prbl004 - lecture 5- dealing with outsiders & pre...

1

1

PRBL004– Corporations LawLecture 5 – Corporate Liability

(Agency) & Pre-registration Dealings

Jeswynn YogaratnamRoom: 39.3.72; Yellow 1 (3rd flr)Telephone: (08) 8946 6085

Email: [email protected]

2

Focus of this lecture:

Where companies deal with outsiders/public, we will

look into the liability of companies in the areas of its:

Contractual liability

Criminal liability

Tort liability

Pre-incorporation contracts entered into by promoters

3

Contractual Liability

2

4

Contractual Liability:

General rule:

Co. will only be liable where a person or an “organ” of the co. (eg. the board) has the authority to enter

into the contract on the co’s behalf; or

Co. has approved or “ratified” an act or contract that has been done or made without proper authority

5

Contractual Liability:When is a contract NOT binding?

Contrary to general law – eg. against public policy

Contrary to the provisions of the Corporations Act 2001, which makes such a transaction either:

- void; or- voidable

It was not, at the time it as entered into, for the benefit of the co., and the other party to the transaction knew the directors were acting contrary to the co’s interests- ANZ Executors & Trustee Co Ltd v Quintex Australia Ltd(1990) 8 ACLC 980

It was made at the time the co. was insolvent or on the verge of insolvency- Walker v Wimborne (1976) 137 CLR 1

6

Contractual LiabilityHow does a Co. execute a contract?

Directly – by one of its “organs” (eg. the board of directors or members in GM) – the directing mind and will of co.

Indirectly – by one of its agents acting on its behalf and with its authority

Types of authority:

Actual

- express: stated orally or written (eg. RR)

- implied: authority associated with the position (eg. Managing director) or on the basis of “acquiescence” of co. (condonig unauthorised transactions purportedly entered into)

National Austraila Bank v Sparrow

Apparent (sometimes referred to as “ostensible”)

- co. has “held out’ or represented that a particular person has authority to act on its be half

3

7

Contractual LiabilityHow to enforce agency principles?

Common law principles

Statutory provisions – ss128-130 of the CA

- entitles an outsider to make an assumption when dealing with a co. that the person has authority

8

Contractual LiabilityHow to enforce agency principles?Common law principles:

1. Turquand’s case (“indoor management “rule)

Royal British bank v Turquand (1856) 119 ER 886

- Persons dealing with a co. are taken to have constructive notice of the co’s public documents , they need not go further to ensure the internal proceedings of the co have been properly carried out

- Protects an outsider from co’s procedural irregularities eg. No quorum or voting irregularity

- Rule has been adopted by s 129(1)

Exceptions to the rule in Turquand’s case:

- where outsider has actual knowledge of irregularity; or

- Is put upon inquiry by the circumstances of the case and fails to make inquiries

9


2. Actual authority of co agents- may arise expressly or by implication

- Expressly – eg. per the RR/Constitution - Implied – acts customarily done by persons occupying the

office/role (eg. Managing director)- Caution: just because director acts in a dominant way, does not

mean actual authority conferred – eg. absence of knowledge/acquiescence of Board

National Australia Bank Ltd v Sparrow Green Pty Ltd [1999] SASC 280 (L&H – 117)(doc signed by single dir and acted as co sec against constitution – mgmt of co vested in the board and not a single director)

4

10


3. Apparent (or “ostensible” ) authority of co agents

- applies where an outsider deals with person who has “customary authority” eg. acts as MD but who has neither - actually been appointed to that position or the appointment is defective (eg. no quorum for resolution to be passed for the appointment of MD)

Freeman and Lockyer v Bathurst park Properties (Mangal) Ltd [1964] 2 QB 480 (L&H 118)

- Instances where representation by person who lacks actual authority may not be sufficient to create an agent’s apparent authority (eg. representations of a de facto MD)

Crabtree-Vickers Pty ltd v Australian Direct Mail (1975) 33 CLR 72

(family co. – MD not officially appointed hence no actual authority at most apparent authority and therefore not cpable of making representations for the co)

11

Contractual Liability

Freeman & Lockyer v Buckhurst Park Properties (Mangal)Lord Diplock in that case set out 4 conditions of a contractor’s entitlement to enforce against a company a contract entered into by an agent who had no actual authority:

1. representation made to the contractor that the agent had authorityto enter on behalf of a company into a contract of the kind sought to be enforced

2. the representation was made by a person or persons who had “actual authority” to manage the business of the company either generally or in respect of those matters to which the contract relates

3. the contractor was induced by such representation to enter into the contract – ie relied on it in fact

4. under the constitution the company could actually enter into such contracts that is sought to be enforced or to delegate authority to enter into a contract of that kind to the agent (note this does not apply to aust companies because they have the capacity of individuals)

How to enforce agency principles? (cont)

Common law principles:

12

Contractual LiabilityHow to enforce agency principles?Statutory provisions:

Statutory Assumptions – s 129 of the CA

- sets out the assumptions a person dealing with a co is entitled to make

- Codifies and clarifies Turquand’s case

- apply to “dealings” with a co

Story v Advance Bank of Austraila (1993) 31 NSWLR 722

- dealing includes where a document is forged; extends to purported dealings

- Each assumption in s 129 is separate and discrete

- S 129(8) gives cumulative operation to the assumptions (eg. assumes officer performs duties; assumes officer duly appointed)

5

13

Contractual LiabilitySTATUTORY ASSUMPTIONS

S129 The assumptions:(1) constitution and replaceable rules complied with

(2) Director duly appointed and has customary powers if ASIC docs say so

(3) Officer or agent has been duly appointed and has customary powers if ASIC docs say so

(4) document duly executed without seal if in accordance with the requirements of s 127(1)(5) document duly executed with seal in accordance with s 127 (2)

(6) an officer or agent who has the authority to issue a document – you can presume they are also authority to warrant that the document is genuine or is a true copy

14


Statutory Assumptions – s 129 of the CA

Compliance with the constitution – 129(1)

Oris Fund Management Ltd v NAB [2003] VSC 315

(unless outsider had knowledge)

Person named as officer in public documents – s 129(2)

Person held out as officer or agent – s 129(3)

(s 9 defines “officer of a corporation”)

see Freeman and Lockyer; ANZ v Australian Glass and Mirrors (1991) 9 ACLC 702

15


Statutory provisions:

Statutory Assumptions – s 129 of the CA (cont)

Officers and agents properly perform their duties – s 129(4)

- fiduciary and statutory; constitution or legislation; administrative or statutory tasks

Document duly executed – s 129(5)

- in accordance with s 127(1) and 127 (2)

see Brick & Pipe Ind Ltd v Occidental Life Nominees Ltd (1992) 2 VR 279

Warranting documents genuine

- eg. co secretary assumed to have authority to warrant that a share certificate is genuine contrast from common position in Ruben v Great Fingall Consolidated (1906) AC 439 (L&H P 127)

(co sec forged signatures and affixed co seal without authority – did not bind co. – co sec only authority to deliver share certs – property did not pass)

6

16



Customary authority of officers – s 129(2)&(3)

1. Individual directors

- witness fixing of co seal / sign co’s negotiable instruments eg. Cheques

- case of a dominant director as per Brink and Pipe Inds case (“mind and will” of co)

2. Managing directors

- to make contracts related to day to day management of co’s business

eg. engaging person to work (Freeman & Lockyer);

borrowing money on behalf of co

(but may not include transactions that are not in the ordinary course of co’s business)

17



Customary authority of officers – s 129(2)&(3)

3. Chair

- same as individual director and no authority to contract on co’s behalf

4. Company secretary

- not as wide as a director and no authority to bind co

- limited to administrative, internal nature eg. employing staff

Panorama Developments (Guildford) Ltd v Fidelis (..) (1971) 2 QB 711

(examined customary authority of co sec; hired cars stating for co purpose but used for own purposes – failed to pay hire charges – did co sec have apparent aut? Yes, co sec has customary authority to enter into contracts connected to administrative side of co’s affairs)

18


Limitations to statutory assumptions – s 128 (4) of the CA

Knew assumption incorrect

- at the time of dealing…

- “knew” can be said to mean “actual knowledge”

see Brick and Pipe Inds case

Suspected assumption incorrect

- actually suspecting the assumption is incorrect

- Lipton & Herzberg: may rely on assumption if person did not in fact have suspicions, even though a reasonable person would have

see Oris Fund Management Ltd v NAB Ltd (2003) VSC 315

7

19


Statutory provisions:

Effect of fraud or forgery

Person may rely on s 129 even if officer or agent acts fraudulently or forges a document in connection with dealings

- s 128(3) covers situation where co seal/signatures are forged

Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722

20

Criminal Liabilitys 12.1(2) of the Criminal Code Act 1995 (Cth) (“CCA”)

- a body corporate may be found guilty of any offence including one punishable by imprisonment

- cannot be imprisoned but can be fined

s 12.2 CCA - a physical element of an offence is attributed to a co if it is committed by an employee, agent or officer of the co acting within actual or apparent authority

s 12. 3(6) CCA – defines “high managerial agent” and “corporate culture”

s 12. 5(1) CCA – co can rely on mistake of fact defence (if there was reasonable belief; exercised due diligence

Common law

- Criminal liability of a co could be traced to actions of persons highly placed whose mind and will could be attributed to the company

see Tesco Supermarket case

21

Tort Liability

• Co is vicariously liable for torts committed by employees/agents in the course of their employment

• Damages may be reduced on grounds of contributory negligence where directors or managers were negligent

see Daniels v Anderson (1995) 37 NSWLR 438• s 128(3)– codifies common law rule regarding vicarious

liability of co for the fraudulent acts of their employees/agents

8

22

Pre registration Dealings

23

Pre registration dealings

Pre registration dealings refer to transactions/contracts entered into by promoters prior to the registration of a co

Who is a promoter?

Twycross v Grant (1877) 2 CPD 469; Cockburn CJ:

“…one who undertakes to form a company with reference given to a

project and to set it going, and who takes necessary steps to accomplish that purpose”

24

Pre registration dealingsTypes of promoters

Active

– undertakes the formation of co by carrying out the procedure to incorporate co

- includes registration, payment of legal fees, preparing co constitution, obtaining directors and shareholders, raising capital,

preparation of prospectus, negotiating preliminary agreements

- need not necessarily hold shares or managerial position in co

- not promoter if merely acting in a professional capacity on behalf of promoter to incorporate a co

- includes the officer who is the directing mind and will of the promoter co

Aequitas v AEFC (2001) NSWC 14

Passive

- takes no active part in the incorporation and raising of capital

Tracy v Mandalay Pty Ltd (1953) 88 CLR 215

9

25

Pre registration dealingsDuties of promoters

Fiduciary duties

- must act bona fide

- must avoid conflict of interests

- not to make secret profit

As a result of the fiduciary duty:

Disclosure of interests in a contract

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

Undisclosed profits

- duty to disclose personal profits that may arise from their position

Gluckstein v Barnes (1900) AC 240

Fundraising disclosure

- via the prospectus – promoter required to disclose nature and extent of interest in formation of co, property acquired, the offer of securities

26

Pre registration dealingsRemedies for breach of duties

Rescission

- irrelevant that promoter made no profit where failure to disclose personal interests

Recovery of secret profits and constructive trust order

- co obtain a constructive trust order against promoter

Liability under Corporations Act

s 711(2) and (3) require a prospectus to set out certain information with respect to promoter’s interest in formation, promotion or property acquired by the co.

Promoters are within “related entities” in s9 and may be liable to a liquidator under the voidable antecedent transaction provisions.

27

Pre registration dealingsPre registration contracts:

Common law position

- Co cannot enter into a binding contract until it is

registered

- As a result, a person could not make a legally binding

contract in the name of the co in anticipation of it

being registered

Newbourne v Sensolid (Great Britain) Lat (1954) 1

QB 45

- Co also incapable of ratifying pre-registration contract

after co was registered

Kelner v Baxter (1866) LR 2 CP 174

(Signed ctt with the words ‘on behalf of [unregistered co’s name]. After co. ‘s registration, ratified ctt –

co became insolvent – terms of ctt demonstrated

intention of the promoters to be personally bound)

10

28


Common law position

- Kelner v Baxter (1866) LR 2 CP 174

c/f Black Smallwood (1966)117 CLR 52

(signed ctt using co’s name followed by their own

names as directors of the co, which they believed was registered at that time – promoters not liable

as liability in contract depends on intention of the

parties to the contract – the directors in Smallwood did not intend to become liable which

is the reason they signed using the co’s name –

distinguished Kelner)

29


Statutory position – changes common law rule…

S 131(1) - if a person enters into a contract on behalf

of or for the benefit of a company before it is

registered the contract is binding

if the company or

a company that is reasonably identifiable with it

ratifies the contract ( see Aztech Science Pty ltd

v Atlanta Aerospace (woy woy) Pty Ltd [2005] NSWCA 319)

within the time specified in the contract or

where there is no agreed time, within a

reasonable time after the contract is entered into

30



s131(2)

The person who entered into the pre registration contract is personally liable to pay damages to

the other contracting party if the company

is not registered

or if registered but does not ratify the contract

within the agreed timeframe or a reasonable

timeframe

The amount of damages is the amount co would be

liable to pay if it had ratified the contract and did not perform it

11

31



s131(4)

If co ratifies pre registration contract but fails to perform

all or part of it, court may order person to pay all or part that co should pay

131(3)

Court may do anything appropriate in the circumstances, including ordering the co to:

- pay all or part of s 131(2) damages;

- transfer to the other contracting party property that the

co received because of the contract

- pay an amount to a party to the contract

prbl004 - lecture 5- dealing with outsiders & pre...

Documents