Corporate Law

Week 3:
For Whose Conduct is a Corporation
Responsible?
 A company’s capacity to contract
• A company has the legal capacity and powers
of an individual: s 124(1).

• A company also has all the powers that only a

body corporate can exercise including, for
example, the powers referred to in s 124(1).
 The Relevance of a Company’s Constitution
to Its Legal Capacity
• If a company has a constitution, it may:
a) set out the company’s objects: s 125(2); or
b) contain an express restriction on, or
prohibition of, the company’s exercise of
any of its powers: s 125(1).
• However, an act of a company is not invalid
merely because it is contrary to or beyond any
objects, restrictions or prohibitions in its
constitution: ss 125(1)-(2).
 The ‘indoor management’ rule
• This rule is derived from the decision in Royal
British Bank v Turquand (1856) 6 El & Bl 327;
119 ER 886.
• In general, it permits a person, who is acting in
good faith, to assume that any internal
delegations of power or approvals, that are
necessary under a company’s constitution for
an organ or agent of the company to validly
exercise a power and bind the company, have
occurred.
What if the Person Dealing With a Company
Is Aware of the Content of Its Constitution?

• The company will not be bound by any act of a

person (agent), who is purporting to represent
it, if its constitution makes it clear that the
person (agent) could not have the necessary
authority to bind the company.
• That person dealing with the company still has
the benefit of the indoor management rule.
 Is It Wise For Outsiders To Examine A
Company’s Constitution Before Dealing With It?

If an outsider examines the constitution they will

have actual knowledge of any:
• restrictions on the company’s capacity; and
• restrictions or limitations on the exercise of
the company’s powers by its organs and
agents.
Therefore, the company will not be liable to
outsider on a transaction, purportedly
negotiated on its behalf, if the outsider knew
or should have known, from the content of
the company’s constitution, that the
‘company negotiator’ could not have had the
company’s authority to bind it to the
transaction because, for example, it was
inconsistent with the company’s stated
objects and powers.
 What If the outsider Has No Actual
Knowledge of the Company’s Constitution?

• The outsider will be unaffected by any restrictions

or limitations on the company’s capacity or power
contained in the constitution: CA s 130(1).
• The outsider will be entitled to assume that the
company has the full capacity and range of
powers conferred by s 124(1).
• The company will be bound to the outsider on any
transaction negotiated on its behalf by persons
with actual or apparent authority to bind it to the
transaction.
 Actual authority
• A company’s power to make, vary, ratify or
discharge a contract may be exercised by an
individual acting with the company’s express
or implied authority and on behalf of the
company: s 126(1).
• A person has ‘actual authority’ to act for a
company if the person has been given that
authority by, or pursuant to, its constitution or
any applicable replaceable rules.
 Who Has Actual Authority To Bind A
Company?
Board of Directors: Organ with general
management powers and all other powers
of the company except those vested in
general meeting: see replaceable rule
s 198A.
General Meeting: Organ with the powers
given by the Corporations Act and the
company’s constitution.
 Delegated Powers
Board of Directors

Power to appoint MD: Power to delegate powers of

see, for example, CA board to MD: see, for
replaceable rule s 201J example, replaceable rule s
198C(1)

Managing Director
Implied power
for MD to sub-
delegate to
other company
officers and
agents
 Apparent Authority

A person will have apparent authority to

bind a company if the company has held the
person out as having the relevant authority.
 How Does a Company Represent That a
Person Has Its Authority?
• By authorised organs or agents appointing the
person to a particular position.
• By the relevant organ or authorised agent
allowing a person to act as though the person
has been appointed by the organ or agent to a
particular position.
• By the relevant organ or authorised agent
otherwise representing by words or conduct
that the person has the necessary authority.
 Usual Authority
When a company appoints a person to a
particular position, or otherwise represents
that the person holds that position, the
company is taken to hold the person out as
having all of the usual authority that
persons occupying that position, in
companies carrying on a similar kind of
business, would ordinarily have.
However, the High Court, in the 1975 held
that, in order for a company to be estopped
from denying that a person had its apparent
authority to bind it, the representation,
which is alleged to have given rise to the
estoppel, must have been made by
someone with actual authority to make it.

See Crabtree-Vickers Pty Ltd v Australian

Direct Mail Advertising & Addressing Co Pty
Ltd (1975) 133 CLR 72.
• In Crabtree, the managing director Bruce
intimated to a person that Bruce’s brother
Peter had the carriage of a particular contract
negotiation.
• Peter signed a contract on the company’s
behalf to purchase an expensive item of
equipment.
• The company was held to be not liable
because Bruce had no actual authority to
represent that Peter had authority to bind the
company to the purchase.
• As managing director, Bruce had apparent, but
not actual, authority to purchase the
equipment himself.
• Bruce lacked actual authority because the
company’s directors had privately agreed that
the purchase decision should be made at
board level or by Bruce, Peter and their father
collectively.
• Peter lacked actual authority for the same
reason.
• Peter also lacked apparent authority because
the usual authority of a person of his status
(technical officer) in that kind of company
would not extend to acquiring such expensive
equipment.
• More recent amendments to the legislation
make it possible that Crabtree-Vickers would
be decided differently today.
• Arguably, Bruce, as managing director, should
be considered as having apparent authority to
indicate who, within the company, could
negotiate a transaction on the company’s
behalf.
• The apparent authority of Bruce to make such
a representation should not be eroded by
circumstances of which the person who dealt
with Peter, in reliance on the conduct of
Bruce, could not reasonably have been aware.
Note that the High Court indicated that the
company would have been liable if:
• Bruce had ordered the equipment; or
• Bruce had actually instructed Peter to order the
equipment.

In both cases, Bruce, as managing director, would

have had the apparent authority to order the
equipment either personally or through an
authorised agent such as Peter: see para 16 of
the judgment.
 Company Seals
• Every company used to have to have a
company seal [‘common seal’].
• Now a seal is optional: s 123(1).
• Even if a company has a seal, it is not
necessary that it be applied (affixed) to
documents for the documents to be
considered to be executed by the company.
 Execution of documents without using a
common seal
A company may execute a document
without using a common seal if the
document is signed by:
• 2 directors of the company; or
• a director and a company secretary of the
company; or
• for a pty co that has a sole director who is also
the sole company secretary – that director: s
127(1).
 Execution of documents under seal
A company with a common seal may execute a
document if the seal is affixed to the document
and the fixing of the seal is witnessed by:
• 2 directors of the company; or
• a director and a company secretary of the company;
or
• for a proprietary that has a sole director who is also
the sole company secretary – that director: s 127(2).
 The s 129 Statutory Assumptions

A person is entitled to make one or more of

the s 129 assumptions when dealing with a
company unless the person knows or
suspects that the relevant assumption is
incorrect: s 128(1), s 128(4).
 Effect of entitlement to make a
s 129 assumption
• Where a person is entitled to make a s 129
assumption in dealings with a company, the
company is not entitled to assert in legal
proceedings that the assumption is incorrect:
ss 128(1)-(2).
• The ability to make a s 129 assumption may
assist, in an evidentiary sense, the person to
successfully sue the company.
• However, whether the company is liable will
still be determined by reference to common
law principles (eg corporate agency principles)
and to provisions such as s 126 and s 127.
 Sections 128 and 129
• An attempt has been made to legislate
something equivalent to, but not identical
with, the common law ‘indoor management
rule.
 Section 128(1)
• A person is entitled to make the assumptions
in s 129 in relation to dealings with a
company.
• The company is not entitled to assert in
proceedings in relation to the dealings that
any of the assumptions are incorrect.
• The ability of a person to make the s 129
assumptions may make it difficult for a
company to defend an action against it.
• Sections 128-129 do not purport to impose
substantive liability on companies.
 ‘Dealings With a Company’
• There must be dealings (in the sense of
negotiations or other steps in relation to a
contemplated transaction) with someone on behalf
of the company which are dealings authorised by
the company.
• It is not necessary that the person representing the
company have authority from the company to
commit the company to the relevant transactions
or execute the relevant documents:
Soyfer v Earlmaze P/L [2000] NSWSC 1068 at [82].
 Section 128(3)
• The assumptions may be made even if an
officer or agent of the company acts
fraudulently, or forges a document, in
connection with the dealings.
 In Soyfer at [80], Hodgson CJ considered that:
• The relevant fraud or forgery does not need to
be within the agent’s authority in such a way
as would make the company liable for it.
• It is sufficient that the person responsible for
the fraud or forgery is an agent of the
company in the sense of having some
legitimate role on behalf of the company in
relation to the dealings in question.
 When the s 129 assumptions
cannot be made: s 128(4)
• A person is not entitled to make an
assumption in s 129 if, at the time of the
dealings, they knew or suspected that the
assumption was incorrect.
• The onus of proof in relation to s 128(4) lies
on whoever is challenging a person’s
entitlement to make a s 129 assumption.
• It must be shown that the person in question
actually knew or actually suspected that the
assumption in question was incorrect.
• It is not sufficient to show that the
circumstances were such as to put a
reasonable person upon enquiry.
• The common law ‘put upon enquiry’ test has
been displaced by s 128(4).
 Section 129(1)
• A person may assume that the company’s
constitution (if any), and any applicable
replaceable rules, have been complied with.
 Consistent with the indoor management rule,
and subject to s 128(4), s 129(1) allows an
outsider to assume, for example, that:
(a) appointments, which might be made under
the constitution or rules, have been made;
(b) delegations of power, that might be made
under the constitution or rules, have been
made;
(c) any required general meeting or board of
directors approval for a transaction has been
given.
 Section 129(2)
A person may assume that anyone who
appears, from information provided by the
company that is available to the public from
ASIC, to be a director or a company secretary
of the company:
(a) has been duly appointed; and
(b) has authority to exercise the powers and
perform the duties customarily exercised or
performed by a director or company
secretary of a similar kind of company.
• The usual authority of directors and company
secretaries will be dealt with in next week’s
seminar.

• Should a person be able to make the s 129(2)

assumption if the person was unaware of the
information provided by the company to ASIC
when dealing with the company?
 Section 129(3)
A person may assume that anyone who is held
out by the company to be an officer or agent
of the company:
(a) has been duly appointed; and
(b) 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.
 Section 129(4)
A person may assume that the officers and
agents of the company properly perform their
duties to the company.

At common law, a contract may be avoided by

a company if the other party knew or should
have known that the relevant company officer
was acting in breach of a general law or
statutory duty.
 Section 129(5)
• A person may assume that a document has
been duly executed by a company if the
document appears to have been signed in
accordance with s 127(1).
• For the purposes of making this assumption, a
person may also assume that anyone who
signs the document and states next to their
signature that they are the sole director and
sole company secretary of the company
occupies both offices.
 Section 129(6)
• A person may assume that a document has
been duly executed by the company if:
• (a) the company’s common seal appears to
have been fixed to the document in
accordance with s 127(2); and
• (b) the fixing of the seal appears to have been
witnessed in accordance with that section.
 Section 129(7)
• A person may assume that an officer or agent
of the company, who has authority to issue a
document or a certified copy of a document
on its behalf, also has authority to warrant
that the document is genuine or is a true copy.
 Section 129(8)
• Without limiting the generality of this section,
the assumptions that may be made under this
section apply for the purposes of this section.
• Accordingly, the presumptions are cumulative.
• For example, a person may be entitled to
make several of the assumptions in
connection with a dealing with the company.
 Pre-Registration Contracts
• Persons who form a company (its promoters)
sometimes seek to acquire property before
the company is registered with the intention
that the property will be transferred to the
company after it is registered.
• At common law, a company when formed is
not bound by any contract purportedly made
on its behalf before the date of its
incorporation.
• At common law, a company cannot ratify a
pre-registration contract upon registration:
Kelner v Baxter (1866) LR 2 CP 174.
• A principal cannot ratify a contract unless, at
the time the contract was entered into, the
principal was in a position to enter into the
contract on its own behalf.
• In the case of a company, this meant that
ratification was impossible unless the
company was registered at the date the
relevant contract was made.
 Section 131(1)
• If a person purports to enter into a contract on
behalf of, or for the benefit of, a company before
it is registered, the company becomes bound by
the contract if it, or a company that is reasonably
identifiable with it, is registered and ratifies the
contract:
(a) within the time agreed to by the parties to the
contract; or
(b) if there is no agreed time – within a reasonable
time after the contract is entered into.
 Section 131(2)
The person who purported to act for the
unregistered company is liable to pay damages
to each other party to the contract if the
company is:
– not registered, or
– is registered but fails to ratify it, or enter
into a contract in substitute for it;
within the agreed time or, where there is no
agreed time, within a reasonable time of the
pre-registration contract being entered into.
 Ratification by the company
• Within the time agreed by the parties to the contract
or within a reasonable time
• What's a reasonable time? A question of fact to be
determined having regard to all the circumstances -
yes its vague and difficult to apply
• Aztech Science Pty Ltd v Atlanta Aerospace (Woy
Woy) Pty Ltd [2004] NSWSC 967 time agreed
• promoter can still be liable s131(4)
• The amount that the person is liable to pay
under s 131(2) is the amount that the
company would be liable to pay to the
relevant party if it had ratified the contract
and then failed to perform it at all.

• A person who is liable under s 131(2) has no

right to be indemnified by the relevant
company in respect of that liability. This is so
even if the person purported to act as a
trustee for the company: s 132(2).
To prevent the relevant company promoter
avoiding liability under s 131(2) by setting up a
company with few if any assets to ratify the
contract, s 131(4) permits a court to order the
person/promoter to pay all or part of the
damages that the company is ordered to pay
to the other party.
 Section 131(3)
• If proceedings are brought against a promoter
under s 131(2), because the company has
been registered but has failed to ratify the
contract, or enter into a substitute contract,
the court may do anything that it considers
appropriate in the circumstances (such as
order damages or transfer property).
The court could, for example, order the
company to:
• pay all or part of the damages that the person
is liable to pay;
• transfer property that the company received
because of the contract to a party to the
contract; or
• pay an amount to a party to the contract.
Promoter May Be Released From Liability

A party to a pre-registration contract may

release a promoter from all or part of their
liability under s 131 to the party by signing a
release: s 132(1).
 Acknowledgement
• These slides and seminar questions have been
adapted from original work developed and
prepared by Associate Professor Jim
Hambrook.