CORPORATE GOVERNANCE

Question 1

THE TWO THEORIES OF CORPORATE CONTRACTING

Answer 1

• Organic Theory (S 127)
  › Was the document properly executed?
  › Did the organ acting for the company have the authority to bind the company?
• Agency Theory (s126)
  › Actual Authority
   Express
   Implied
• Company Position
  o Incidental authority
  o Usual authority
• Acquiescence
  › Apparent Authority

Question 2

Legal Capacity of Corporation

Answer 2

• Legal capacity: s 124(1)
• Legal capacity not affected by non-beneficial action: s 124(2)
  › Also see Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239
• Legal capacity not invalidated by acts contrary to the company’s constitution: s 125(1) and (2)
  › Ultra vires?

Question 3

the general conception of corporations exercising their powers

Answer 3

• The conception is that the corporation has powers which it (as an artificial entity) can exercise
  › However, for the exercise of those corporate powers, individuals (usually the board of directors) have to act
  › The distinction between the capacity or corporate power of the corporation and the powers of its intermediaries is fundamental and is an aspect of the separate entity doctrine

Question 4

how to know if a corporation is bound by a contract

Answer 4

• To know whether a company or any other corporation has bound itself by a contract or other transaction one needs to consider:
  › Whether the corporation had legal capacity to enter the transaction; the power to acquire and exercise legal rights and assume legal liabilities
  › Whether the individuals acting for the corporation as intermediaries had authority to act

Question 5

capacity of registered companies

Answer 5

• A registered company under the Corporations Act has the legal capacity and powers of an individual: s 124
• There are some restraints in the Corporations Act on the use of company power
• The grant in s 124(1) to a company of the capacity and powers of an individual is to be read subject to other provisions of the Corporations Act
  › Ex. Restrictions imposed on companies reducing, otherwise than in normal trading, the share capital subscribed by their shareholders
• The company’s constitution may restrain an exercise of corporate power: s 125

Question 6

what is ultra vires

Answer 6

• Ultra Vires = “beyond power”
• Historically, in the eyes of the law, a company was seen as capable of engaging only in those businesses and activities for which it was established and that were identified in its objects clause
• If the company took actions that went beyond the powers stated in its objects clause, it was acting ultra vires: Ashbury Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653
• An ultra vires act is beyond the legal power of the holder and therefore invalid

Question 7

s 124

Answer 7

• S 124 of the Corporations Act ensures that a company has the powers of an individual; generally, a company can engage in anything it wants to and the company is no longer confined to being only able to do what was specified in its objects clause

Question 8

contemporary application of ultra vires

Answer 8

› Ultra vires abolished in Australia in 1984, see Companies and Securities Legislation (Miscellaneous Amendments) Act of 1983
› Wide vs narrow ultra vires
 Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1982] 3 All E.R. 1057 at 1077
 ANZ Executors & Trustee Company Limited v Qintex Australia Limited (receivers and managers appointed) [1991] 2 Qd R 360
 Wide version of ultra vires is still in existence to a limited extent.
* S 124 abolished narrow ultra vires. S 125 maintains wide ultra vires to a limited extent.

Question 9

s 125

Answer 9

› Section 125 Constitution may limit powers and set out objects
(1) [Constitution may restrict capacity] If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution.
(2) [Capacity no affected by constitutional objectives] If a company has a constitution, it may set out the company’s objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.

Question 10

indoor management rule and ultra vires

Answer 10

› If you have constructive notice that a company/individual is acting ultra vires, that notice may be enough to invalidate the contract.
 Constructive notice – s 130
* Not did they know, should they have known.
* Cannot solely rely on information published by ASIC.

Question 11

corporate capacity

Answer 11

• Once a company is registered, it is granted the legal capacity and powers of an individual
• Thus, for all practical purposes, a company may enter into a contract that an individual may enter into
• The company may create contracts itself, or through agents (s 126), such as directors or employees who have the required authority
• The actions of a company are not invalidated just because they happen to be contrary to the powers and purposes set out in the company constitution: s 125
• A company may execute documents and contract with or without reliance on its common seal (a common seal is a legal stamp which contains the the company’s name and ACN or ABN. A company can choose to have a common seal (s 123), which is the used as if the company was signing the contract itself – the common seal is equivalent to the signature of an individual person – traditionally this was a common method for a company to transact directly)

Question 12

two ways a company may be contractually bound

Answer 12

• A company may be contractually bound by the authorized acts of individuals in two situations:
  › The first involves the “organic theory” where the company contracts directly in its own name (board of directors and the general meeting of members)
  › The second more usual mechanism for determining authority or persons authorized to contract on behalf of the company involves applying the principles of agency law or the statutory assumptions in s 129

Question 13

how does a company sign a contract

Answer 13

• S 127 provides the manner is which a company may execute a document, including a contract
• If a common seal is used (rare): s 127(2) requires affixation of the common seal to be witnessed by two directors or one director of the company and one company secretary, or for a proprietary company with one director/company secretary – that director is required to witness the fixing of the seal
• Alternatively, a company may execute a document without the use of a common seal; the company may contract directly with third parties by executing a contract (most common way)
• In such situations, s 127(1) of the Corporations Act requires:
  › The document to be signed by two directors or one director and the company secretary
  › For a proprietary company that has a sole director who is also the sole company secretary – that director

Question 14

what is the indoor management rule

Answer 14

• Royal British Bank v Turquand (1856) 6 El & Bl 327; 119 ER 886; a person who contracts with a company in good faith may assume the company is acting within its constitution and that its powers have been duly performed, and they are not bound to enquire whether acts of internal management have been regular
  › (the rule in Turquand has been replaced by s 129)
• A person having dealings with a company is entitled to make certain assumptions about the company and its officers: s 128; The Corporation Act s 129 lists the statutory assumptions that persons dealing with the company may make under s 128
  › Assumptions that can be made:
   Relevant board or shareholder authorization required was given.
   If board made the decision, all requirements were met (quorum, authority, etc.)
   Adequate notice was given to any board or meetings.
  › Reason = business convenience

Question 15

general law of agency - indoor management rule

Answer 15

• Under the general law of agency (discussed further in slides), an agent has actual authority from the principal, or an agent appears – in the eyes of an innocent third party [who is ‘outside’ or not privy to, the agreement between the principal and agent] - to have the apparent or ostensible authority to do certain acts on the principal’s behalf
• Northside Developments
  › Mason CJ:“The precise formulation and application of [the rule in Turquand’s case] calls for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings…On the other hand, an over-extensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.”
  › S 128(4) – reflects this.

Question 16

exceptions to the indoor management rule

Answer 16

› Actual Knowledge
› Outsider failed to make usual enquiries
› Reasonable person would’ve been put on enquiry about the need to investigate
› Constructive notice.
› Fraud/forgery (court split on this).
 Sometimes difficult to determine it its fraud or just dodgy.

Question 17

s 129

Answer 17

assumptions of regularity:
- The assumptions at s 129 relate to the internal procedures of the company having been complied with and are aimed at protecting persons who deal with a company in good faith from being affected by an officer or agent of the company who acts outside their authority
- The company is not entitled to assert in proceedings in relation to a person’s dealings with the company that any of the statutory assumptions are incorrect: s 128(1)
- However, 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: s 128(4)
› Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335

Question 18

organic theory

Answer 18

• S 127
  › 2 Directors or a director and a secretary make up the company seal.
• Company enters into contract through a company seal.
• Authority to bind company
  › Need formal and substantive authority.
   Formal = was the forms signed properly
   Substantive = did they have the authority to sign.

Question 19

what is agency

Answer 19

• Agency is the relationship existing between two parties whereby the agent is authorized by the principal to, on the principal’s behalf, do certain acts which affect the principal’s rights and duties in relation to third parties
• s 126 allows a company to contract through an agent and under agency law, a company will be bound by the acts of its agents
• Agency law is supplemented by overlapping statutory rules contained in ss 128-130
• Agency relationships may arise in a number of ways, for us we are mainly concerned with agency created by actual authority and apparent or ostensible authority

Question 20

sourced of an agents authority

Answer 20

• Actual authority:
  › Express and implied authority
  › Based on the principal’s actual instructions – what authority did the principal actually give to the agent?
• Apparent authority:
  › Apparent or ostensible authority
  › Based on the principal’s conduct/representation of agent’s authority – what authority would the third party reasonably expect the agent to have?

Question 21

what is actual authority

Answer 21

• An agent who enters into a contract on the principal’s behalf binds the principal to the contract with an outsider if the contract is within the scope of the agent’s express or implied actual authority
• either express or implied

Question 22

actual express authority

Answer 22

› The usual starting point in any consideration of a director’s actual authority is the constitution of the company, which provides for directors’ powers (eg. The replaceable rule in s 198A(2) authorizes the board of directors to exercise the powers of the company)
› The principal has expressly given to the agent in words or writing the authority to enter into contracts on their behalf
› The agent’s authority may be specifically created and limited by the terms of the agreement which give rise to the agency relationship

Question 23

actual implied authority

Answer 23

› Actual authority can be implied from the statements or from the principal’s conduct and surrounding circumstances
› Most frequently arises when an agent is appointed to a particular position by the principal and such position carries with it authority to do certain things (eg. an agent who is appointed to manage a business has implied authority to make all those contracts that a manager in such position customarily has: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549)
› For example, when the board of directors of a company appoints one of the directors to be managing director, they thereby impliedly authorize him/her to do all such things as falls within the usual scope of that office

Question 24

implied actual authority through company position

Answer 24

› Usual authority of certain company officers, see Re Qintex Ltd (No 2) (1990) 2 ACSR 479
 Individual director
* Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
o Business convenience approach, this is reflected in the Corps Act.
* Sole director / company secretary, see s 198E(1)
 Managing director
* S 198C(1)
* Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424
* Capper’s Pty Ltd v L & M Newman Pty Ltd [1960] NSWR 143
* Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
* Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72

Question 25

what is apparent authority

Answer 25

• Apparent authority is the authority of an agent as it appears to others: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549)
• Where the principal represents either by word or conduct that an agent has authority to contract on the principal’s behalf, the principal will be bound by those acts of the agent which fall within that represented authority
• Apparent authority often created through representation by conduct, such as by the principal permitting a person to act in the conduct of the principal’s business so that the third party is led to believe that the person has authority to contract on behalf of the principal

Question 26

effect of agent’s apparent authority

Answer 26

• If an agent’s apparent authority can be proved it creates an agency by estoppel under which the principal is prevented from asserting that the agent lacked authority

Question 27

when does apparent authority arise

Answer 27

› The principal represents or holds out to the outsider that the agent has the requisite authority to make particular contracts on the principal’s behalf, and
› The outsider relies on the principal’s representation to enter into the contract with the agent who is purportedly acting on the principal’s behalf
For example, where the board of directors of a company permits one of the directors to act as a managing director without having been formally appointed, the agent will have apparent authority to deal with third parties in a manner consistent with the functions normally falling within the usual authority of the holder of that position: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

Question 28

the basis of apparent authority

Answer 28

• The basis of apparent authority is that there has been a representation of authority on which the third party relied. However, the representation of authority can only be made by someone who has actual authority to make the representation: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 33 CLR 72

Question 29

what is needed to est. apparent authority

Answer 29

1. There must be a representation by the principal;
2. There must be reliance by the third party on the representation; and
3. There must be an alteration of the third party’s position resulting from such reliance.
    Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

Question 30

Who can make representations as to a person’s apparent authority?

Answer 30

 Person making representation as to another’s apparent authority must have actual authority: Crabtree- Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd [1975] HCA 49, 133 CLR 72, 50 ALJR 203
 Holding out by an organ of the company i.e. shareholders in a general meeting or board of directors, or by person with actual authority
 Representation may be express or implied from course of dealing
› If X has actual authority, X can give Y apparent authority.
› If X has apparent authority, X cannot give Y apparent authority.

Question 31

s 128

Answer 31

• 128 Entitlement to make assumptions
  › Dealings
   Construed liberally: Sheahan v Londish (2010) 244 FLR 64; 80 ACSR 337
   Dealings must be by person seeking to rely on the assumptions: Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068
   Can include single transaction: Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 307
   Purported dealings: Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722

Question 32

knowing or suspecting? - s 128

Answer 32

1. Actual knowledge or suspicion is required: Caratti v Mammoth Investments Pty Ltd [2016] WASCA 84 [377] (Buss JA
2. Constructive notice is not conclusive of actual knowledge or suspicion: Cf Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279
3. Knowledge may be inferred from a dishonest failure to inquire: United States Surgical Corp v Hospital Products Int Pty Ltd [1983] 2 NSWLR 157
4. Knowledge or suspicion must be at the time of the dealings: Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662
5. ‘Suspicion’ means more than a mere idle wondering: Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
6. Section 129(4) assumptions are not available to a director: Mercanti v Mercanti [2015] WASC 297

Question 33

assumptions that can be made under s 128

Answer 33

1. Constitution and replaceable rules complied with
2. Anyone who appears from publicly available information to be a director or company secretary has been duly appointed and has authority to exercise customary powers
3. Anyone who is held out by the company as an office or agent has been duly appointed and has authority to exercise powers
4. Proper performance of duties
5. Document duly executed without seal
6. Document duly executed with seal
7. Officer or agent with authority to warrant that document is genuine or true copy