A company with multiple directors operates under the assumption that all directors are to act within their fiduciary duties to one another. That is to act in the best interests of the company, avoid conflicts of interest, act in good faith, use their powers for proper purposes and act with reasonable care and diligence.
Where a director effectively defaults from these duties, whether conscious or unconsciously, by attempting to bind the company to a transaction, agreement or assignment, that the remaining directors do not agree with or condone, you may be concerned as to whether or not your company is effectively bound by a single director.
What are the typical requirements for documents to be ratified by a company?
As per section 127 of the Corporations Act 2001 (‘the Act’) the typical process for the execution of documents by a company, with or without the common seal, require that the document must be signed by:
- Two directors of the company;
- A director and a company secretary of the company, or;
- In the case of a proprietary company in which there is a sole director who also acts as secretary for the company, then that director can execute a contract alone.
However, section 126 of the Act, clarifies that where an individual, director or otherwise, is acting on the company’s express or implied authority, the formalities above may be discharged and the contract can be ratified without a common seal and without the signature of other directors or secretaries.
What qualifies as express or implied authority?
- Express authority, as implied by its name, is authority which is given directly and clearly often by written authority. This may be in the form of an email, company constitution or otherwise.
- Implied authority arises where the principal says or does something that implies authority is given for such as where a principal appoints a person for a position, or the directors/principals have acquiesced to the authority for example where a person has knowingly taken on certain duties which no director has protested to nor attempted to discontinue the assumption of the role – the directors are seen to have acquiesced their authority. This is especially true in senior roles such as managers, team leaders and CEOs.
What does this mean for my company?
As it pertains to assignments, in-house contracts and transactions, It is important that where you see an employee or director actioning the aforementioned on behalf of the company which you or your fellow directors do not agree with nor have given express authority to, that you provide written notice of such.
If you are seen to allow an employee or director to enter into a similar type of assignment, contract or transaction, consistently, this could be taken to be implied authority and your company will be bound to these agreements under section 126 of the Act.
For further protection, ensuring that your company retains express declarations of the roles, authorities and the extent of responsibilities of each employee and director is vital, and can preemptively negate the argument of implied authority should you oppose the assignment, agreement or transaction in the future.
What about third party contracts?
The judgements in both Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd and Northside Developments Pty Ltd v Registrar-General, are consistent in stating that where there is a company with multiple directors, a single director has no implied actual authority and cannot bind the company to a third party contract.
If your company is looking to dispute an agreement, assignment or transaction entered into by one of your directors, you can seek advice from our qualified Commercial Law Team by contacting 9525 8688 or email wmd@wmdlaw.com.au.
