Legal Tip 403: How do you know a Company has the Power to Do Something?

Companies are supposed to be operated in accordance with their constitutions. The constitution may restrict what the company can do or may impose limits. An example: A company may not be permitted to borrow money unless a general meeting of shareholders is called and the majority of the shareholders agree to allow the company to borrow.


This makes it difficult for others dealing with the company because outsiders will never know whether the company has proper authority to enter into contracts or not. And this is what happened in the case of Royal British Bank v. Turquand (1856) 6 E&B 327


The company borrowed money from the bank, but the company required shareholder approval to borrow money and this was not obtained. The company argued that it should not be liable for the loan. The court disagreed and said that outsiders dealing with the company were entitled to assume that the company is authorised to do what it is proposing.


This has become known as the ‘indoor management rule’. It is now incorporated into the Corporations Act under s 128 and s129

CORPORATIONS ACT 2001 - SECT 128 Entitlement to make assumptions

CORPORATIONS ACT 2001 - SECT 129 Assumptions that can be made under section 128


What does this mean? If you are dealing with a company you can assume the company is authorised to deal with you. You can assume the director has properly been appointed director and has the authority to bind the company (if they appear on the asic register).


You should always do an ASIC search before entering into a contract with a company to make sure the person you are dealing with is actually a director – as if they are not then you will find the company is not bound to any contract signed by the person purporting to be the director.


These sorts of disputes still come up from time to time. A recent example is a South Australian case of

Ross & Anor as Joint & Several Administrators Of GNC Homes P/L (Admin Apptd) v GNC Homes P/L (Admin Apptd) [2015] SASC 168


In this case the sole director of the company appointed Administrators to take control. Shareholders had resolved to remove the director and the liquidator didn’t know this. The liquidators appointment was deemed valid because of the indoor management rule.

 

Also be wary of s127 which governs officer signatures. This affords limited assumptions to the application of s129 If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.

s129 governs assumptions about the IMR. It can mean a person who fraudulents represents as a Director could create a issue that is binding upon the company. I had this occur to me. I had refused to sign a company loan matter and another person fraudulently signed as me. I later became aware through the lender and advised them and forensic examination confirmed I did not sign the form. The offender confessed under police interview (with fingerprints) and was charged. Bank was terrific. The company remained liable for the new loan which the lender ordered to be repaid.