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CHAFTER 4

GOMPANY MANAGEMENT AND GONTRAGTTNG


GONTENTS 4.1 GompanyManagement
a t a o o rt o a Introduction Division of Powers Within a Company The Management Powers of the Board Proceedings of the Board Types of Directors Company Secretary Members' Powers at a General Meeting General Meeting Cannot Interfere in Management

4.2

GompanyGontracting
o a 0 t a . a a a Introduction Execution of Documents Organic Theory Contracts Made by Agents Actual Authority Apparent Authority Outsiders' Rights of Assumption Customary Authority of Officers Limitations to Assumptions

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4 MANAGEMEI{T ANDCOf{TRACNNG CI{APTER - COMPA]W

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OBJEGTIVES
* how a companyis managedand the division of power betweenthe To understand board of directorsand the membersin generalmeeting; * * To know the different types of directors and secretaryand their appointments; how a directors' boardmeetingoperates; To understand

rf To understandthe different ways in which a company can enter into contractsand outsidersare entitledto make. the assumptions

IMPORTANT SEGTIONS
[seeCorporationsAct 2001] CompanyManagement . 9(director), 9(officer), 249C,249CA,2O3C-D,201G-H, Ss 198A-D,LO7ZF-G, 201A-8,2024.

Company Contracting r S s 1 2 3t o 1 3 0 .

IMPORTANT GASES
[seetext below -references in bold] Company Management . . . v Syndicate Cunninghame AutomaticSelf-Cleansing [1906]; John Shaw(SaWrd) Ltd v Shaw[1935]; NRMAv Parker (1986).

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Company Contracting ' ' . . . . . . . Lennard's Carrying Co Ltd v Asiatic PetroleumCo Ltd [ 1915]; HL Bolton (Engineering) Co Ltd v TJ Graham & Sons U957); Ltd TescoSupermarkets v Nattras tl972l; Brambles Holdings Ltd v Carey (1976); Hely-Hutchisort v Brayhead Ltd [1968]; Freeman and Loclqear v Buckhurst Park Properties (Mangal) Ltcl U9641; RoyalBritish Bankv Turquand(1856); (1990); Pty NorthsideDevelopments Ltd v Registrar-General Bank of New Zealand v Fiberi (1994).

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MAIIIAGEMEilT CHAFfER 4 - COMPAT{Y ATIDCOTITRACTNG

SUPPORTING SEGTIONS [seeCorporationsAct 2001] Company Management 142,145,201E-F,20lK-L, 202A,2028,203A,204A-8,204D-F, Ss 140(l), 127,136, 2058, 2068-G,230,232, 248A-G,249D,251A,2548,254D,254U, Div 2 Part2D.2, 3 t 9 , 3 4 5. CompanyContracting l9 Ss1 3 0 , 3 6 (5 ), 8 A -B .2 0 1 J. 1

SUPPORTING [seetext below]

CASES

Company Management Petsh v Kennedy [l97tl; Mitropoulos v Greek Orrhodox Church(1993); Jenashare Pty Ltd v Lemrib Pty Ltd (1993); Mistmorn Pty Ltd v Yaseen(1996); Standard Chartered Bank of Australia Ltd v Antico (1995); AWA v Daniels (1992); KeIIy v Wolstenholme (1991); Whitehouse Carlton Hotel Pty Ltd (1987);Daniels v Anderson (1995);Levinv v of Clark U962); Commissioner Corporateffiairs v Bracht (1989); Commrfor Corporate Affairs v Ekamper(1987); ASIC v Adler (2002);Re Duomatic Ltd [969].

Company Contracting Entwells Pty Ltd v National and General Insurance Co Ltd (1991); Meridian Global Funds ManagementAsia Ltd v SecuritiesCommission[1995]; Donato v Legion Cabs (Trading) Co-operativeSoc Ltd (1966); Federal Commr of Taxationv WhitfurdsBeach Pty Ltd (1982); Re Chism ServicesPty Ltd (1982); SPP Ltd v Chew Beng Gim [1993]; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992); Chew Hock San v ConnaughtHousing DevelopmentSdn Bhd [1985f; Crabtree-Vickers Pty Ltd v Australian Direct Mail (1976); Kcth Nai Chye v Tong Loong Pte Ltd (1992); Banque Bruxelles Lambert v Puvaria PackagingIndustries (Pte) Ltd U994; Chew v R (1992); British Thomson-HoustonCo Ltd v Federated European Bank Ltd U9321; Re Qintex Ltd (1991); Dart Sum Timber (Pte) Ltd v Bank of Canton Ltd [1982]; Panorama (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd U97I). Developments

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4.1
Introduction

COMPANY MANAGEMENT

a l

Like any individual, a company needs to make decisions from time to time. These hiring of employees, appointment decisionscan rangefrom the day{o-day operations, of officers, entering into contractswith outsiders,decisionsabout company'sfundraising, internally. and constitutionaldecisionsas to how the companywill be governed This chapter examinesthe decision-makingpowers of a company - who it is within a companythat has the power to make decisionsand the type of decisionsthey can make. Different legal considerationsapply to determining who has decision-makingpowers within a company,comparedwith the exerciseof the company'sdecisionmaking powers in transactionsthat affect outsiders. Here both are examined - the division of powers within a company,and how the companycontractswith outsiders. Acting through indivi.duals legal entity, it is an artificial entity and thereforeneeds Although a companyis a separate individuals to act on its behalf. These individuals can be either organsor agentsof the company. Organsare part of the company itself (no different from the organsof a human person) to and they are considered be the directing mind and will of the company. As such,their decisions and actions are the company's decisions and actions. The organs of the 'board' or company are the board of directors (whose meetings are described as 'directors' meetings)and the membersin general meeting ('general meeting' is a term power is split between meaninga meetingof members). The company'sdecision-making The organsof the companyoften grant power to an agentto act for and thesetwo organs. on behalf of the company. Thus the company,as the principal acting throughits organs, appointsagentswho in turn may bind the companywith a third party in contract. A company is legally inseparablefront its organs. However, an agent is a separatelegal entityfrom a contpany Division of powers within a company

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A company is an anificial entity, with legal capacity and powers. It requiresnatural persons exercisethose powers. It is normally the organsof the companythat bind the to companyto the outsiders(seeorganic theory companycontractingbelow). The organsof a companyare: . . the board ofdirectors, and in the mentbers general meetinB.

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Division of Power The CA and the constitution divide the power between the board of directors and membersin generalmeeting. The division of power in the constitutionhas to be observedby each party, since the constitution creates a statutory contract between the members,the company and the directors and secretary(5140 - see chapter3). A most important principle that arises from this contractual relationshipis: If the memorandumand articles grant management power to the board of directors, the membersmust not interfere in the management that company- to do so would of be unconstitutional and a breach of contract. The CA and the replaceable rules generallydivide the powersas follows:

Powers-Board of Directors

Powers-Members general meeting

power RR S198A- management RR S198A(l)- issueshares, borrow debentures, RR 51988 - executenesotiable instruments RR S 1072F-G-refuse transfer of shares RR S249C- convenemeetings RR S254U - determinedividend Examples of division of power

RR S201G- appointdirectors RR S203C,S2O3D-remove directors RR S202A - remuneratedirectors Ss 249E,F- call members'meeting S249N- members'resolution Sl36 - altercompany's constitution

In Automatic Self-Cleansing Syndicate v Cunninghame the membersin generalmeeting resolvedthat the company should sell someof its property. The directorswith general managementpower under the company's constitution refused to act as the members ordered. The court found that the members could not interfere in the company's management breachof the company'sconstitution. in ln John Shaw (SaUord) l:td v Shaw a majority of the directorsdecidedto instigatelegal action againsttwo of the company's directors. Thesetwo directorshad sufficient support amongstthe memberssuch that the members passed resolutionorderingthe directorsto a

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discontinuethe company's legal action. The directors refusedthe order and the court supported their management power (which includes the power to initiate legal as proceedings) grantedto them by the company'sconstitution. In NRMA v Parker the directorshad the power to selecta returningofficer when a ballot for the appointment of directors was held. The returning officer had the power to determine the method of distributing the ballot papers. The members requestedan election of directors as they were entitled to do under the company's constitution. However, part of their request selectedthe returning officer and chose a method of distributing the ballot papers. This was considered interferencein the director's power providedby the constitutionand as such,was invalid. management

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The management Broad Powers

powers

of the board

rules apply and RR Sl98A, If a company does not have a constitution,the replaceable provides the board of directors with broad managementpower. If a company has a constitution, the constitution may give the board of directors general or restricted powers. Managementpower includes the power to make decisionsabout management the company's operationsand the company'scapital. The company'sboard of directors normally exercises managementpower at the company's board meetings. However, with powers individual directors,such as the managingdirectormay have beendelegated the to implement board'spolicies. It is most unusual to overly restrict directors' managementpowers through a constitution that as to do so would requiremembersengagingin a role (management) is foreign to the purposefor which they becamemembers(investment). Also, if the membersengagein too much day to day managementthey may themselvesbe classified as directors, of attractingall the duties and responsibilities sucha position. It is thus usually only the constitutionsof closely held proprietarycompanies(such as a family company where the members are much closer to the activities), that restrict powersby requiringmembers'approvalin generalmeeting. Such directors'management restrictionis usually limited to significant irregular events so that there is little prospect of the membersattractingthe statusof directors. For example,a family company,where over the company's debts,may have a rule the membershad given personalguarantees loanscan be incurred. requiringmembers'approvalbefore further
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Also, for companieslisted on the ASX, the listing rules also introducesome restrictions on directors' managementpowers. An example is the requirementfor members to (cunently this is L5Vo of approvean issue of sharesif it is over a prescribedpercentage itto 20Eo). but issuedshares it is proposedto increase

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CHAPTER - COMPAT{Y 4 MATIAGEIUEiIT coItITRAcTING AND

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The following powersare generallyconferredon the board of directorsby the company's constitution(and are also found in the replaceable rules): Management RR S198A(1) gives the board of directorsthe generalpower to managethe company's business. This would includethe powerto borrow money,chargeu.o-puny's property, and issue debentures and issue shares(see footnote to RR S198A). Note tirat power is granted to the directors collectively for the making of board decisionsand not to an individual director (see Calling meetingsbelow for the only example where power is grantedto an individual director). Delegation of powers RR S198C allows the directorsof a company to appoint a managingdirector (the chief executiveof the company). The board can delegateany of its powers to the managing director. RR S198D also allows directors to delegatetheir powers to committeesof directors(e.g.an audit committee). Issueshares The directors' power to issue sharesor make a call on sharesis derived from the broad power RR S198A. In exercisingthis power, the directorswould determine management the terms of the issue and the rights and restrictionsattachedto the sharesS254B. RR of S254D statesthat before issuingshares a particularclass,the directorsof a proprietary company must first offer them to the existing holdersof that class. This is known as a pre-emption clause and it ensuresthat members can retain their existing proportionate if shareholding they wish to take up their shareof the new shareissue. A rule suchas this but could be usedby a public companyin its own constitution it is not usuallysuitablefor such a companywhere an offer of sharesto existing memberswill normally require the with an of preparationof a prospectus; whereas,a single placement shares very expensive investormay be able to attractan exemption(seefundraisingchapter9). Transfer of shares RR S1072F generallyperrnits membersto transfertheir sharesto any personthey wish. This is consistent with the concept of a share being an item of personal property Sl070A(1). A transferrequiresa properinstrumentof transfer. RR S1072F(3)however permits directorsto refuse a transfer of sharesif the sharesare not fully paid up or the companyhas a lien on the shares. This reflects the fact that the companyhas an interest to transferred a in who owns its partly paid sharesas it would not wish to have the shares personwho is less able to meet a call than the currentholder. This shouldnot be thought of as the company still having an ownership interest in the partly paid shares- rather, legal existencethe sharesare owned by the member and under the principle of separate the liability to meet the call rests with that person. It is a contractualright that the

AI{D 4 CHAPTER - COMPA$TMANAGEMENT COilTRACTIIIG

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if a call is companyhas that would permit it to force forfeiture and resaleof the shares, not paid. refusethe Under the replaceablerules, proprietarycompany directorshave the power to with transferof sharesfor any reasonwhatsoeverRR S1.072G. This may be popular a rule that one tightly held family companies. For a companywith a governingdirector, might be used. personhascontrol over all transfers public companydirectorscould also have this power if a constitutionso providedit but it is not very suiiable for such companieswhere the right to sell sharesto any personads valueto the shareholding. Companieslisted on the ASX are not permittedby the listing to rulesto restrictthe rights of shareholders transfertheir shares. Calling meetings notice. RR S248Cpermits a director to call a directors' meeting by giving reasonable power to a director to call a meeting of the members. This is a RR S249C also grants mandaroryrule under S249CA for a listed public company director. Section 249D permitsa prescribednumber of membersto requestthe directorsto call a generalmeeting (seechapter7 members'meetings). Dividends Dividendsare paid by a companyfrom its profits to its members.They are nearly always paid in cashand are thus a cash flow item that would properly is a matter for directorsto decide. Subjectto the constitution,the directorshave the full authority to determineand pay both interirn and final dividends. RR S254U statesthat the directorsmay determine the amount,time and method of paymentof a dividend. For companiesthat still have a constitutionbased upon the old Table A articles, the members would be required to (approve)the directorsrecommended declare divided. Executedocuments A company may execute a document with or without a company seal 5127. If a document executedusing the company's seal,2 directors or a director and a company is secretary must witnessit. If a documentis executedwithout a companyseal,then it must be signedby 2 directorsor a director and a companysecretary.

Proceedings

of the board

Directors' Meetings Part 2G.l dealswith meetingsof directors. RR S248C enablesa director to call a board meeting. It is at the board meeting the directors exercise their powers and make decisions.Decisionsat board meetingsare madeby passingresolutions.

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A directors' meeting does not have to be held at one place. Subjectto the constitution, directors could meet by telephoneor by the use of video - to "meet" means to be intentionally and mentally presentrather than physically present. Section248D provides that a meetingof directorsmay be called or held using any technology consented by all to the directors.A directors' meetingis chaired by a personelectedas chairpersonby the directorsRR 52488. Resolutions RR S248G(l) provides that a resolutionof the directorsmust be passed a majority of by the votes cast by directorsentitled to vote on the resolution. This recognises that some directorsmay not be entitled to vote, especiallyif the directorshave personalinterests in the matter being discussed.The chairpersonhas a castingvote at the directors' meeting underRR S248G(2). Re solutionswithout meetings RR S248A allows resolutionsto be passedwithout actually holding directors' meetings. This can be done by circulatingthe resolution and each directorsigning in favour of the resolution set out in the document. More than one copy of the resolution can be circulated,so long as the wordingsin each copy are identical. When the last directorhas at signed,the resolutionpasses that time. Single director proprietary companies pass a director's resolution by recording the resolutionand then signing the record s2488. Notice of meetings RR S248C statesthat a directorcan call a meeting giving reasonable notice individually to every director. There is no requirementfor this notice to be in writing. However, all the directors must be given notice of the board meeting Petsh v Kennedy. In Mitropoulos v Greek Orthodox Church, the court held a board committeemeetinginvalid, when notice of the meetingwas not given to a director who was overseas. The length of notice of a directors' meeting depends upon any provision in the company'sconstitution(which would be unusual),or if nothingis statedit simply must be reasonable. The notice must contain details of the businessto be discussedat the meeting. A meeting was held void in JenasharePty Ltd v Lemrib Pty Ltd when the noticeof a meetingdid not includedetailsof the business be discussed. to Quorum A quorum is the minimum numberof directorsrequired to attendin order to constitutea valid board meeting. RR S248Fprovides that unlessthe directorsdetermineotherwise, the quorum for a directors' meetingis two. Under RR S248F,the quorum is requiredto

CHAPTER 4 - COMPANY MANAGEMENT AND CONTRACTING

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be presentat all times during the meeting. Obviously if the quorum is two, failure to maintain this number would also result in the meeting adjourningdue to the failure to maintain the meeting (with only one personbeing left present). Only the directorswho are eligible to vote at a meeting constitutea quorum. A director who has a personal may be ineligible to vote and would thereforenot be interestin a matterbeing considered, to make up the quorum. counted Minutes Section 25lA provides that companies must keep minute books and record the resolutionsof directors' meetingswithin one month of the proceedings.The chairperson must sign these minutes within a reasonabletime and it then becomesprima facie evidence of the proceedings5251A(6). The minutes should also record resolutions passedwithout a meeting and in the caseof a single member proprietarycompany,the by making of any declarations the director.

Types of directors
Director "director" is defined in 59 as a person occupying or acting as a director, by The term whatever name called and whether properly appointed or not. Thus, the definition "shadow directors" (those who are not appointed but give orders to the includes Yaseen was held to be a shadow director of a directors). ln Mistmorn Pty Ltd v Yaseen, company when he conducted himself as a director, although not formally family appointed. Onlv individuals Although 52018(1) provides that a body corporate cannot be appointeda director (i.e. only individuals can be appointed), in Standard Chartered Bank of Australia Ltd v Antico, a companywas held to be a shadowdirector. Here, the directorsof a subsidiary companycustomarilyfollowed the instructionsof the holding companyand the holding companywas held to be the shadowdirectorof the subsidiary. Managing director The board can appoint one or more of them as managing directors RR S198C. This that all directorsare appointedfirst and is description somewhatmisleadingas it suggests then the managingdirector is selected. The managing director is the chief executive officer of a company and is recruited for their executive skills with their directorship being part of their job requirements. It is common for companiesthat require their directorsto standfor re-electionon a rotating basis,not to include the managingdirector in that process.

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The managing director is sometimesreferred to as the third organ of the company, exercisingthe powersdirectly conferredon them by the boardof directors. Their primary function is to implementthe decisionsof the board. An importantsecondary function is to ensurethat the boardis fully informed of developments that occurwithin the company. Chairp erson of dire ctors RR S248E allows directorsto appoint one of thern as "chair" (this book usesthe more "chairperson" inclusive term althoughlinguistically the correctterm is "Chairman"). The role of a chairpersonincludesexercisingcontrol over a board meetingsuch as the agenda (the businessdiscussed the meeting),the discussionand decisionmaking procedure, at v Daniels, Roger CJ said that a primary responsibilityof the chairperson etc. ln AWA included the selectionof mattersand documentsto be brought to the board's attention. A board meeting cannot proceed without a chairperson. ln Kelly v Wolstenholme,a meeting without a chairpersonwas held to be void. Governing director especiallyfamily companies,may appointa governingdirectorto Proprietarycompanies, maintain absolutecontrol over the company's affairs. The constitutionwould spell out the power, authority and discretionvestedin the governingdirector. It is not unusualfor the governing director of a proprietary company to have power over every director and member decision, including being the sole member entitled to appoint or remove directors. In Whitehousev Carlton Hotel Pty Ltd, the governing director had the power to without referringthe matterto other directors. issueshares Executive and non-ex rc unl, directors Executive directors are full time employees of the company and, in their executive capacity,carry out the day to day management the company'sbusiness.The managing of directoris an executivedirector. Non-executive directors are noh-employees who aftend board meetings and other directors' activities such as committee meetings,but do not otherwiseparticipatein the ordinary businessof the company. The purposeof the non-executive directorsis to bring view to the board. Their role is not to engagein day to day management an independent but to have a more distant relationship in what is the peak decision making forum responsiblefor the overall direction and policies of the companyand its financial wellbeing. ln Daniels v Anderson,the court held that non-executive directorsowe the same standard ofcare as executivedirectors. Alternate directors If a director cannot attend a board meeting, they may be entitled to appoint an alternate director (sometimesalso known as a substitutedirector) to take their place RR S201K.

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An altematedirector can only be appointedif the constitutionso provides and it usually requires other directorsto approvethe alternate. the An altemate director only has powers when they are acting in place of the director for whom they are the alternate. An alternate director owes the same duty as any other directorat the meetingsthey attend. It is thus an onerousposition to occupy as they may not be as familiar with the company's affairs as the regulardirectors. Assignmentof office is a different procedureand meansthat the director has the right to basis. This unusualpower on actuallytransfer their position to an assignee a perTnanent provide sucha right. normally would requirethe constitutionto expressly Associatedirector An associate director is appointed to the board for their special expertise. Some directors. An associatedirector may companiesappoint junior executivesas associate havelimited powers,but is subjectto the samedutiesas any other director in the exercise of thosepowers. De facto and shad,owdirectors A defacto director is a personwho acts as a director,and the companyholds him out as a director,even though not formally appointedas such. This could arise where there has been a failure to appoint the director in the manner required by the company's constitution. A shadow director is a person who gives instructions with which the directors are to accustomed act. Here both the company and the director are trying to concealthe real might be found where the personhas role performedby the person. This arrangement been banned from being a director due to a disqualification such as being an bankrupt,and they are trying to breachthe order. undischarged However,both of thesetypes of directorsfall within the definition of director under 59. Nominee directors Nomineedirectorsare appointedto representthe interestsof an outside party, usually a or particulargroup of shareholders creditors. A nomineedirector's duty under corporate law is primarily owed to the company and duty to any outside party should be of consideration. However this priority of duty can be set aside. In Levin v secondary Clark, a nominee director acted in the interestsof a mortgageeand this was properly as regarded being in the interestsof the company,as the company's constitutionallowed a for suchan appointmentand diversion of duty. In such circumstances, companywould in not succeed an action againsta director for acting in the interestof the outsideparty as theconstitutionhasthe effect of a contractbetweenthe parties(seechapter3).

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Committee s of directors RR s198D allows directorsto delegatetheir powersto committeesof directors. Listed public companies may have a large number of directors on their board and forming committees helps a smaller number of directorsto concentrate a specific task. For on example, an audit committeemay have the job of monitoring the accountingfunctions within a company, including the activitiesof the internal(if any) and externalauditorsof the company. Any directors,(excludingthe executivedirectorsfor corporategovernance reasons),with a backgroundof accountingskills would be suitablemembersof such a committee.

Gompany secretary
Role A secretaryworks with the board of directorsproviding guidanceover the company's regulatory complianceand corporategovernance.The secretaryattendsboard meetings and although not a participant in the decision making, they are commonly asked for advice. All (directors' and members') meeting arrangements commonly fall under the secretary's duties. Often for small companiesthe secretarymay also be the chief thesetwo roles are usuallyseparated. accountingofficer but with bigger listed companies Under case law the secretaryhas been found to be the chief administrative officer of a company Panorama Developments(Guildford) Ltd v Fidelis Furnishing Fabrics Ltd. An act of a secretary can be regarded as an act of the company, if it relates to the administrationof the companyDonato v Legion Cabs (Trading) Co-operativeSoc Ltd. requiredfor has no authority to enter into commercialtransactions Generally,a secretary the day to day running of the company, unlessthey are of an administrativenature. A the authorityextendsto counter-signing affixing of the company'sseal. secretary's Under the CA, some of the secretaryresponsibilitiesare: office Ss 142, 145 Maintenanceof the company'sregistered Lodging the company'sannualreturn5345 Lodging annualreportswith ASIC 5319. Appointment All public companiesmust have at least one secretaryS204A who is appointedby the directorson such terms and conditions as they determineSs 204D, 204F. A personmay rules are silent as act both as a director and a secretary.Both the CA and the replaceable to who has the power to remove a secretary. This power is likely to fall within the power. board's management Who may be appointed as a company secretary must be at least l8 yearsof age 52048(l) and residein AustraliaS204A(l). A secretary

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AilD MANAGEMEI{T CONTRAC'NNG 4 CHAPTER - COMPANY

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illemberst

powers

at a general

meeting

Memberst Forms of Control The members in general meeting have the power to indirectly control the board of directorsby: (i) altering the constitution which confers the power on the board [members' statutory and/o right S1361; removing directors and appointing new ones [director removal is a statutoryright for public company members S203D(1) but only a constitutional right for is proprietary companymembersRR S203C; director appointment a constitutional RR S201Gl. of both types of companies right for members

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Alteration of Constitution Although the board of directors may have the managementpower, the members in generalmeeting can createa constitution, or alter a constitutionand restrict the board's power S136.For example,the memberscan havea clausein the constitution management that if the directors want to borrow more than a certain amount, the board must obtain approvalfrom the membersin generalmeeting.

Appointment of Directorc RR S201G providesthat a company (membersin generalmeeting)can appoint a director by resolution at a general meeting. Public company directorshave to be individually members' resolutions unlessthe S20lE procedures observed. appointedby separate are 2058 and 201L require a company to lodge personaldetails of the director to Sections ASIC within 28 days after they are appointed. that directorscan appoint a personas a director. This may occur where RR S201H states there is a vacancy. The person appointed, holds office until the next AGM for public when the appointment needsto be confirmedby the members. Most directors companies, are firstly appointedby the directors, rather than by a person challenging a retiring director in an election by the members. For proprietarycompanies, membersmust the confirm the appointment within 2 months of the appointment. Many proprietary companieswould find this an unsuitable rule, particularly if the samepersonsare both directorsand members. proprietary company may appoint a director by recording A single director/shareholder and the appointment signingthe record S201F.

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Who may be appointed as a director? A director must be at least 18 yearsof age and must be an individual 52018. From I July 2003 there has been no upper age limit or requirementsfor the directors of public (or proprietary) companies under the CA. The company's constitution could however, provide restrictions. A proprietary company must have at least I director and I director who is residentin Australia S201A(1). A public company must have 3 directors, 2 of whom must be residentin Australia S201A(2). Persons disquaffiedfrom acting as director Certain personsare disqualified from acting as a director. These include undischarged bankruptsand convictedpersons52068. However,the court hasthe power to grantleave to allow a personto managethe corporationSs 20lB(2),206G. Managing a corporation involves policy and decision-making, but excludesmere clerical and administrative acts of Corporate Affairs v Bracht. Sections 324C1-I prevent an auditor of a Commissioner company becoming a director until 2 years have elapsedsince the audit. This is to promote auditor independence. The court can order a personnot to managea corporationwhere the relevantofficer fails to take action when the company repeatedlybreachesthe CA, or the relevant officer failed personallyrepeatedlybreaches CA, S206E(1). A director who had repeatedly the return was disqualifiedunder 5230 in Commrfor CorporateAffairs v to lodge an annual Ekamper. The court can also prohibit a personfrom managinga corporationfor up to l0 years,if they have been a director of 2 or more insolvent companiesin the last 7 years of S206D(1). For breaches duties of good faith, conflict and profiting to the detrimentof the company, a director was banned from the managementof a company for 20 years ASICv Adler. when a director losestheir office. Theseinclude: Pan2D.6statesthe circumstances Bankruptcyof directorS206C(3); affected52068(l); Conviction wherethe companyis substantially Subjectto court ordersunder Ss 206C-E; Subjectto ASIC ordersS206F. have a constitutionalrequirementfor directorsto have limited terms of Some companies office or a requirementfor directorsto be reappointedon a rotational basis. Companies listed on the ASX are required to have one third of their directors (excluding the managingdirector),standfor re-electioneach year.

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Terminatian of appointment as director A director may be appointedfor a limited term. The office would therefore terminate at the end of that term. A directormay resign as a directorby giving notice S203A.
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Removal of directors The company (membersin general meeting) may be able to remove a director anytime. rule for a proprietarycompany RR S203C but a statutoryright for This is a replaceable public companyS203D. This meansthat membersin a public company the membersof a can always remove a director, and the constitution of the company cannot alter this statutory right S203E. However, a propnetary company's constitution can provide in restrictions removingits directorsand may even entrencha directorin their position. The board cannot remove public company directors. Only the members have control over their removal. However, S203D requires the members to give the company 2 months notice before the meeting is held to remove the directors. The company must then forward a copy of the notice to the director concernedwho has a right to give a or written statement be heardat the meeting. Note that under S203D a nomineedirector holderscan not or the of to appointed represent interests a classof shareholders debenture be removed from office until their successorhas been appointed. For proprietary companies,it is permittedfor the constitution to provide the directors with a right to remove other directors. Remuneration of directorc RR S202A provides that the membersshall determinethe remunerationof directors by incurredin conductingtheir office may be reimbursedto directors resolution. Expenses as an additionalsum that doesnot require approvalRR S202A(2).

General meeting

cannot

interfere

in management

power on the board of directors. The generalrule is RR S198A confersthe management that if power is conferredon the directorsby the constitution,the membersare bound to comply and not interferewith the exerciseof that power by the directors. in This rule was established Automatic Self-Cleansing Syndicate v Cunninghame.In this case,the membersin general meeting ordered the directors to sell the company's property.The directorsrefused.The courts held that since the constitutiongave the board of directorsthe power to deal with the company's property, the members could not interferewith the directors'decisionas they were contractuallybound by the constitution

s 140(r).

CHAPIER 4 - COMPAT{Y MAI{AGEMEIIT AND COTTITRACTING

PAGE +17

In the case of John Shaw (Salfurd) Ltd v Shaw,3 brotherswere directorsof a family company. They entered into an agreementto appoint 3 new directors and 2 of the brothersrefusedto comply with the agreement. The independent directorsdecidedto take legal action. The brothersat the generalmeetingpassed resolutionin an attemptto stop the legal action. The court held that the generalmeetingcould not usurpthe powersthe constitution vested in the directors any more than the directors can usurp the powers vestedby the constitutionin the generalbody of shareholders. The inability of the generalmeeting to interferewith the powersof the directorsthat were conferred upon the directors by the constitution was affirmed in the case of NRMA v Parker.In this case,the memberstried to passa resolutionto control the appointment of a retuming officer for a directors' election and to changethe way ballot papers were used. It was held that thesepowerswere vestedin the directorsand not in the members, the by constitution. Ratification by General Meeting The board of directors should also refrain from exercising powers that the constitution has vested in the general meeting. For example, the constitution may state that the directorscannot enter into a transactionwithout the approval of the generalmeeting. If the directorsfail to obtain the approval of the generalmeeting,they are acting beyond their power. However, where the directors act ultra vires their power, the general meeting can ratify or adopt the transaction,if it rs intra vires (within) the members' power. Separation of Ownership and Management In small companies,especially family companies,the shareholdersare the directors and of there is no real separation ownership and management.Although, the CA maintainsa legal practical separation of power between ownership and management for all companiesthe court has set this aside on occasions. In Re Duomatic Ltd the company had 3 directors who were the only holders of voting sharesin the company. The company's constitutionrequired the membersto determinedirectors' fees but this was not done and the paymentof fees was decidedat directors' meetings. The High Court (England)found that the membershad given their informal assenteven though they had been acting in their capacity as directors when making the decisions. This outcome had been involved and it is would have been different if not all directors/members obviously desirable to properly follow procedure and hold separatedirectors' and members'meetingsif and when required. to For large companiesit would be impractical for a large number of shareholders of interfereand participatein the management the corporation.

ANDCONTRACTING MAI{AGEMEI{T 4 CHAPTER - COMPANY

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4.2

GOMPANY GONTRAGTING

lntroduction
Thereare 3 ways in which companiesare capableof forming contractswith outsiders: . . . By applyingthe company'scommon seal(if it hasone); By applyingthe organictheory that the organ's actionsare the company'sactions; By applyingthe principle of agencylaw.

Execution

of documents

Common Seal At common law, the traditional position was that a company could only enter into contractsby affixing its common seal. However, 5123 has made a commonsealoptional and5126 providesthat a companymay make contractswithout using a commonseal. Section 126 identifies two ways in which a person acting under the authority of a companymay enter into contracts: in the nameof the company(organic theory); and on behalf of the company(agencyprinciple). Section 127 provideshow a company should executea documentwith or without the use of a cornmonseal.

Organic theory TheTheory


The organs of a company are: The membersin generalmeeting; and The boardof directors. An organ is more than a mere agent. The stateof mind of an organ is the stateof mind of the company(its directing mind and will). An act of an organ is an act of the company.

MAilAGETYIEI{TAND CONTRACNNG CHAPTER - COMPAI{Y 4

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The organic theory originated from the case of l*nnard's Carrying Co Ltd v Asiatic Petroleum Co Ltd. Dawson J in the case of Northsi.de Developments Pty Ud v Registrar-General, said that an organ is an extensionof an agent. This meansthat before to an agentcan be considered be an organicpart of a company(to be the stateof mind of the company)they must first have authority,actualor apparent. ln Lennard's case,an un-seaworthyboat whilst canying oil for Asiatic Petroleumcaught fire and the cargo was destroyed. Asiatic Petroleumsued the owner of the ship. The owner would be exemptedfrom liability under the relevant statute if they could show they were not at fault. The sunken ship had operatedunder the management another of companyappointedby the owner and the managingdrrectorof the management company for permitting the unseaworthyboat to sail. The courts held the had been responsible failure of the management company and its managingdirector was imputed to the owner which was thus not entitled to exemption from liability under the statute. The managementcompany acting through its chief executive was treated as the directing mind of the owner under the circumstances and thereforetheir action was considered to be the owner's action. If it had only been a junior employeeof the managingcompany that made the decision,this would not have been considered directins mind and will the of the owner and liability would have beenavoided. ln Entwells Pty Ltd v National and General Insurance Co Ltd a company had three directors/shareholders.Whilst no directors' meetingswere held two of the directors worked as executivesand made all the decisions. Even though not formally appointedas managingdirector,one of the two was considered joint managingdirector in substance a and their actionswere considered be the company'sactions. This was importantas the to company had sufferedloss as a result of a fire lit by the joint managingdirector and the insurancepolicy excludeddeliberateactsof employeesand agentsbut not the actsof the companyitself. Who is a company's directing mind and will? The "brains" ln HL Bolton (Engineerinil Co IJd v TJ Graham & Sons, Lord Denning likened a companyto a humanbody, needingbrains,arms and limbs. Somepeoplein the company arejust the armsand limbs: " ...the mere servantsand agentswho are nothing more than hands to do the work and cannot be said to representthe mind and will". More senior personshowever may be in a position of control: "... directors and mangerswho represent directing mind and will of the companyand control what it does. The state the of mind of thesemanagers the stateof mind of the companyand is treatedby the law as is such." In this casethe issuewas whether the companycould have formed an intentionto occupy certain premises.The generalmeeting or the board had not met to considerthis issue.It was held that the state of the mind of the directors and managers(who controlled the company)wasthe stateof mind of the company.

" ..

CHAPTER - CSMPATYMAilAGETIETfT 4 AT{DCOiIIRACN]IG

PAGE +20

When is a manger's act the act of the company? The intentionof a companyis derivedfrom the intention of its officers and agents. Some managershave significant powers to act and make decisions without supervisionand commonlytheir decisionsand actsareconsidered be the company'sdecisionsand acts. to However in a notable departure from the usual, a store manager was held not to be the controlling mind of the company in TescoSupermarketsl;td v Nattras. In this case,the store managerhad advertisedgoodsfalsely and the question was whether the company was liable through his actions. If he was considered the directing mind of the company, then the companywould be liable. The companyconductedits affairs in such a strict and rigorous manner, that a breach of policy by the store manager was consideredby the Court to be so contrary to the company's usual pattern of behaviour that it would be wrong to treat that act as being that of the company. It was held that the store manager was not the controlling mind of the companyand as such,the companywas not liable. Lord Reid said that the directing mind and will of the company are normally the board of directors,managingdirector and superior officers, and also includes management fully delegated the boardto act on its behalf without further instructionsby The decisionin Tesco Supermarketslttd v Nattras may have application in situations where extensive corporate governancepractices are exercised but otherwise, as in lldv Carey, it is more common to treat a manager(such as a store Brambles Hol^dings and thus the directing mind and will of the manager)as being senior and independent companywhen carryingout their function. ln Brambles Holdings Istd v Carey, the company was charged with an offence of carrying more than the maximum legal load in its truck. This responsibilityrestedwith the dnver, supervisorand manager.However, the main driver was sick and the new driver did not know the loading instructions. The supervisor was consideredto have mistakebut the managerwas held to have known, or ought madean honestor reasonable proper instructionshad not been given (leading to the prospectof a to haveknown, that truck beingoverloaded).It was held that the managerwas the directing mind and will of the companyand so the company was in breach of the regulations. Unlike the case of that the company had TescoSupermarketsLtd v Naltras, the court was not persuaded such a high standardof due diligence and extensivecorporate governancepracticethat from the conductof the company. the conductof the managercould be distinguished ln Meridian Global Funds ManagementAsia Ltd v Securities Commissiontwo senior in officersof Meridian eachacquiredon their employer's behalf, shares anothercompany its which, whencombined,requiredMeridian under securitieslaw to announce holding. but theseacquisitions Meridian'sdirectorsand managingdirector were not awareof the nevertheless actionand knowledgeof its seniorofficers were attributedto it and thus it was foundto havebreachedthe law.

MAI{ACEMENT ANDCONTRACNNG CHAPTER - COMPAI{Y 4

PAGEtl-21

casesuchas thoseabove,that statutecommonly It shouldbe noted when considering makesthe act of an employeethe responsibilityof the companyregardless the of the employee. That is, there is often no requirement ascertain seniority of whetherthe to personwas a directing mind or will of the companyor not. The principleappliedis that the companyhasprimary liability for the actionof its staff and as the boardof directors (an organ of the company)hasultimate management authority,includingresponsibility for staffing and proper processes procedures and within the company,it is appropriate that the companyshould be held accountable. Change in management The company may changeits mind with a changein its controllersFederal Commr of Taxation v Whitfurds Beach Pty Ltd. In this case a company acquired land to enable the to shareholders engagein fishing. The sharesin the company were sold and the new wantedto subdivideand sell the land. The intentionof the new shareholders shareholders to was considered be the intentionof the company,as they had becomeits directingmind power that would and will. Note that it is unusual for membersto have management to allow then to be considered be the directingmind and will of the company. Can the knowledge of many mangers be aggregated? In a large company where the businessis delegatedto a number of executivesand managers,the directing mind and will of the corporation may be determinedfrom the state of mind of more than one personBrambles Holdings Istd v Carey. to The knowledgeand belief of various officers could be aggregated determinethe mind company Re Chism ServicesPty Ltd. In this case,the information held by and will of the officers in the bank's head office was aggregatedwith the knowledge of the branch managerto determinethe company'sknowledge.

Gontracts

made by agents

The Law of agency The principlesof agency law apply to companies. There are three partiesin an agency relationshipand two legal relationships: Parties o
o

Legal Relationships Principal(the company)


Agent

Between principal and agent

Outsider

Betweenprincipal andoutsider

Af{D COiITRAC"TING MAI{AGEMENT 4 CHAPTER - COMPAT{Y

PAGE+22

Contracting through an Agent The agent acts as a conduit through which the principal and the outsider enter into a contract. It is not the intention to bind the agentto the outsiderin contract.

Authority Required In order for the agent to bind the principal to the outsider the agent requiresauthority "agent" would not be an agentin a legal from the principal. If there is no authority the "agent" who would be senseand any contract would be between the outsider and the acting in a personal capacity. If the outsider cannot obtain performance under the "agent" in such a situation,they could sue the "agent" for the tort of contractfrom the breach of warranty of authoity. Authority can only be conferred by a principal that possesses such authoritY. Typesof Authority betweenthe principal and the agentcan be createdby: A relationship Actual authority(which can be of two types) - express - implied authority. Apparent(also known as ostensible)
.rE .itB

Actual authority
Actual authority can be expressor implied. Express Actual Authority Expressactual authority is the expressconferral of authority. The form of the authority could be written, verbal or by conduct. actualauthoritycan arisein a numberof ways: Express Firstly, statute can provide such authority e.g. as provided by the CA to a companyliquidator to undertakevariousfunctions. registered Secondly,the company's constitutioncan expresslyprovide authority e.g. as may be providedto a governingdirector over all the company'saffairs. Thirdly, an organ of the company can confer the authority e.g. the board of an directorsmay authorisethe managingdirector to purchase asset.

CHAPTER - COMPANY 4 MANAGEMENT ANDCONTRACflNG

PAGE +23

Fourthly, an agent of the company who has been grantedauthority confers this onto another agent, who in turn may delegate this to another agent e.g. a managing director who has authority from the board of directors (an organ) to spend up to $lM on capital equipment,confers part of this on the production managerby granting authorityto spendup to $250,000on capital equipmentand the productionmanager, turn, conferspart of his authorityon to the production in to supervisor spendup to $10,000on capitalequipment.

This fourth exampleis the common model for any company that has employees engaged in the usual line management structure. For authority to properly flow, it requiresthe managerwho confers a level of authority upon his subordinate, actually possess to that level of authority. It can be seenthat the possessors authority at the higher levels (the of board of directors and the managing director) get further and further away from the decisionmaking at the lower levels. Nevertheless principal (the company)is just as the bound by a transactionenteredinto by an agent at the lowest level in the company's hierarchy(no different as if it had beenundertaken the board of directors)as long as it by hasbeenundertaken with appropriate authority. Implied Actual Authority I Implied actual authority is authority that can be implied from the conduct of the parties and the circumstances. Where a type of transactionhasbeenconductedin the past with the tacit approvalof the principal, such past conduct could be reasonably relied upon to infer that implied authorityexistsfor the agentto enter into sucha transactionagain. This inferencewould require the absenceof any knowledge or instructions to the contrary and is more persuasive therehad beenmultiple transactions this type in the past. if of Implied actualauthorityfrom circumstances be found in threesituations: can - Firstly, the authority to undertakewhatever is customary for the position that the agentactuallyoccupies(this is also known as usual authority) - seeHely-Hutchison v Brayhead Ltdbelow. - Secondly, the authority to undetake whatever is necessaryor incidental to the of attainment a task that the agenthasbeengiven expressauthorityto undertake. - Thirdly, to exercisethe authoritythat arisesfrom the acquiescence the holder of the of - seeSPP Ltd v ChewBeng Gim below. authority Thus with implied actual authority the agent does not require a specific conferral of authoritybeforeundertakinga particular action, in order to bind the principal in contract with an outsider.

Al{D MAT{AGEMENT COiIfRAC'fII{G CHAPfER4 - COMPAT{Y

PACE+24

An agent or outsideris entitled to assumethat an office held by a person (the agent), confersupon that officeholderall the power that is customary(usual)for such a position. For example, an agent appointedto completely manage a business,has all the powers with holding the office of managingdirector. In Hely-Hutchison customarilyassociated outsider had the right to assume the agent held all the power v Brayhead Ud the customaryfor the managingdirector'sposition that they held and any restrictionson that power imposedby the companydid not diminish the outsider'srights of assumption. The application of this concept in South East Asian jurisdiction can be seen in the Singapore case of SPP Ltd v Chew Beng Gim, where the directors permitted the managingdirectorto managethe affairs of the companywith little if any refetenceto the board. The managingdirector authorisedtwo executive directorsto enter into personal guaranteesto secure businessfor the company and undertook that the company would indemnify those two directors. The managing director and the two directors lost their were exercisedagainstthe two directors. The company positionsand later the guarantees refusedto honour its indemnity. The court found that the managingdirector had implied actualauthorityto grantthe indemnityon behalf of the companydue to the conduct of the board of directorsin allowing the managingdirector to exercisepower without reference can result in the conferral of implied actual to them. Thus, an act of acquiescence authority. with small family companiesfor there to be one director that It is a common occurrence manageseverything, often with another director being completely passive. In such the circumstances managingdirector is consideredto have the implied actual authority to undertakeany matter in behalf of the company. Customary An outsidercan assumethat the agentwho has implied actual authority can exerciseall the powersthat are usual or customaryfor the position held. Each caseis a question of fact. Customarily, complete managementpower is granted to the board of directors through the company'sconstitution(seeRR S198A). The power is conferred upon the boardof directorsas a collectivebody. An individual director hasno customaryauthority to transact behalf of the companyand it would require a delegationof power from the on boardin orderfor the individual directorto bind the company. A managingdirector derives authority from their chief executive'srole (not from their directorship). The office of managing director customarily confers complete powers on the incumbent as was seen in Brick and Pipe Industries Ltd v management Pty OccidentalLife Nominees Ltd. Any otherexecutivedirectorsimilarly derivesauthority from their executiveposition (not from their director's office). Thus, a finance director, who also holds an executive position as financialcontroller of the company, would bind the company in a contract to purchase an accounting software system by viftue of their executive (financial being customaryfor the office held. controller's)role - that type of transaction

At{D COTTRACTI]IG CHAPIER 4 - COMPA$T MAilAGEIIIET{T

PAGE +25

However, if a person held only the position of director;or altemativelyheld the positions of director and marketing manager,or alternativelyjust held the executiveposition of marketing manager - then in all these circumstances the purchaseof an accounting software system would not be customaryfor the position(s)held and the outsidercould not rely on implied actual authority in their attempt to enforce the contract againstthe company. It would require the presenceof express actual authority to enforce the contractagainstthe companyin suchcircumstances. A company secretary has been found to be the chief administrative officer and customarilyis not a manager for the purposesof the company's externalactivitiessuch as trading or manufacturing. An agent (without instruction to the contrary) can assumethey possess the implied all actual authority necessaryto undertakethe task assignedto them. For instanceif the factory manageris authorisedby the managing director to purchasea new production machine,without instruction to the contrary, the factory managercan assumethat they could reasonably incur costs (say, to travel to view the machine in a workrng environment)as part of that process. Any limitation to the customary role of an agent can be overcome by confening actual expressauthority. For instance,an individual director (customarilyholding no authority) could be granted authority by the board of directors to undertakeany transactionthat comeswithin the authority of the board. Similarly, a productionmanagercould be given actual expressauthority by the financial controller to purchasean accountingsoftware system on behalf of the company and the company would be bound in contractto the outsiderundersuchcircumstances. For further details,refer paragraphCustomary/usual authority of fficers below for more details.

Apparent (Gtensi6i'Il auffi ority


Appearance of Authority Apparentor ostensibleauthority occurs where an agentdoes not actually have authority to carry out a transactionbut the principal conductsitself in such a mannerthat it gives the agentan appearance possessing office or holding the necessary of the authority and the outsider,relying on this appearance, enters into the transactionwith the principal (through agent)in good faith. the o\nt H")J;1 E lt must be the principal that holds out the purportedagentto the outsiderif the principal is to be held liable. In the Malaysian case, Chew Hock San v Connaught Housing Development Sdn Bhd, a clerk entered into a contract on behalf of the housing without expressactual authority. The clerk's position did not reasonably development, permit implied actual authority as the contract was not usual for a clerk and it could not be shown that the housrng development had held out the clerk as having authority. Therefore, contractwas not enforceable the againstthe housingauthority.

*tr..;c**

:,

:.,:;.::.

4 MANAGEMET{T COiITRASTING At{D CHAPTER - COMPANY

PAGE+26

rn O Yo\i cs
made by the principal. It is also important that the outsider relies on the representation that would reasonablylead an Even though the company conductsitself in a manner outsiderto believe an agenthas authority, where a particular outsider knows or suspects that the purported agent does not have that authority, then the company will not be estopped from denying that the agentlacked authority - as the outsider did not rely onthe holdingout.

\)Doctrine of Estoppel
It is difficult for an outsider to know whether an agent has authority. The outsider normally relies on the representationsmade by the principal that the agent has the and authority. If the principal has made such representations, the outsider has relied on thoserepresentations, then the doctrine of estoppelapplies and will preventthe principal from denyingto the outsiderthat the agentdid not have the authority. In order to bind the company as principal to the outsider, a person acting on behalf of the company and giving the agentan appearance authority,must have actualauthoritycovering that type of of transaction.That is, a personmust have authority in order to confer it on another. Types of Representation to A principal may either expresslymake a representation the outsider,or may impliedly by makea representation allowing an agentto occupy a particularposition or to carry out of an act beyondthe agent'scustomaryauthority; e.g. there is a defectin the appointment the agentbut the principal actsas if the appointmenthad beenproperly made. ln Freeman and Inckyear v Buckhurst Park Properties (Mangal) L;td, Kapoor and Hoon formed a company. Hoon was often overseasand Kapoor acted as managing director and appointed an architect. The outsiders could rely on the apparentauthority of a the "managingdirector" to engage firm of architectson the company'sbehalf, sincethe board of directorshad allowed the personto act as managingdirector, even though they had not formally appointedhim as such. The act of the companyin allowing Kapoor to to performthe role of managingdirectorheld out (represented) outsidersthat he held that that it is the customaryfor such a position. It is essential office and had all the authority - the agent holding themself out, will not bind the principal that holds out the agent principalto the outsider. Limit to conferring authority An agentholding only apparentauthority cannot confer apparentauthority on another agent and bind the principal Crabtree-Vickers Pty Ltd v Australian Direct Mail. to However,a defactomanagingdirectorconsidered be the mind and will of the company (i.e. is the companyitself and considered hold actual authority)can hold out anotheras to Pty having apparentauthority Brick and Pipe Industries Ltd v OccidentalLift Nominees Ltd.

MAI{AGETIETffAI{D CONTRACNilG C1IAPIER4 - COITIPAilT

PACE+27

Outsiderst rights of assumption


Delegationof Authority The company's constitution provides the allocation of power (authority) betweenthe organs(the membersin generalmeeting and the board of directors). It is usually not practicablefor the members to retain general powers of managementand these are customarily conferred on the board of directors (see RR Sl98A). It is similarly not practicablefor the board of directorsto actually undertakethe exerciseof all authority grantedto it. It is commonplacefor there to be delegationof a considerable part of the board'sauthoritydown to the chief executiveofficer (the managingdirector) and through that office to the other levels of managementand staff. Thus, the exerciseof a company's powers may be spread by delegation over the company's hierarchical managementand with actual and customaryauthority varying considerablyfrom office to staff structures office. Breach of authority If an agent has not acted within actual authority delegated,the appropriateness their of actioncould be challengedon the groundsof whether it is customaryfor their position this assessment a responsibility imposed on the outsider. However, where there has is beena breachof an internal procedure- such as a board meetingimproperly convened, a - the outsider quorum not presentat the meeting,or the company sealimproperly applied is not in a position to necessarily know of the existenceof the procedure,Iet alone if it hasbeenobserved correctly or not. Actual and Constructive Knowledge If it happensthat the outsider has actual knowledge that a company procedurehas not beencompliedwith and as a consequence agentlacks authority,then the outsidermay the losetheir right to enforcethe contract. company contractingprocedureis containedin a company's constitution, If the necessary which is availableto the public by inspection at ASIC, is an outsider dealing with the to companyconsidered have knowledgeof what is in that public document? This type of imputedknowledgefrom the public availability of information is known as "constructive knowledge"(seechapter3). Such constructiveknowledge could only apply to the constitutionsof public companies as only they are required to lodge them 5136(5). However statute has set aside the common law doctrine of constructivenotice for most company documents,including a lodged constitution. Section 130(1) now states that a person is not taken to have information about a company merely becausethe information is available to the public from ASIC. Thus, 5130(1) abolishesthe doctrine of constructivenotice for the purposes of this discussion.Note that constructive notice is not abolished registrable for charges Sl30(2), a mostimportantexception considered laterin loan capital, chapter8.

i;-.*:?;:&..:

-rircdr.:,.

AIID COI{TRACfII{G CHAPTER - COMPAIIYMA]IAGEilIET|T 4

PAGE +28

The Indoor Management Rule in Turquand's case notice was widely applied, a deemedknowledge of a When the doctrine of constructive requirement within the memorandumand articles did not provide the outsider with knowledgeof whether the company's organsor agentshad actually complied with that requirement. At common law the rule in Royal Brirtsh Bank v Turquand operated in favour of outsiders,to allow them to assume that the intemal proceedings a company of had been properly carried out. In Turquand'scase,the board of directorscould borrow money only if the generalmeetingapproved. When the company borrowed without the necessary approvalof the generalmeeting,it was held that the bank could assume that the had beenpassed. requiredresolutionof the members In Koh Nai Chye v Tong Loong Pte Ltd (1992), the managing director of a company which had previouslyonly borrowedfrom banks,borrowedfunds in the company's n:une from a different party. The High Court, Singapore found that the lender could not have known, and was not expectedto have known, that the company had internal rules coveringsuch a matterand that they had not beencomplied with. The right of the outsider to assumethat the internal rules of the company have been is observed, referredto as the indoor managementrule. It has beencodified in Sl29 and allows outsiders to assumethat the constitution and the replaceablerules have been complied with at all times and that company officers perform their duties properly. Exception to the indoor managementrule in Turquand's case hasrtual A significant etcDptitFto the rule in Turqmrd'yrerrsis wffithffirtsider put upon inquiry, but fails to make inquiries. knowledgeof the irregularityor is This was illustrated in the caseof Northside Developments Pty lld v Registrar-General, that the internal proceedingsof the wherethe lender could not rely on the assumptions company has been complied with, since the lender failed to exercise reasonablecare and worthy of inquiry. In this apparent wheresuspicionof an irregularitywas reasonably case,Sturgessa director of Northside borrowed money from Barclays Bank, using a mortgageover the company'sland as security for the loan. The loan documentswere witnessed Sturgessson, purporting to be the company secretary. The other directors by werenot awareof the transaction.There was no benefit to the companyin the transaction and there was nothing that indicatedthat this would be so. It was held that the lender, have been put upon inquiry and should have queried BarclaysBank, should reasonably was outsideNorthside's usualbusinessand was secured the transaction on the loan. since beneficialreason. Northside'smajor assetwithout any apparent The decisionin the Northside'scasecan be contrastedwith BanqueBruxelles Lambert v Puvaria Packaging Industries (Pte) Ltd U9941 where a bank took security over a company's assetsfollowing a transactionentered into by company officers breaching resemblingan ordinary business their internal authority, However,due to the transaction deal for the parties,the court applied the indoor managementrule in finding the loan

CHAPTER - COMPAT{Y 4 MAfIIAGETTiET{TAl{D CoIITRAeTING

PAGE +29

enforceableagainstthe company. There was not sufficient mattersof concern to put a personon inquiry. reasonable The exception to the rule in Turquand's case arising from the objective standardof reasonable conduct by the outsideras applied in the Northside'scase,has been adopted by statute but later amendedso that now the provision of 5128(4) only applies the exceptionin restrictedform (seelimitations to assumptions below). The statutory assumptions - Sl29 The rule in Turquand's case has now been incorporatedin 5128(1), (subject to the limitations in 5128(4) - seebelow). Section 129lists the following assumptions that can be made under 5128: Compliance with the constitution A person may assumethat the company's constitution and the replaceablerules have beencomplied with 5129(1). In BNZ v Fiberi Pty l;td, the companysealwas affixed to a mortgage in breach of the company's constitution. It was held that the lenders could assume that the company seal had been affixed in accordancewith the company's constitution. Person named as officer in public documents that personswho appearin public documents An outsidermay assume lodged with ASIC as a director or company secretary,have been duly appointedand have the authority customarily exercisedby that position Sl29(2). By naming those officers in public documentslike the constitution,the companyis holding out thoseofficersto the outsiders as having the customaryauthorityarising from thosepositions. The outsiderswill be able to make the assumption,whether or not the officers have been duly appointed and whether or not the outsidersare aware of the contentsof the public document. Outsiders only have to show that the officer's name appearsin a public document and that the officer is actingwithin their customaryauthority. Outsidersdo not haveto prove that the outsiderhad actuallyread that public documentor relied upon its representation. Person held out as offieer or agent that anyoneheld out as an officer or agentof the companyhas been A personcan assume duly appointedand has the authority customarilyexercisedby that position Sf29(3). Unlike Sl29(2), the outsidersin 3129(3) have to prove that they relied on the company's that the person was an officer or agentand that the agent or officer was representation exercisinga power within the customaryauthority of that position. As statedin Freeman and Lockyear v Buckhurst Park Properties (Mangal) Ltd, only persons with actual authonty can hold out an officer or agentto an outsider. Persons with apparentauthority cannotdo so.

4 CHAPTER - OOMPAI{YMANAGEMEilTAilD OO]ITRASTII{G

PAGE'I-3O

Offi.cersand agentsproperly perform their daties A person is entitled to assumethat officers and agentshave properly performed their duties Sl29(4). The proper performance of duty in Sl29(4) includes fiduciary duty, by statutoryduty and tasksdelegated thosewith authority, seeChew v R chapter5. Document duly executed with 5127, a personcan If the company's documentshave been executedin accordance are documents duly executed. Under Sl27, a documentcan be executed assume that the without using a common sealif it is signedby two directors,or a director and a company by secretary.If a companysealis affixed on the document,then it must be witnessed two directors,or a director and a companysecretary. The outsiderscan make the assumption signing in with Sl27, even if the persons that the documenthasbeenexecuted accordance and Pipe Industries Ltd v Occidental or witnessinghave not been duly appointedBrick Life NomineesPty Ltd. Wananting documents genuine Outsiderscan assumethat officers in the company who have the authority to issue a e.g.a sharecertificate,also have the authorityto warrantthat it is genuine. document, The effect of fraud orforgery Even if an officer or agent is fraudulent or has forged a document, a person can make the in assumptions 5129 in relation to that officer's or agent's dealings with the company

s128(3).
Gustomary/usual Analysis of Authority Under Ss 129(2) and (3), outsiderscan only make the assumptionsif the officers and agents are acting within their customary authoity. "Customary" here means usual, common,normal or regular. Customaryauthority is analysed below. Individual directors Normally individual directors do not have the authority to bind the company. It is the boardof directors(a collective body) which is the organ of the company. However,if an individual director has been delegatedwith actual expressauthority or has beenheld out to have an apparentauthority, then the individual director can bind the companyin that matter. Note that a managingdirector's authority arisesfrom the chief executiveposition occupied, not from their directorship. The sameappliesto any other executivedirectors. For instance, in a transaction with an executive finance director, who is also the authority of officers

CHAPTER - COMPATTY 4 MAI{AGEME}IT AT{D COiITRACNNG

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company's financial controller,the outsider should only rely on the customary authority for a financial controller. Individual directorshavepower to witnessthe applicationof the company's seal Sl27(2), andto signthe company's negotiable instruments S198B. Managing director RR S20lJ allows the board of directors to appoint one of themselvesas a managing director. The managing director then has all the customary authority to do the acts relating to managing the company, e.g. employing staff - Freeman and Loclcyear v Buckhurst Park Propefties (Mangal) I;td, or borrowing money - British ThomsonHouston Co Ltd v FederatedEuropean Bank Ltd. The managing director's authority is regardedas being very extensivealthough they may not have the customaryauthority to sell the entire business the company. In Re Qintex Ltd, the managingdirector did not of havethe authorityto appointsolicitorsto opposea winding up petition. Chairperson It was held in Hely-Hutchinson v Brayhead l;td that the chairpersononly has the same customaryauthorityas any individual director. In the Singapore case, Dart Sum Timber (Pte) Ltd v Bank of Canton Ltd the outsider assumed that the company's chairman and largest shareholderwas the controlling on managerof the companyand was able to enter into a written guarantee the company's the companyhad a managing director to perform the chief executive behalf. However, role; the chairman'sposition, being a non-executiveone on the board, does not have power - thus,the doesnot give rise to management executiveauthority;and,membership High Court, Singaporefound it was wrong to infer that the chairman would have authorityto contracton behalfof the company. Cornpany Secretary The role of a company secretaryis an administrativerole. ln Panorafra O"f"toprffif, (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd, it was held that the customaryauthority included entering into contractspertainingto the administrative of a companysecretary nature of a company'saffairs, such as employing staff and ordering cars. The company secretarydoesnot have the customaryauthority to mortgagea company's land, but can countersign the affixing of the company's seal Northsi.de Developments Pty Ltd v Registrar-General.

AI{D COTTRACTII{G MATIAGEMEIIT CHAPIER 4 - COMPAIIIY

/T.32 PAGE

Limitations to assumptions
The assumptions in 5129 are subject to limitations. A person cannot make the assumptionsin 5129 where the person lorcw or suspectedthat the assumptionswere incorrect 5128(4). A person'ssuspiciondoes not have to be basedon their connection with the company. In the caseof Northside DevelopmentsPty Lttd v Registrar-General discussedabove, the court applied an objectivestandardof conduct on the outsider. The outsider could not assumethe company officers were acting with proper authority if the circumstances inquiry should then be personto be put on inquiry - reasonable would lead a reasonable made and concerns satisfied before the outsider proceeded. Previous statute of this objectivestandardby denying assumptions proper authority where encompassed "Ought "knew or ought to have known" that the assumption was not valid. the outsiders to haveknown" requiredan inquiry where necessary. imposed on Section 128(4) howeverhas significantlydiminishedthe objectivestandards "know if or suspect"that the outsiderby only removingtheir right of assumption they the this amendment that accompanied to assumptionis false. The explanatorymemorandum that the amendment was to enhancethe objectivity of the section, the law actually stated but it has had the opposite effect. The decision in Northside Developments Pty Ltd v Registrar-General,(which precededthe introduction of S128(4)),would be considered if under different standards heard today. It would not matter if the conduct of the by Barclay's Bank officer was unreasonable not making inquiry - it would come down to the whether they knew or suspected other party was acting in breach of their authority. This unfortunatelycreatesa situation where poor perfornance or ignorancecan be an to advantage the outsider- not a sound legal standard. The courts have determinedthat the onusof proof of whetherthe outsiderknew or suspected, restswith the company. Knew the assumption was inconect It would require more conclusiveevidencefor the company to prove that the outsider actually knew (rather than merely suspected) the company officer was breaching authority. This would be a questionof fact. It is not necessary that the actualknowledge be held by the outsider directly. In Brick and Pipe Industries Ltd v Occidental Lift Nominees Pty Ltd, the court was preparedto impute the knowledge of the outsider's the solicitorsas representing actualknowledgeof the lender (the outsider). Suspectedthe assumption was incorrect It may be possibleto presentless conclusiveevidenceto show that a personsuspected a lack of authority. A court may be more persuadedby circumstantial evidence in determining the state of mind of the outsider than would be the case with actual knowledgeas discussed above. However,if the outsiderdeniessuspicionexistedat the was entered time the transaction into, (and only they can really know what was in their own mind), then the coutt would have to find that the personwas perjunng themselves if they were to acceptthe circumstantialevidenceinsteadof the denial. A seriousfinding, without compellingevidence. not often reached

MANAGETVIEf{T CONIRACNNG AND 4 CHAPTER _ COMPANY

PAGE +33

lffi] r,r.ther Reading


A Lipton, P. and Herzberg. A, Understanding Company l"aw, llth edition, and 107-140. ThompsonLaw Book Company,pages261,-290 * Hanrahan, P., Ramsay, I., and Stapledon, G., Commercial Application of and Law,3'o edition,CCH, pagesl19-137; 203-226', 440-450. Company

WHAT YOU SHOULD KNOW

...BEFORE.... PROCEEDING TO THE NEXT CHAPTER Chapter 4.1 ) ) How a companyis managed; The division of power betweenmembersand directors;

D The executive role of the directors: ) ) ) The power of membersto removedirectorsor alter the constitution; The different typesof directors; The role of companysecretary.

Chapter 4.2 ). The organictheory of companies; ) How a companycontractsthrough its agents;

> The differenttypesof authority; > The indoormanagement rule; ) The statutoryprovisionscovering theseprinciples.

CRITICAL

YOU MUST TINDERSTAND: I. THB DIFFERENT ROI.F]S OF THE I)IRECTORS ANI)

z. niilffi=6"

MEMBf,RS;
CONTRACT.

::

ourslDnrls AcAINsr A

::: :.:: :

COMPANY IN

MAI{AGETIENT CHAPTER - COMPATW 4 Af{D COiITRAgNilG

'I.34 PAGE

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