contract will serve the best interest of the Two2’s Pty Ltd.

Assumptions under subsection 129(5) and 129(6)

Now, according to section 127(1) of the Corporations Act 2001,  a company is entitled to execute a document without using a common seal provided such document have been signed by 2 directors of the company or a secretary and a director of the company. As per the facts of the case, Pauline signs the contract with IT Manufactures Pty Ltd as a director and asked Sue to sign the contract as the secretary of Two2’s Pty Ltd despite knowing the fact that Sue does not hold the position of a company secretary. This amounts to the contravention of section 127(1) of the Act. This is because two other directors or a director and a secretary of the company should have signed the contract with It Manufactures when the managing director is away on company business.

Here, Pauline asked Sue to sign the contract as a company secretary as there were no other directors available to sign the contract. She recommended the Board to make Sue the company secretary after the contract was already signed by her. As was observed in Northside Developments Pty Ltd v Registrar-General (NSW) (1990), any person who is working on behalf of the company shall be conferred with the representation authority by the company itself. Here, although Sue was made the company secretary, but she signed the contract as one when she was not holding the post of a company secretary. 

According to Section 129 (2) of the Act entitles a person to assume that any person who is considered as a company secretary or a director of the company from the information that is available to the public from ASIC and has also been provided by the company, has been duly appointed.

Here, the IT Manufactures Pty Ltd is the party dealing with the Two2’s Pty Ltd as it entered into a contract with the company, which was signed, by Pauline and Sue as the director and company secretary respectively. However, IT manufactures did not receive any information from the company and neither there was any information that was available to public from ASIC regarding Sue being the secretary of the Two2’s Pty Ltd. This amounts a contravention of section 129(2) of the Act.

Moreover, section 129(5) of the statute states that a person may make assumptions about execution of a document by the company if the document has been signed in the manner prescribed under section 127(1) of the Act. Further, in order to make such assumptions, a person may assume that the person signing the document and stating beneath their signature that they hold the position of a secretary and a sole director of the company are assumed to occupy both offices.

Analysis of the case of Two2’s Pty Ltd

Here, the contract entered into between Two2’s Pty Ltd and IT Manufactures Pty Ltd that is worth $40000 has not been signed in the manner prescribed under section 127(1) of the Corporations Act (Cth) which requires a document to be executed if a company director has signed it and a secretary of the company. Here, although Pauline is the director of the company but Sue is not the secretary of the company. Furthermore, to make such assumptions under section 129(5) of the Act, the person dealing with the company must assume that the persons signing the document and stating the post they hold that is, of a director and a secretary, holds both the offices.

As per the facts here, despite being aware that Sue was not the secretary of the company, she signed the contract and stated that next to her signature that she held the position of a secretary of Two2 is Pty Ltd.

According to Section 129 (6) of the Act states that a person may make assumptions regarding the execution of a document  if the common seal of the company is said to have been fixed to the document in the manner prescribed under subsection 127(2) of the Act. In order to make any assumption, a person is required to assume that any person who witnesses the fixing of the common seal and specifies next to the signature that they are the secretary and sole director of the company shall be assumed to hold both the offices.

On the facts here, after Colleen returns from England, Sue is made the secretary of the company Two2 Pty Ltd. However, at the time of witnessing the contract the company entered with the IT Manufactures which amounted $74000, the execution of such contract was not witnessed in the manner as prescribed under section 172(2) of the Act, thus contravening section 129 (6) of the CA 2001. This is because execution of document is required to be witnessed by the director and the secretary of the company where in this case, the execution of the contract was witnessed only by one director that is, Pauline and Sue who falsely stated to be the Secretary of the company. 

As observed earlier that section 127 of the Act states that a contract is considered as valid only if it is signed by both the directors of the company or a director and a secretary of the company as was also observed in Frank Australia’s case. Further, as per section 129(1) of the Act, a person is subjected to the assumption that the company has complied with the provisions of this Act and the constitution of the company applicable to this company as replaceable rules. Further, any person is subjected to the other significant stipulated under Section 129 (2) of the Act that from the information available to the public from ASIC and by the company, a person has been duly appointed as a company secretary or a director of the company.

The indoor management rule in Turqland’s case was approved in Mahony v East Holyford Mining Co. The two primary reasons to support the indoor management rule is firstly, it is an unfair imposition on the outsider to demand proof from the directors that they have fulfilled all the relevant requirements of articles and by-laws. Secondly, the continuous duty to verify would be considered as an impractical burden on the business.

However, the only exception to the rule is that it is not applicable where a person dealing with the corporation has actual knowledge about the lack of authority of the director or the officer. Moreover, it shall also not eb applicable under sus[icious circumstances which puts the outsider on notice to inquire about the actual authority of the corporate officer as was stated in B Liggett (Liverpool) Limited v Barclays Bank Limited.

Conclusion

Two2’s Pty Ltd is not bound by the contract made by Pauline. 

Reference List

Corporation Act 2001 (Cth)

Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103

Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146

Royal British Bank v Turquand (1856) 6 El & Bl 327

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Dagwell, Ron, Graeme Wines, and Cecilia Lambert. Corporate accounting in Australia. Pearson Higher Education AU, 2015.

Keay, Andrew. “The public enforcement of directors’ duties: a normative inquiry.” Common Law World Review 43.2 (2014): 89-119.

Overland, Juliette. “Corporate Social Responsibility Reporting and Directors’ Duties: The Australian Experience.” Corporate Social Responsibility in the Global Business World. Springer Berlin Heidelberg, 2014. 135-152.

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