(02) 9525 8688

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Personal Liability of Directors Upon Signing of Company Contracts

Personal Liability of Directors upon signing of company contracts

In one recent case, a company director came under scrutiny after he failed to correctly arrange signatures for the purchase of property on behalf of De Chellis Homes Pty Ltd.
 
The contract execution page for the purchaser (De Chellis Home Pty Ltd) was marked “in accordance with section 127 (1) of the Corporations Act 2001” whereby it is necessary for two or more directors and a company secretary to sign the contract to make it binding.
 
The director of De Chellis Homes signed the first execution box as a director and struck out the words “Sole Director/Sole Secretary”, thereby designating that the company had two or more directors.
 
As there was no second signature by another director, the contract was deemed to be not fully executed by the purchaser under section 127 and the vendor could not enforce the contract against the purchaser.
 
EXECUTED by De Chellis Homes Pty Ltd
ABN                             in accordance with
Section 127(1) of the Corporations Act 2001
 
Although it is stated under section 126 that a contract may be executed by an agent on behalf of a company, such power must be granted in writing for the contract to be binding on the company. As there was no such power granted to the director in this case, section 126 did not apply.
 
However, the case is a reminder that where a director executes a contract as an agent on behalf of a company, and the other party relies on this representation, the director has warranted that it has authority to enter into the contract. The director could be personally liable for damages if he or she did not have actual authority to act as the company's agent to bind the company. This could occur in situations where the company has more than one director and there is no written authority for a single director to act as an agent for the company. Where the contract is unenforceable against the company, the Vendor may have a claim against the director personally to fulfil the contract by his or her own means, rather than those of the company.
 
Directors are urged to ensure they are fully aware of how to properly sign a contract on behalf of a company. Vendors are also encouraged to seek legal advice to ensure that a director who is signing on behalf of a company has written evidence of the required authorisation to sign if required. Contact the experts at WMD Law Office on 9525 8688 for guidance.