Focus of this lecture:

PRBL004 Corporations Law Lecture 5 Corporate Liability (Agency) & Pre-registration Dealings Jeswynn Yogaratnam Room: 39.3.72; Yellow 1 (3rd flr) Telephone: (08) 8946 6085 Email: jeswynn.yogaratnam@cdu.edu.au 1 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 2 3 1

: 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 4 : 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 5 How 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 6 2

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 7 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 8 Common law principles: 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) 9 3

Common law principles: 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) 10 (cont) Common law principles: 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 authority to 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) 11 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) 12 4

STATUTORY 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 13 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 14 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. 15 co sec only authority to deliver share certs property did not pass) 5

Statutory Assumptions s 129 of the CA (cont) 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) 16 Statutory Assumptions s 129 of the CA (cont) 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) 17 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 18 6

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 19 Criminal Liability s 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 20 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 21 7

Pre registration Dealings 22 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 23 Types 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 24 8

Duties 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 25 Remedies 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. 26 Pre 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) 27 9

Pre registration contracts: 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) 28 Pre registration contracts: 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 29 Pre registration contracts: Statutory position changes common law rule 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 30 10

Pre registration contracts: Statutory position changes common law rule 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 31 11