Can you rely on the authority of a director (acting alone) to bind a company?

How can you be confident that a person signing a contract on behalf of a company has the necessary authority to bind the company?  Recent case law suggests that being a director of the company may not be enough where the company has more than one director and the transaction is not “business as usual”.

The decision in Bishop Warden Property Holdings Ltd v Autumn Tree Ltd serves as a reminder for third parties to carry out their own due diligence on companies before entering into contractual arrangements.  This will help ensure any signatories are sufficiently authorised to properly bind the company to the agreement.

What Happened in Autumn Tree?

On 3 August 2017, Autumn Tree Limited (Autumn Tree), through Tina (a director), entered into an agreement with Bishop Warden Property Holdings Limited (Bishop) to sell land that was owned by Autumn Tree (Agreement).  On the morning of 3 August, Tina was the sole director of Autumn Tree but, by early afternoon on that day, papers had been filed with the Companies Office appointing a new director to Autumn Tree, Anna.

Given the Agreement was signed in the evening, which was after Anna’s appointment as a director, the Court cited the established view that the authority of one director of a board acting alone (as opposed to a sole director) is very limited – particularly where the transaction is outside of the company’s ordinary business.

The Court found that once Anna was listed as a second director with the Companies Office, Tina (as one director of a board of two) would not have the authority to enter into the Agreement alone, and therefore her execution of the contract could not be relied upon by Bishop.

The Court also touched on the fact that the Agreement was, in fact, a “Major Transaction” under the Companies Act and, in any event, would have required a 75% resolution of shareholders (as opposed to directors) for the Agreement to be valid.

What does this mean in practice?

The key take away from this decision is a reminder that a single director on a board of more than one has, in reality, ‘very limited’ customary authority – particularly if they are not the managing director, and particularly where the transaction is outside of the company’s ordinary business.

It is important to note that the outcome in Autumn Tree case did point to its particular facts.  The Agreement involved the sale of the Company’s major asset, and Bishop clearly knew it was getting a bargain.  The Court believed that these considerations should have alerted Bishop to the fact that this may have been a major transaction requiring shareholder approval, and may well have been a case of wilful blindness.

That said, the case is still a useful reminder that when contracting with a company, you should undertake some basic due diligence to seek to ensure that the relevant signatory is properly authorised and ask yourself the following questions:

  1. Is the transaction within the ordinary business of the company? If, for example, you are entering into an agreement to purchase a vehicle from a motor vehicle dealer who may be a director of the sales company, you will likely have every right to believe that the deal is in the ordinary business of the company.
  2. Is the transaction possibly outside the ordinary business of the company? Using the same example, if the salesperson/director offers to sell you the land and buildings of the company, this is clearly outside the usual business of the company and should put you on notice that further investigation is required.  The protections in the Companies Act will not assist you if you have been wilfully blind.
  3. Do I need to search the Companies Register? We suggest this is a good habit to adopt, particularly for a company you may not have dealt with before or may not deal with regularly.  A search is free and can be completed quickly.  You should do the search at the time of execution, check that the signatories of your contract align with the named directors and then hit the ‘print’ button and file the pages.

If further investigation is warranted based on the above, then you may wish to seek confirmation that the board has properly authorised the transaction, including noting any shareholder approvals that may be required.

If this article raises any questions, or you would like any assistance with your contracting arrangements, please get in touch with one of our team.

Business Law Team

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Nicola Hardy, Peter Orpin, Nicola Hardy, Ellen Sewell, Matt Tolan, Kristina Sutherland, Caroline Cross, Jacob Nutt, Danita Ferreira, Angela Sargent, Whitney Moore, Alex Stone, Joshua Wall, Ben Cooper

also in this edition:

Business law newsletter:

Contact

Joelle Grace
Partner, Lane Neave

t +64 3 372 6350
m +64 21 039 6521
e (click to email)

 

Peter Orpin
Special Counsel, Lane Neave

t +64 3 372 6328
m +64 21 482 288
e (click to email)

 

Ben Cooper
Solicitor, Lane Neave

t +64 3 377 6876
e (click to email)