This article is an update of our article “Consequences of defective execution clauses”.
We often come across situations where a director purports to execute a document on behalf of a company. This article examines how effective that is.
Section 127 of the Corporations Act 2001 (Cth) (Act) sets out the ways in which a company may validly execute a document. In summary, a company may execute pursuant to section 127 with or without a company seal. If a company has a seal, it is not obliged to use it.
The most common form of execution pursuant to section 127 is execution without affixing the common seal of the company. This can be validly done if the document is signed by:
Section 126 of the Act enables an individual acting with the express or implied authority of the company to execute a contract on behalf of the company. A person acting under the express or implied authority of a company may contract on behalf of the company in the same manner as if the contract were made by a natural person.
This raises the issue as to how the company is to exercise the power to grant authority to such an individual. The provisions of the company’s constitution (or, for companies without a constitution, the replaceable rules) will dictate the way in which the company can grant authority to an individual, including enabling them to execute on the company’s behalf pursuant to section 126. Commonly, the constitution will provide that this power resides with the company’s directors (consistently with section 198A of the Act, for companies governed by the replaceable rules).
Issues can arise if a third party seeks to hold the company liable pursuant to a contract made on behalf of the company by a director or officer of the company, namely:
The general laws of agency will determine the question as to whether the agent is personally liable to a third party under the contract when that contract is executed by the agent on behalf of the company.
In some circumstances the third party may rely on certain statutory assumptions pursuant to sections 128 and 129 of the Act. However, section 128(4) of the Act provides that the statutory assumptions cannot be relied on in circumstances in which, at the time of the dealing, the person seeking to rely on that assumption knew or suspected that the assumption was incorrect. The exception applies in circumstances in which the person has actual knowledge or suspicion and not merely where circumstances are such as would put a reasonable person on enquiry.
Further, the statutory assumptions in relation to due execution of documents under sections 129(5) and (6) of the Act are only available where the document appears to have been executed by the company under section 127. For this reason, where a contract appears to have been entered into by a person on behalf of a company, it would be prudent for the other parties to that contract to make enquiries as to the source of the person’s authority, such as requesting sight of a copy of the resolution of the directors authorising the person to sign on behalf of the company, and a copy of the company’s constitution.
In our opinion, the evidentiary requirements to establish the authority of the director to sign on behalf of the company are quite cumbersome. For that reason, we suggest that the company should grant a power of attorney to the director. A copy of that power of attorney can easily be produced as evidence of the director’s power to sign on behalf of the company.
