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Is one director’s signature sufficient in an agreement?

The valid execution of a document is usually critical to its enforceability.

Whether one director’s signature is sufficient to validate an agreement turns on the company’s constitution and statutory provisions regarding the exercise of company powers and the proper execution of documents.

Dealing with company officers

The Corporations Act 2001 (Cth) provides guidance for third parties when dealing with company officers. Section 129 holds that a third party is entitled to assume that the ‘representative’ with whom they are dealing is validly appointed and has authority to act and to perform the duties customarily exercised within a similar context.

Further, a person may assume a document has been properly executed if it appears to have been signed in accordance with s 127(1) of the Act, and that any person who signs where an attestation clause states they are the sole director / secretary of the company, does occupy those positions.

The ‘indoor management rule’ originating from Morris v Kanssen [1946] AC 459 provides that ‘persons acting in good faith may assume that acts within [the company’s] constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular’.

These statutory and common law assumptions are however subject to limitation.

A party may not rely on the s 129 assumptions or internal management rule if they wilfully close their eyes to the truth in circumstances where they should have inquired into the transaction. If a party knew or ought to have known a ‘director’ was not authorised or duly appointed, the assumptions do not apply.

These principles were considered in Lopez & Verge v Pawski [2017] WASC 338. The case reiterates the need to exercise care to confirm the proper execution of legal documentation in all situations.

The facts

In August 2013, Mr Darren Pawski (Mr Pawski) who was sole director / secretary of WealthSure Pty Ltd (WealthSure) from 26 August 2009 until 2 September 2013, entered an undertaking with the Australian Securities and Investments Commission (ASIC). The undertaking emanated from ASIC’s concerns (after conducting surveillance checks of WealthSure’s activities), regarding inadequate supervision and monitoring of its representatives.

The undertaking prohibited the WealthSure group of companies from having only sole director boards and required Mr Pawski who was at that time WealthSure’s most senior executive, to resign as director and chief executive officer. In his place, two independent directors were appointed – Mr Newman (as managing director) and Ms Humphries.

WealthSure subsequently went into liquidation and George Lopez and Evan Verge, the appointed liquidators, applied for directions under (prior) s 511 of the Act.

The Court was required to determine the validity of a loan facility agreement between WealthSure and the first defendants (Mr Andrew Pawski – a relative of Mr Pawksi, and Stanely Kaminski), and the second defendant (Sentry Group Pty Ltd) in circumstances where only Mr Newman had signed on behalf of WealthSure.

In evidence, Mr Pawski (who had authority of the first defendants to act on their behalf regarding the agreement) submitted that he understood Mr Newman to have had authority to sign the document alone.

Mr Newman contested that he had indicated to Mr Pawski the need for the second director, Ms Humphries, to also sign the document and that there had been no resolution by the board of directors of WealthSure to approve its entry into the agreement.

The decision and the deciding factors

In the circumstances, the Court determined that the loan facility agreement was not validly executed. In particular:

• The existence of the undertaking negotiated between Mr Pawski and ASIC was relevant in illustrating his knowledge of the prohibition against one director companies of WealthSure and the concerns about sole directors acting unilaterally.

• Mr Newman was also aware of the ASIC negotiations and that entering into the loan facility agreement was a significant undertaking by the company.

• Neither WealthSure’s constitution, nor its board of management, conferred on Mr Newman authority to unilaterally enter into the loan facility agreement.

• The indoor management rule pressed by the first defendants as giving Mr Newman authority to unilaterally enter into the agreement, did not apply.

The substance of the loan facility agreement was to pledge ‘all present and after acquired property’ of the company as security. This was not considered within WealthSure’s ‘usual scope’ of business nor ‘normal trading activity’. The Court confirmed ‘…it is not customary for a managing director to pledge all of the company’s assets to a lender without having the approval of the board.’

• Given Mr Pawski’s prior involvement in WealthSure and his knowledge of its management structure (as detailed in the negotiated undertaking with ASIC) the first defendants were unable to rely on the assumptions provided in s 129 based on s 128(4) which precluded persons from making an assumption if at the time of the dealings they knew or suspected that the assumption was incorrect.

As agent of the first defendants, Mr Pawski ‘actually knew it was not open to Mr Newman alone to sign the loan facility agreement’.

Conclusion

Reliance on the statutory and general law assumptions may not always be available when a party seeks to enforce a company’s legal obligations through the purported execution of an agreement.

A company has legal capacity to enter a transaction in its own right, however parties should ensure that documentation is signed by the company in accordance with its constitution or under the provisions of the Act.

If you or someone you know wants more information or needs help or advice, please contact us on 08 9422 8111 or email buslaw@taitlegal.com.au.