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For Whose Conduct is a Corporation Responsible?A company’s capacity to contract1. A company has the legal capacity and powers of an individual: s 124(1).2. 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 powers in s 124(1) include, for example, the power to issue shares and debentures; and grant a floating charge. An individual cannot do any of these peculiarly corporate things.

The Relevance of a Company’s Constitution to Its Legal Capacity1. 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).2. 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 only companies that are required to have a constitution are:1. listed companies which are required by the ASX Listing Rules to have a constitution; 2. no liability companies because s 112(2)(b) requires a no liability company to have a constitution which

states that its sole objects are mining purposes; and3. companies limited by guarantee which wish to be relieved from the obligation to have the word ‘Limited’

in their name: see s 150(1). Almost all companies have their own constitution even though they are not required to have a constitution.

The ‘indoor management’ rule1. This rule is derived from the decision in Royal British Bank v Turquand (1856) 6 El & Bl 327; 119 ER 886.2. 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?1. 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.

2. 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:1. restrictions on the company’s capacity; and2. restrictions or limitations on the exercise of the company’s powers by its organs and agents.An outsider’s knowledge will be relevant to the outsider’s ability to rely on any representations of authority made by the company. San outsider’s knowledge may also be relevant to an outsider’s ability to make one or more of the s 129 statutory assumptions: see s 128(4).

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.

The constitution might also indicate that although the company had the capacity to enter into the contract it could not do so through the particular company negotiator or agent.

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What If the outsider Has No Actual Knowledge of the Company’s Constitution?1. 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).2. The outsider will be entitled to assume that the company has the full capacity and range of powers

conferred by s 124(1).3. 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.An outsider may also have the ability to make one or more of the s 129 statutory assumptions in any litigation against the company.

Actual authority1. 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).2. 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?1. 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.2. General Meeting : Organ with the powers given by the Corporations Act and the company’s constitution.3. If either of these organs does an act within their respective powers, the act is considered to be an act of

the company itself. See, for example, FCT v. Lutovi Investments Pty Ltd (1978) 37 FLR 209 [reversed on other grounds on appeal (1979) 53 ALJR 152] Deane J.

Delegated Powers

1. Company constitutions routinely deal with delegations of board powers to the managing director and to a committee of directors or an individual director.

2. Replaceable rule s 198D(1) also empowers the directors to delegate their powers to employees or other persons. There is no doubt that managing directors are entitled to sub-delegate their powers to other company executive directors and employees. However, company constitutions rarely deal with these

Board of Directors

Managing Director

Power to appoint MD: see, for example, CA replaceable rules s201J

Implied power for MD to sub-delegate to other company officers and agents

Power to delegate powers of board to MD: see, for example, replaceable rules s198C(1)

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powers to delegate. When you deal with a sales assistant in a large department store, you might consider why the assistant probably has the actual authority of the company that owns the store to deal with you.

Apparent Authority1. A person will have apparent authority to bind a company if the company has held the person out as

having the relevant authority.2. ‘Apparent authority’ and ‘ostensible authority’ are interchangeable terms. This type of authority is rooted

in equity. The company is estopped by its behaviour from denying, as against persons acting in good faith, that someone has authority to act for it and bind it to a transaction.

How Does a Company Represent That a Person Has Its Authority?1. By authorised organs or agents appointing the person to a particular position.2. 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.3. By the relevant organ or authorised agent otherwise representing by words or conduct that the person

has the necessary authority.The relevant organ or agent is the organ or agent that, under the company’s constitution, is entitled to exercise the company’s power to make the appointment.

Usual Authority1. 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.

2. 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.

Is it likely that a company officer would have actual authority to misrepresent the authority of another company officer? Crabtree is featured at para 5.335 of Redmond

See Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72. 1. In Crabtree, the managing director Bruce intimated to a person that Bruce’s brother Peter had the

carriage of a particular contract negotiation.2. Peter signed a contract on the company’s behalf to purchase an expensive item of equipment.3. 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.4. As managing director, Bruce had apparent, but not actual, authority to purchase the equipment himself.5. 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.6. Peter lacked actual authority for the same reason.7. 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.

But:1. More recent amendments to the legislation make it possible that Crabtree-Vickers would be decided

differently today.2. 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.3. 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

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been aware.Note:

1. 1984 Amendments: See now CA s 128(1) and ss 129(2)-(3).2. It is also arguable that the High Court misapplied Freeman & Lockyer in reaching its decision. It is

arguable that, notwithstanding the secret limitation on Bruce’s authority, he still had the power to manage the company’s business generally.

3. Lipton & Herzberg p 119: ‘It is anomalous that a company is bound by a contract entered into by a de facto managing director but not bound by representations of the de facto managing director that someone else has apparent authority.’ [On the facts of Crabtree, the real managing director Bruce has arguably represented to the outsider that Peter was the person to deal with; that is that Peter had actual authority to bind the company.]

4. Boros & Duns p 144: ‘What causes disquiet about [Crabtree-Vickers} is that the company would have been liable if Bruce Jnr had authorised Peter to place the order. If he had authorised Peter to place the order this would have been an exercise of his apparent authority just as if he placed the order himself. However, it was because he did not have the actual authority required to make a binding representation on behalf of the company that the company was not liable. The disquiet arises because the third party is a stranger to these internal corporate arrangements. It is true that that Peter had no actual or apparent authority (as a mere technical officer) to make a purchase of this magnitude and that they could have checked to see if Bruce Jnr had actually authorised Peter to submit the order form. However, that the outcome could turn on the arrangements made between Bruce Jnr and Peter seems somewhat arbitrary and the onus it places on the third party to make enquiries seems out of step with the protection otherwise offered by apparent authority. It will be seen below that had the provisions of the Act been in place the result may well have been different.’

5. The effect of the reasoning in Crabtree-Vickers is that the company would only have been bound by a representation made by Bruce Jnr that Peter was authorised to bind the company if the board had actually authorised Bruce Jnr to make that representation. However, in that event, both Bruce Jnr and Peter would have been acting with the company’s actual authority. Thus the High Court’s reasoning gives the concept of apparent authority very little work to do. How often does a board of directors give a managing director actual authority to misrepresent the authority of another?

6. Also note that the approach taken to apparent authority in Crabtree-Vickers seems to be inconsistent with the following statement by Brennan J in Northside Developments Pty Ltd v Registrar-General (NSW) [1990] HCA 32 at [13]: ‘In transactions other than those engaged in for the purposes of a company's business or otherwise for the benefit of the company, and in transactions where the officer or agent has purported to exercise an authority over and beyond the authority which an officer or agent in that position would ordinarily be expected to possess, a party seeking to bind the company by estoppel must rely on particular representations of authority made by the company - that is, by officers or agents of the company having actual or ostensible authority to make those representations.’ (emphasis added)

Note that the High Court indicated that the company would have been liable if:1. Bruce had ordered the equipment; or2. 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 Seals1. Every company used to have to have a company seal [‘common seal’].2. Now a seal is optional: s 123(1).

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3. 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.

Where a company does have a seal it must comply with s 123. Some companies have quite elaborate metal seals. However, most modern seals are made from plastic.

Execution of documents under sealA company may execute a document without using a common seal if the document is signed by:1. 2 directors of the company; or2. a director and a company secretary of the company; or3. for a pty co that has a sole director who is also the sole company secretary – that director: s 127(1).Note that a pty co does not have to have a company secretary: see s 204A(1).How does a pty co which has only one director but no secretary execute a document without using a common seal? See CA s 198E.Note also that s 127(1) is not intended to state the only way in which a company can execute a document without using a common seal. The company’s constitution may, for example, set out alternative or extra ways: see s 127(4).Again consider the position of a pty co that has a sole director but no secretary. Presumably, the seal would have to be used in the manner set out in the company’s constitution. But what if the constitution is silent? Is CA s 198E relevant?

The s 129 Statutory AssumptionsA 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).An assumption may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings: s 128(3). The statutory assumptions were intended to codify and ‘broaden’ the common law indoor management rule.

Effect of entitlement to make a s 129 assumption1. 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).2. The ability to make a s 129 assumption may assist, in an evidentiary sense, the person to successfully sue

the company.3. 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 129An attempt has been made to legislate something equivalent to, but not identical with, the common law ‘indoor management rule.

Section 128(1)1. A person is entitled to make the assumptions in s 129 in relation to dealings with a company.2. The company is not entitled to assert in proceedings in relation to the dealings that any of the

assumptions are incorrect.3. The ability of a person to make the s 129 assumptions may make it difficult for a company to defend an

action against it.4. 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.

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• 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].

Hodgson CJ added: ‘It is necessary that the person have authority to undertake some negotiation or other steps, so that the dealings, in relation to which the document is executed, are properly considered to be dealings with the company…’

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:1. 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.2. 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)1. 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.2. 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. 3. It must be shown that the person in question actually knew or actually suspected that the assumption in

question was incorrect.4. It is not sufficient to show that the circumstances were such as to put a reasonable person upon enquiry.5. The common law ‘put upon enquiry’ test has been displaced by s 128(4).Hodgson C J also added in Soyfer that a person who has been wilfully ‘blind’ to the facts would probably have an actual suspicion in relation to them.The same view of s 128(4) was taken by Gray J in Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 at [178]

Section 129(1) A person may assume that the company’s constitution (if any), and any applicable replaceable rules, have been complied with.Note:1. Consistent with the indoor management rule, and subject to s 128(4), s 129(1) allows an outsider to

assume, for example, that:1. appointments, which might be made under the constitution or rules, have been made;2. delegations of power, that might be made under the constitution or rules, have been made;3. 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.Note:1. A similar company is presumably one that carries on a similar kind of business. The immediate predecessor of s 129(1) was s 164(3)(b). It referred to ‘a company carrying on a business of the kind carried on by the company’. The information would have to be publicly available from ASIC at the time of the relevant dealing.

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2. The information provided to ASIC is likely to be that in the company’s annual return (see s 345 and s 348) or in the notice required by s 205B (notice of personal details of each director and secretary and notice of changes to those details). Information provided to ASIC by company directors or secretaries under s 205A (notice of retirement or resignation) and s 205E (in response to ASIC questions) would be outside the terms of s 129(1) as it would not have been provided by the 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.Arguably, in Crabtree-Vickers, the board of Australian Direct Mail Advertising Co Ltd had held out Bruce Jnr as having the power to represent to the Crabtree-Vickers agent that Peter was the person to deal with. The board’s appointment of Bruce Jnr would be taken to involve a representation by the board (acting as the company) that Bruce Jnr had all of the usual powers and authority of a managing director of a printing company.

Section 129(4)A person may assume that the officers and agents of the company properly perform their duties to the company.1. 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).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.Note: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.

2. The entitlement to make the s 129(5) and (6) assumptions is not dependent on proof that the company had complied with all relevant provisions of its constitution or that the company had authorised the document: see Myers v Aquarell Pty Ltd [2000] VSC 429 at [72]-[74] per Gillard J.

3. The object of making an assumption that a document has been duly executed or sealed is that the recipient of the document might fairly accept that it had been executed or sealed with the company’s authority: see Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; (1990) 3 ACSR 649 at 682; 9 ACLC 324 at 350-1 per Ormiston J (affirmed Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; (1991) 6 ACSR 464; 100 ACLC 252, SC(Vic)).

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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.At common law, it is unclear whether a company officer such as a secretary, who has authority to perform the ministerial act of issuing a document on behalf of the company, also has implied actual or apparent authority to warrant that the document is genuine: see Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 151; 2 ACSR 161 at 166; 8 ACLC 611 at 617-18 per Mason CJ. Section 129(7) is intended to overcome the decision in Ruben v Great Fingall Consolidated [1906] AC 439; [1904-7] All ER Rep 460 where the House of Lords held that a company secretary had no authority to warrant that a forged share certificate was genuine.

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.1. Accordingly, the presumptions are cumulative.2. For example, a person may be entitled to make several of the assumptions in connection with a dealing

with the company.In Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335, one issue was whether the persons who signed a contract for a company were directors of the company at the time. The most recent documentation lodged with ASIC by the company indicated that they were. Therefore, under s 129(2), the third party was entitled to assume that they were directors of the company. It also meant that other assumptions could then be made.

Pre-Registration Contracts1. 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.2. At common law, a company when formed is not bound by any contract purportedly made on its behalf

before the date of its incorporation.Until a company is registered as a corporation it lacks legal personality. Since contractual capacity runs, at least in part, with legal personality, it follows that a company cannot be directly or indirectly a party to a contract prior to incorporation (registration). 3. At common law, a company cannot ratify a pre-registration contract upon registration: Kelner v Baxter

(1866) LR 2 CP 174. 4. 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.5. 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. Note:The only ways in which a corporation could benefit from a pre-registration contract were (i) by the contract being novated to it; or (ii) by the benefit of the contract being assigned to it, after registration.

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.Note:

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1. The person purporting to act for a company prior to it being registered must provide a sufficient description of the company to allow a subsequently registered company to be identified with it: see, for example, Herniman & Associates Pty Ltd v Williams [2005] VCAT 2084 at [132]-[135] per Bowman J.

2. Section 131 will not apply where a person purports to contract for a company which has been de-registered: McKeagg Contractors Pty Ltd v Howard Porter Pty Ltd [2000] WADC 287. The position might be different if the person proposes to re-register the company.

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:(a) not registered, or (b) 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.1. It is the company, and not the person who purported to act for it prior to registration, that has the power

to ratify the contract. The company's power to ratify the 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). In some cases, that individual may be the person who was party to the pre-registration contract: see, eg, Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR 1; 23 ACLC 1903; [2005] NSWCA 319; BC200506977 [contract ratified by the company's promoter and directing mind]; MX Projects Pty Ltd v Hyber Pty Ltd [2007] VCAT 271.A valid ratification does not necessarily involve use of the company's seal if it has a seal: s 126(1). There is no special ratification procedure. In practice, a board of directors will usually have the power to ratify a pre-registration contract: see, for example, s 198A(2) which operates as a "replaceable rule". But, if the contract is with a promoter, the board should be independent of the promoter. Ratification could result from an express decision of an authorised company organ or agent, or it might be inferred from part performance of the contract by the company. An officer, such as a managing director, could also have actual or apparent authority to ratify an agreement.

2. It is uncertain whether a s 131 ratification can occur without the other party to the contract being informed.

3. No attempt has been made to define "a reasonable time". The courts are unlikely to establish inflexible periods: Lifesavers (Aust) Ltd v Frigmobile Pty Ltd (1983) 1 NSWLR 431 at 438; ASC 55-251 per Hutley JA; Breeze v Cambridge Gulf Holdings NL (SC(WA), Chapman J, No 1858/97, 27 November 1997, BC9706473, unreported). All of the circumstances surrounding the contract should be relevant in determining whether ratification is permissible. In Clasic International Pty Ltd v Lagos (2002) 11 BPR 20,573; (2003) NSW ConvR 56-053; BC200207201; [2002] NSWSC 1155, it was held that ratification of a commercial property lease within a month of the pre-registration contract being entered into was effective.

Ratification by the company1. Within the time agreed by the parties to the contract or within a reasonable time2. What's a reasonable time? A question of fact to be determined having regard to all the circumstances -

yes its vague and difficult to apply3. Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd [2004] NSWSC 967 time agreed4. 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).

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• 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:1. pay all or part of the damages that the person is liable to pay;2. transfer property that the company received because of the contract to a party to the contract; or3. pay an amount to a party to the contract.

Promoter May Be Released From LiabilityA 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).