Dealing with company officers

Section 129 of the Corporations Act 2001 (Cth) provides 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.

Under the common law, ‘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’.

However, 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 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 into an undertaking with the Australian Securities and Investments Commission (ASIC), the terms of which 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 general security and loan facility agreement between WealthSure and 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

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 purporting to give Mr Newman authority to unilaterally enter into the agreement, did not apply.

·   The substance of the 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 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’.