COMPANY LAW

TOPIC 3 Dealings with

outsiders
The Rules by which a Company is
bound to transactions entered into
with outsiders Chp 5 p 129 -163
 A Co has the legal capacity
and powers of an individual
A company can enter into contracts and
property dealings as if it were a real person. (
sec 124)
However the separate legal entity of a company
is a legal fiction and it needs a Board to
manage its affairs, and a constitution and rules
by which to operate, and agents to carry out its
relations with outsiders. This creates problems
for those who make agreements with the Co.
 Are the actions of those who
represent the Co binding?
A company does not have a guilty mind and
cannot be put in prison, therefore the law has
developed ways in which those who manage the
company can be held liable as the directing
mind and will of the company eg. organic
theory from the Tesco Supermarkets case
(1972) and Lennards Co v Asiatic Petroleum
( 1915).
Their intentions and state of mind is the mind of
the company.
 Organic Theory- is one
approach
Organic Theory is an extension of the law of
Agency. The Board and directors and company
officers when acting under the powers given to
them by the Constitution are acting as organs of
the company, and therefore they can represent
the company and have authority to enter into
transactions on behalf of the company.
The circumstances of each case will determine
if they are the mind and will.
 The Tesco Supermarkets case
and limits on Organic Theory
In this case Tesco Co. was charged under the
English Trade Practices Act with making a false
representation as to the price of goods in one
of its stores. The House of Lords held that
Tesco Co. was not liable because the store
manager who made the mistake was not
sufficiently high enough in authority to be the
controlling mind and will of the Company. This
view has been criticised as being too narrow.
 Vicarious liability and Strict
liability other approaches
Vicarious liability is used particularly in the
civil law of torts such as negligence, and
can be applied to companies in that: - the
company is liable for the actions of its
employees whilst doing acts connected to
and in the course of their employment.
Strict liability requires no proof of fault for
the physical elements of a crime. Sec 6.1
Commonwealth Criminal Code Act (1995).
Protection of shareholders when
a company deals with outsiders.
Historically a companys Objects Clause was
the most important part of its Memorandum of
Association in its Constitution. It set out the
nature and scope of the companys business
objectives. BUT it favoured companies : -
Companies could get out of contracts with
outside businesses by arguing that there was
no proper authority. The constitution and Co.
rules had not been complied with.
 A lack of proper authority is
Ultra Vires
If a company officer or agent entered into a
contract or property transaction that was of
a kind that was outside the scope of its
objects clause then the company could
argue that the transaction was not binding
on the company because it was outside the
powers set out in the Constitution and
therefore Ultra Vires= out of power.
See for example, Ashbury v Richie (1875)
 Constructive Notice
Ultra Vires was used in conjunction with the
concept of Constructive Notice whereby the
outsider was said to be aware of internal rules
and the objects of the company because the
Constitution was available for public
inspection, and therefore the outsider should
have known that the contract would be
invalid. This rule became unfair on outsiders
and not helpful for modern business dealings.
 Ultra Vires and Constructive
Notice
The law allowed companies to use a
combination of ultra vires and constructive
notice to escape from unwanted contracts
because the law was constructed to
promote companies and encourage
investment by protecting the shareholders.
Any irregularities in the use of internal rules
and procedures could give the company a
way out of some agreements.
 The start of a change in legal
attitudes Turquands case
In Royal British Bank v Turquand (1856) 119
ER, two directors borrowed money by using the
company seal without first getting authorisation
by the Board as required in the Constitution.
The company used this irregularity to get out of
the loan contract by saying that the Bank had
constructive notice that the rules had not been
followed and therefore knew the loan contract
would not be valid.
 The Court developed the
indoor management rule
The court disagreed with the Companys
argument saying that the outsider did not have
to inquire whether the seal had been used
correctly or not because it was an internal
matter and an outsider should be able to
assume that the constitution and internal rules
had been properly followed and complied with.
This decision took the practical view that
outsiders should be protected.
Modern Statute law has codified
Turquands common law rule.
The Corporations Act (2001) sec 128(1)
states that a person is entitled to make
several assumptions set out in sec 129 in
relation to their dealings with a company.
The company is not entitled to assert in
relation to the dealings with outsiders who
make any of the assumptions are incorrect.
This altered the balance of the law and
tipped it in favour of protecting outsiders.
But there is an Exception to the
use an application of s 128
Sec 128 (4) states that, A person is not
entitled to make an assumption in sec 129 if at
the time of the dealing they knew or suspected
that the assumption was incorrect.
This exception to the rule is based on an
exception to the rule from Turquands case
actually knew of irregularity or put on inquiry
by the circumstances this tries to restore
some balance for the company.
 The Assumptions in sec 129
S 129(1) compliance with constitution
(2) person named as officer in public
documents
(3) person held out as officer
(4) officers and agents properly perform
their duties
(5) documents duly executed without seal
(6) documents duly executed with seal
The abolition of Ultra Vires and
Constructive Notice
Sec 125(2) states that An act of the
company is not invalid merely because it
is contrary to or beyond any objects in the
companys constitution.
Sec 130(2) states that, A person is not
taken to have information about a
company merely because the information
is available to the public from ASIC.
 The change in the law
endeavours to find a balance
There is a need to promote business
convenience. If an outsider dealing with a
company was put to the expense and
inconvenience of investigating the authority
of those acting for a company every time a
transaction was entered into, it would make
business people reluctant to do business.
To always protect the outsider could lead to
fraudulent conduct.
 Powers of the Board of
Directors
Sec 198A (1) - the business of a company is
to be managed by or under the direction of
the (board of) directors.
Sec 198A(2) - The (board of) directors may
exercise all the powers of the company eg. to
issue shares, borrow money and issue
debentures.
Sec 198B(1) Any 2 directors can sign, draw,
accept or endorse a negotiable instrument.
 Delegation of authority
Sec 198D(1) Unless the constitution
provides otherwise the directors may
delegate any of their powers to: a committee,
a director, an employee, or any other person.
Sec 198C(1) The directors of a company
may confer on the Managing Director any of
the powers that the directors can exercise.
(and revoke these powers sec 198C(2)).
 How do Companies Directly
enter in Contracts?
Directly by use of the Company Seal sec
123(1), where two directors or one director
and the Company Secretary fix the seal,
and witness the fixing of the seal. OR
Since 1998 the use of a seal has been
made optional - now the same as above
can apply, but by just a signing the
document rather than fixing the Company
Seal, see sec 127(1).
 A Company can give express
actual authority
To give express actual authority the Board of
Directors will need to pass a resolution in an
appropriate form.
Where an outsider is entering into dealings with
a company that involves a large sum of money
it is customary for them to ask the company for
an extract from the minutes of the meeting
where the resolutions were passed authorizing
the dealings and execution of documents.
 Implied authority from the
customary powers of Co.officers
The Managing Director: has all the
powers of the company necessary to deal
with the day to day operations of the
company including delegation to others,
employment of others, the borrowing of
money and the giving of guarantees, in the
ordinary course of business.
A CEO who is not on the Board may still
have the same authority as an MD.
 Customary powers of
directors
An Individual Director (executive or non-
executive): has no usual authority to bind the
company unless they act collectively with other
directors as a Board.
Chairperson of the Board: has the special
responsibility of managing meetings, acting as
a spokesperson for the company and
sometimes is responsible for selecting a CEO.
BUT, they have no other special powers.
Customary powers of the Co.
Secretary
The Company Secretary: is the chief
record keeper and administrative officer
and as such has some special authority to
sign contracts to do with the purchase of
administrative supplies, the hire of cars and
the supervision and employment of
administrative staff.
With the assistance of a director they can
use the company seal.
Other Company Executives can
have implied authority
In AWA Ltd v Daniels as Deloitte Haskins &
Sells (1992) 7 ACSR 759, a money market
manager who acted as a foreign exchange
dealer for an electronics company with usual
authority to enter into contracts with banks, lost
$ 50 million. The court held: that the company
was bound by the contracts because of the
usual implied authority that was attached to the
money managers powers in the company.
 Implied actual authority from
acquiescence by the board.
In Brick and Pipe Industries Ltd v Occidental
Life Nominees Pty Ltd [1992] 2 VR 279, Brick
&Pipe became a wholly owned subsidiary of
Gs company. G and his associate F were
added to the Board. The seal was used on a
bank contract by G as a director and F as
secretary. The Board had acquiesced by
allowing G to act on its behalf and also G had
said that F was the secretary but in fact he was
not.
 The Common law of apparent
authority and Agency
Statute law over rides case law and therefore
Sec 128 and 129 govern most situations where
a company contracts with an outsider, and
must be used first. BUT Common law cases of
agency, implied and apparent authority can
assist courts in the interpretation and
application of the statutory assumptions and
sometimes may directly apply to situations not
covered by the statute see Northside and
Freeman.
 Apparent (ostensible) authority
of agents and holding out.
In Freeman and Lockyer v Buckhurst
Properties (Mangal) Ltd [1964] 2 QB 480,
Kapoor acted as the Managing Director but
without formal appointment, he was allowed to
act as MD with informal approval by the
Board. He engaged a firm of architects but the
other directors refused to accept the contract.
The court held that there was a holding out
by the Board creating apparent authority.
 Exception to Turquands Rule
and the assumptions in sec 129.
In Northside Developments Pty Ltd v
Registrar General (1990) 8 ACLC 611, the
Company seal was fixed to a bank loan by
Sturgess a director and his son who
purported to act as company secretary. The
other directors knew nothing of these actions.
The court held that the circumstances were
suspicsious and should have alerted the bank
to make inquiries. See sec 128 (4).
What is meant by holding out?
Holding out can be a representation by words
or actions, and can also be by acquiescence.
But if there is a representation it must be by
someone with real authority see Crabtree-
Vickers Pty Ltd v Australian Direct mail and
Advertising Co Pty Ltd (1975) 33 CLR 72, and
NAB v Sparrow Green Pty Ltd [1999] SASC
28, - a person without authority cannnot
confer authority on themselves.
 Sample Test/Exam Question
Roger, Alex and Judy are directors of Big
Hawks Pty Ltd but Alex and Judy allow Roger
to think that he is the MD, but he has not been
formally appointed to that role. Roger gets
carried away with his own self importance
and without consulting the others enters into
expensive design contracts and some rather
large bank loans. He says he is the MD. Is the
Co. bound? Advise Alex and Judy.(20 marks)
 Key points of Focus
Legal theories to make directors/managers
liable as the directing mind and will of a
company organic theory
Abolition of ultra vires and constructive
notice. s 125(2) and s 130(2)
Turquands case and the indoor
management rule to protect outsiders.
Statutory assumptions for outsiders s 129,
128, exceptions 128(4)
 Key points of Focus continued
Powers of directors to bind the Company in
contracts with outsiders:
- Direct authority to act on behalf of the Co
- Implied Authority
- Customary authority
- Apparent authority and holding out
Application of apparent authority in case
examples: Freemans case and Northsides
case, Crabtree Vickers case.