Companies Act 1993 - ''Indoor Management''

A recent Court of Appeal decision (Autumn Tree1) makes it clear that where a company enters a contract and only one director signs it:

1. You need to check the Companies Office register to ensure that only one director is listed and keep evidence of that search; and    
2. If the company has two or more directors, you need to ensure that two directors sign the agreement or you risk that the contract may not be enforceable against the company.

Indoor Management Rule    
The "indoor management rule" originated in a case known as Turquand's Case2 and entitles third parties who deal with a company to presume that the company's internal procedures to secure the necessary authority have been taken. Where an officer of a company (such as a named director) signed an agreement, the other party could assume that officer had received the necessary authority to do so from shareholders or board members.

The "indoor management rule" was codified in s18 of the Act. The Autumn Tree decision related to a prohibition under section 18(1)(a) which provides protection to third parties dealing with a company when a director, agent or employee of the company is exercising powers that it would customarily have authority to do. The decision in Autumn Tree indicates that s18 provides for much narrower protection than the original rule in Turquand's Case as it confirms that in any section 18 enquiry, the emphasis will be on what is customary for only one director (or an employee or agent) to have authority to sign.

Facts    
The decision dismissed an appeal from a High Court decision which discharged a caveat over a property that was to be subdivided. On the early afternoon that the Agreement to sell the subdivision in question was signed, the vendor company ('Autumn Tree') submitted documentation with the Companies Office with effect from 1.10 pm to register a change in director replacing one director ('Tina') with another ('Anna'). The director of the purchasing company's evidence was that on the evening that the Agreement was signed, he performed a search of the Companies Register which outlined that there was only one director of the Company – Tina. The purchaser did not keep a print-out of this Company Search. At around 6.00 pm, Tina entered into the Agreement on behalf of Autumn Tree to sell the property for approximately one-third of the valuation of the property. The purchasing company immediately placed a caveat on the title. Autumn Tree then launched an application to the High Court to discharge the caveat arguing that the agreement was invalid as Tina no longer had authority to bind Autumn Tree. Tina was subsequently removed as a director of Autumn Tree but this change was not recorded on the Companies Register until two days after the Agreement was signed.

The Decision    
The decision ultimately turned on the Court finding (as a fact) that two directors were listed on the Companies Office register at the time the agreement was signed. While Bishop Warden asserted that when it searched the register only one director was listed, the evidence was that the Companies Office had been served notice prior to that search of the appointment of a second director. No evidence was advanced that there was a delay in that notice being processed. Practically speaking, this means that a party contracting with a company has to:

1. Search the Companies Office Register at the time the contract is formed; and    
2 Keep a copy of that search to prove what it showed at that time.

The Court of Appeal outlined that the authority to bind a company to an agreement is primarily reserved to the company's Board. Whether an agreement entered into by a company by a director is valid depends on whether the director had actual or apparent (also known as ostensible or implied) authority to enter into the agreement. These different types of authority were only briefly discussed in the decisions.

The Court noted actual authority can be expressly given to a director (or agent) by the Company, or implied from the circumstances. Apparent authority is where an agent does not have actual authority, but those who do have actual authority hold out to a third party that this particular agent has authority and the third party must rely on that representation and the reliance must be reasonable.

Neither the High Court nor the Court of Appeal referred directly to section 180 of the Act. Section 180 sets out the authority required to bind a company. A third party only needs to invoke section 18 (which was discussed at length in the case) if section 180 does not apply. Section 180(1)(a) provides that where there are more than two directors, two directors are required to enter a deed (not an agreement). Section 180(1)(b) provides that a person acting under that company's express or implied authority can enter an obligation on behalf of a company.

Without referring to section 180 directly, the Court of Appeal essentially held that where there was more than one director, you could not reasonably assume that one director could sign without more evidence that they had been granted authority by the company to do so.

Section 18 of the Act (which related to the indoor management rule) was discussed in much more detail. Section 18(1)(b) prevents a person from asserting that a person named as a director:

(i) Is not a director of a company;    
(ii) Has not been duly appointed; and    
(iii) Does not have authority to exercise a power which a director carrying on business of the kind carried on by the company customarily has authority to exercise.

Section 18(1)(c) is similar and extends to employees and agents of a company.

The Court held that it was not customary for one director to be able to sign an agreement such as a sale and purchase agreement which was something a board would ordinarily sign.

Analysis    
We consider it is unfortunate that there was no detailed discussion on the interplay between section 180 and section 18 and "implied authority" and more detail on when a contract is "customarily" entered into by one director.

In our view, where a company has more than one director, this decision means that unless a company's constitution allows one director to bind a company, you can never safely assume that one director has implied authority or can "customarily sign" anything. We consider third parties should always perform and retain a company search when dealing with another company and, where the company has more than one director, must insist that two directors sign the Agreement or risk that contract being held to be unenforceable. We also consider that any agreement signed by an agent or employee of a company will also be unsafe without a board representation of that person's authority to bind the company.

For inquiries or requests for assistance related to the subject matter of this article, or more general corporate/commercial law inquiries, please contact McVeagh Fleming's corporate/commercial law specialists:

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz)  

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© McVeagh Fleming 2018

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice. 

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1    Bishop Warden Property Holdings Ltd v Autumn Tree Ltd [2018] NZCA 285    
2    Royal British Bank v Turquand 6 EI & BI 327, 119 ER 886