COMPANY LAW

LAW2450
TOPIC NOTES

TOPIC 3: The Companies relations with

outsiders

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Topic 3: The Companies relations with outsiders
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Contents

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Topic 3: The Companies relations with outsiders
1. Introduction
2. How companies powers exercise their power
a. Entering a contract directly
b. Entering a contract indirectly
3. Actual Authority
4. Apparent Authority
5. Indoor Management Rule

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Topic 3: The Companies relations with outsiders
1. Introduction
In this topic we will consider how companies exercise their legal capacity and
powers, particularly when entering into contracts with third parties. In doing so,
we will look at an agent’s authority to enter into contracts indirectly, and also the
power of the company to enter contracts directly. See sections 124 and 127 of the
Corporations Act for further details

2. How companies exercise their power to enter

contracts with third parties
There are two basic options:
● A party may contract directly with a company, meaning the company acts
of and by itself (The Organic Theory); or
● a party may contract with a company indirectly by way of agent, meaning
the company has agents that act on its behalf.
Refer to page109 of the Text Book for further information

Contacting

Directly Indirectly

Formal Substantive Actual Apparent

authority authority authority authoirty

Directly
Under section s.127(4) of the Corporations Act, a company contracts directly
when it executes a document by:

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Topic 3: The Companies relations with outsiders
 (a) using its common seal if it has one or if there is no common seal, by
certain company officers signing the document; or
(b) using any other method which the company’s constitution (if any)
has provided.

Section 127 of the Corporations Act sets out the ways in which a company may
execute documents i.e. with a common seal (s.127(1)) and without a common
seal (s.127(2)).

In addition to the signing procedures, a company must have authority to enter

into a contract, which is determined by the board by a resolution.
There are two kinds of authority:
● Formal authority (see s127);
o Signatures of officers are treated as if they are signatures of a the
company itself; or
● Substantive Authority (see s124);
o The company has the legal capacity and power of an individual to
enter contracts
See pages 112-113 of the Text Book for further information.

Indirectly
Section 126 of the Corporations Acts provides for an agent of the company to
enter contracts with third parties on behalf of the company. There are two kinds
of authority:
● actual authority which is either express or implied; or
● apparent authority.

3. Actual Authority
An agent of a company has actual authority when the company has expressly
granted them authority or has through circumstances or dealings implied that
they have authority to act on behalf of the company. Therefore, the Board of
Directors collectively, as opposed to individual directors, is the agent of the

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Topic 3: The Companies relations with outsiders
company. However, there are situations where it is necessary to ascertain the
existence of and the type of authority.

Firstly, how does express actual authority arise? It could be by way of an oral or
written statement such as a provision in the internal governance rules or where
the Board has delegated its power to contract on behalf of the company to
another person such as the managing director, to an individual director or to any
person.

With implied actual authority, the authority may arise in relation to the kind of
position or particular position within the company. Therefore, implied actual
authority will vary depending on the kind of position a person holds so that the
scope of implied authority of the managing director of a company will differ from
that of say the company secretary (Hely-Hutchinson v Brayhead Ltd; Panorama
(Guildford) Ltd v Fidelis Furnishing Fabrics Ltd).
Refer to page 115 of the Text Book for further information.

4. Apparent Authority
Apparent authority is the instance in which a person appears to have as a result
of the company holding out or representing that the person has the authority to
act on behalf of the company. With apparent authority, for the transaction to be
binding on the company, there must be a “holding out” by the company where
someone with actual authority in the company represents, by words and/or
conduct, to the third party that the agent has authority to transact on behalf of
the company. The third party must have relied on this representation (Freeman
& Lockyer v Buckhurst Properties(Mangal) Ltd; Crabtree- Vickers Pty Ltd v
Australian Direct Mail Advertising and Addressing Co Pty Ltd; Pacific Carriers
Limited v BNP Paribas).

Section 126 of the Corporations Act deals with the powers of agents. However,
note that s.126(1) provides for contracts entered into on behalf of the company
where the agent has express or implied authority but not apparent authority.
Refer to page 117 of the Text Book for further information

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Topic 3: The Companies relations with outsiders
5. Indoor Management Rule
The Indoor Management Rule is the common law rule used look at how a
company can enter into a contract, and a company’s authority to enter into
contracts.

Also referred to as ‘the rule in Turquand’s case’ (Royal British Bank v Turquand),
the rule,as stated by Mason CJ in Northside Developments Pty Ltd v Registrar-
General at page 616 applies when:

“... persons 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 inquire whether acts of internal
management have been regular.”

Therefore, an exception to this rule will therefore apply in situations where a

person who has not acted ‘in good faith’ in that the person knew or was ‘put on
inquiry’ that the acts of internal management have not been regular. The ‘put on
inquiry’ exception is illustrated by the Northside case and Story v Advance Bank
Australia Ltd.
Refer to page 119-123 for further information on the exceptions.

The statutory assumptions under s.128 and s.129 of the

Corporations Act

Section 128(1) of the Corporations Act provides that a person is entitled to

make the assumptions in s.129 in relation to dealings with a company and in
relation to dealings with another person who has, or who purports to have,
directly or indirectly acquired title to property from a company. In these
situations, the company is not entitled to assert in proceedings in relation to the
dealings that any of the assumptions are incorrect.

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Topic 3: The Companies relations with outsiders
Section 128(3) of the Corporations Act provides for these assumptions to be
available to persons dealing with the company even if an officer or agent of the
company is acting fraudulently or forges a document in connection with the
dealings but this is subject to s.128(4).

Similarly as with the common law position, there are exceptions under statute as
provided in s.128(4) where a person is not allowed to make any of the
assumptions in s.129 where at the time of the dealings with the company, the
person knew or suspected the assumption was incorrect.

The assumptions set out in s.129, as follows:

1) s.129(1) is the statutory embodiment of the indoor management rule;
2) s.129(2) is applicable to a director or company secretary as appears from
information provided by the company and available to the public from
ASIC and reflects the agency principles relating to implied actual
authority;
3) s.129(3) is applicable to any officer or agent of the company having been
held out by the company and reflects the agency principles relating to
apparent or ostensible authority and again to implied actual authority(see
s.129(3)(b));
4) s.129(4) allows a person to assume that the officers and agents of the
company properly perform their duties to the company;
5) s.129(5) re documents duly executed without seal if signed in accordance
with s.127(1).
6) s.129(6) re documents duly executed with seal if signed in accordance
with s.127(2).
7) s.129(7) allows a person to assume that an officer or agent of the
company who is authorised to issue documents or certified copies of the
documents on the company’s behalf has the authority to warrant that the
document is genuine or a true copy thereof.

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Topic 3: The Companies relations with outsiders
Question 1:
William and Kate married in 2012. They incorporated a company, Cambridge Pty Ltd, in 2013. The
company is the registered owner of their investment property. Kate has a sister, Pip, and both Kate and Pip
are the directors and members of a company called George Pty Ltd.

Early this year, George Pty Ltd ran into financial difficulties but they managed to obtain loan facilities from
Queens Bank. The loan facilities were to be secured by a mortgage over the investment property owned by
Cambridge Pty Ltd.

The mortgage documents appear to be executed by Cambridge Pty Ltd’s two directors, William and Kate. In
actual fact, Kate had forged William’s signature. William had no knowledge of the mortgage and neither he
nor Cambridge Pty Ltd had anything to gain from the loan facility. George Pty Ltd has now defaulted on the
loan and Queens Bank wants to exercise their right to sell the property mortgaged by Cambridge Pty Ltd to
recover their money.

Advise Queens Bank as to whether it is able to enforce the mortgage and recover their money.

Issue: Is the mortgage documents binding on Cambridge Pty Ltd?

Rules: The answer to this question depends on the application of the assumptions that the
Bank is (or is not) entitled to make under section 128 and 129.

Section 129(5) provides that a person may assume that a document has been duly executed by the company
if the document appears to have been signed in accordance with subsection 127(1).

- Section 127 states that a company may execute a document without using a common seal if the
document is signed by 2 directors of the company.

- Section 128(3) provides that this assumption may be made even if an officer or agent of the company
acts fraudulently, or forges a document, in connection with the dealings.

- However, Section 128(4) provides that a person is not entitled to make an assumption in section 129
if at the time of the dealings they knew or suspected that the assumption was incorrect.

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Topic 3: The Companies relations with outsiders
Application: The mortgage documents appear to be executed by Cambridge Pty Ltd’s two directors, William
and Kate. Therefore, the starting point is that the bank could rely on this assumption, even though one of the
signatures is fraudulent. The question then becomes whether the bank knew or suspected that the assumption
was incorrect.

This is an objective test – and involves discussion of the Northside Developments case, relevant because
Cambridge Pty Ltd had nothing to gain from the loan facility. In that case, the court said that this fact meant
the bank should have been ‘on notice’ to make further enquires about whether the mortgage documents had
been validly executed – security was held Northside (getting benefit from it)

Conclusion: The bank may not be able to rely on the assumptions, and the mortgage document may not be
binding on Cambridge Pty Ltd. (Note: the Bank may have a separate action against Kate – but that is beyond
the scope of this course).

Scenario – Based Problem: BCJA Pty Ltd

You are the accountants for BCJA Pty Ltd. Advise whether the company is liable to repay the $150,000 to
the NAB. Refer to relevant case law or legislation

Facts –
BCJA - Proprietary company with 3 directos
Bev – MD and shareholders
 looks after the administration matters of the company
 acquires loan for $150,000 however rules state 100,000 limit
Teamed with Jonathan to fire chris

Christopher
 Director and shareholder, he is short of funds
 borrowed funds, does not appear to have misrepresented purpose

Rules:
S 136
S140
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Topic 3: The Companies relations with outsiders
S126
S127
S129
S128
S128 (4)

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Topic 3: The Companies relations with outsiders