Validity of Motorbikes Pty Ltd Contract
Issue
Whether the Motorbikes Pty Ltd was bound by the contract made on its behalf?
Rule
As per Section 126 of the Corporations Act, 2001[1], the company has a power to make a valid contract. The contract may be exercised by the any person who has direct authority or implied authority to execute a contract on the behalf of the entity[2]. An individual may act and contract on the company’s behalf in the same manner in which natural person made contract. The agent may execute the contract on the behalf of the company[3].
Section 127 and the section 126 of the Corporations Act, 2001 draw the difference between the contract executed by the company itself and the contract executed by the agent on the behalf of the company. As per section 127, the documents can be executed with or without the common seal of an entity[4]. In case where the common seal of the company is not used and there are minimum two directors of the company, then it is required by the section 127 that the document or contract should be signed by minimum two directors or by the one company secretary and one director of the company to make a valid contract.
The doctrine of indoor management (Turquand’s rule) secures the outsiders against the company’s actions. As per this doctrine of indoor management, an individual should make sure that proposed transaction is consistent with the articles and the memorandum of the company. It is not required by an individual to check the inside irregularities of the organisation[5].
In Ruben v Great Fingal Consolidated[6], the company secretary of the company did bogus sign of the two directors and certificate was issued by him without the authority. It was required by the article of the company to sign by the two directors but still the certificate holder cannot take the benefit of doctrine because it was bogus transaction.
In Varkey Souriar v Leraleeya Banking Co. Ltd. 1956[7], it was held by the Kerala high court that the doctrine of indoor management would be applicable in respect of the existence of agency. It cannot be applied in respect of the powers exercised by the agents.
In the given question, Michelle who was the director of the company and Tim who was the company secretory of Motorbikes Pty Ltd acquired the motorbike. Tim and Michelle both signed the purchase contract to acquire the motorbike on behalf of the Motorbikes Pty Ltd. Later, the director of the company decided to breach the contract. Section 126 and section 127 will be applicable here. The Section 126 of the Corporations Act, 2001 permits the agent to execute the document or contract with implied authority or express authority. The contract may made by an individual or an agent on the behalf of an entity. So the contract made by director of company and the company secretary is valid contract. They had authority to make contract.
Relevance of Sections 126-127 of the Corporations Act 2001
The section 127 of the Corporations Act, 2001 permits the execution of contract without the company seal. It is required that contract should be signed by minimum two directors of an entity or one director and one company secretary in case of one director in an entity. Here, the contract was signed by the Michelle and Tim on the behalf of the Motorbikes Pty Ltd. It was the valid contract and the liability was of the company.
As per the doctrine of indoor management, John who was the seller of motorbike was not required to see the inside irregularities because it is not the duty of outsider to check internal authorities and the activities. Here, the Motorbike Pty Ltd will be bound by the purchase contract. The company cannot breach the contract.
Conclusion
On the basis of the above analysis, it can be concluded that in case of breach of the contract, the company will be bound by the contract which made on its behalf.
Issue
Whether George was bound by the contract?
Rule
As per section 123 of the Corporations Act 2001, the company may have the common seal to execute the document or contract[8]. A company may execute the documents and may make the contract without having common seal as per the section 126 and section 127 of the Corporations Act, 2001. The contract is required to be signed by the two directors or by the one director or one company secretary of the company.
As per the section 131 of the Corporations Act 2001, the company cannot be the party to any contract if a company is not registered[9]. It means if company or any individual or a mediator on the company’s behalf enters in the contract for company’s benefit before the registration of the company, then it would be bound by the deal. The Corporations Act 2001 allows the company to ratify the pre- registration contract after the registration of the company. The liability is imposed on the individual to compensate the third party for the damages because the contract is not ratified by the registered company or the incorporated company fails to perform its duty under a ratified contract. When the contract is not ratified subsequently by the registered company, then the court may give any order in this regard in any circumstances[10]. The court may order the company to take some actions in the respective matter[11].
Application of Doctrine of Indoor Management
As per the section 132 of the Corporations Act 2001, in case of the pre-registration contract, a party may be released from the obligations but it would not be allowed to indemnity[12]. In respect of the pre-registration contract, the party of the contract may release the person from the complete obligation or liabilities on the part. With no respect of the law or principals or the rules or regulation or equity, no right of indemnity against the entity is provided to an individual in respect of the liability of person. It happens when an individual acts as the trustee for the company[13].
The company has also an option of post registration contract. In case of the post registration contract when the company once registered, the company’s members have the options[14]. The pre-registration contract can be ratified by the members of the company. Other option is that the members of the company do not ratify the contract[15]. They can file the proceedings against the person who makes the contract on the behalf of an entity. For example breach of the duty of promoter. The members of the company may form a new contract in the similar manner and as per the same terms and conditions[16].
In Kelner v Baxter (1866)[17], the advocate had agreed to sign the contract on the behalf of an entity which was not registered. The company was not created the advocate to make the contract. It means the advocate was not considered as an agent. In this case it was held by the court that the advocate was not liable personally. The company was not informed about this.
In the given question, Gerard and Sylvia made a deal with George to acquire the cake shop. Sylvia and Gerard register the cake shop in the name Cakes Pty Ltd. In Cake Pty Ltd, Gerard was listed as the director of the company and Sylvia was listed as the company’s company secretary. Later the contract was made between them and it was signed by the Gerard and Sylvia with the common seal. So it was the valid contract because as per the requirement of section 126 and 127 of the Corporations Act, 2001, the contract was signed by the George who was director of this entity as the witness and other witness was Sylvia. As per section 123 of the Corporations Act, 2001 Geared also stamped a company seal on the contract.
Validity of Cakes Pty Ltd Contract
Later George thought to not to sell the cake shop. Here, George would be bound by the contract. It means if the entity or any individual like agent on the behalf of the company forms a contract for the advantage of the company before the incorporation the company, then the company would be bound by the contract. In respect of the pre-registration contract, a party of the contract may be released from the liabilities but indemnity would not be allowed to that party of the contract. In the given situation, company is registered before the contract. The Cake Pty Ltd would not be liable in case of the post registration contract. All the liabilities will be imposed on the George.
Conclusion
On the basis of the above analysis, it can be concluded that in the given situation, George will be bound by the contract.
Articles/ Books/ Reports
Pugliese, A, Nicholson, G, and Bezemer, PJ, An observational analysis of the impact of board dynamics and directors’ participation on perceived board effectiveness (Oxford university press, 2018)
Harris, B, Third Party Suspicion of Lack of Authority on the Part of the Company Agents-A Comparative Study and a Suggested Rule (Cambridge University Press, 2018)
Bottomley, S, Spender, P, and Nosworthy, B, Contemporary Australian Corporate Law (Cambridge University Press, 2017)
Sealy, L, and Worthington, S, Sealy & Worthington’s Cases and Materials in Corporations Law (Oxford University Press, 10th edition, 2013)
Barker, R, The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members (John Wiley & Sons Inc., 2016)
Cases
Kelner v Baxter (1866) LR 2 CP 174
Varkey Souriar v Leraleeya Banking Co. Ltd. 1956 (12) TMI 15
Ruben v Great Fingal Consolidated [1906] 1 AC 439
Legislations
The Corporations Act, 2001 (Cth)
Other
Australian Government, Federal Register of Legislation (2015) <https://www.legislation.gov.au/Details/C2018C00131>
Wolters Kluwer, Agent exercising a company’s power to make contracts (2012) <https://iknow.cch.com.au/document/atagUio485822sl14503794/corporations-act-2001-section-126-agent-exercising-a-company-s-power-to-make-contracts>
Cooper grace ward lawyers, Has the company correctly signed the contract (2016) <https://www.cgw.com.au/publication/company-incorrectly-signed-contract/>
[1] Corporations Act, 2001 (Cth)
[2] Corporations Act 2001, s126
[3] Wolters Kluwer, Agent exercising a company’s power to make contracts (2012) <https://iknow.cch.com.au/document/atagUio485822sl14503794/corporations-act-2001-section-126-agent-exercising-a-company-s-power-to-make-contracts>
[4] Corporations Act 2001, s127
[5] Australian Government, Federal Register of Legislation (2015) <https://www.legislation.gov.au/Details/C2018C00131>
[6] [1906] 1 AC 439
[7] 1956 (12) TMI 15
[8] Corporations Act 2001, s123
[9] Corporations Act 2001, s131
[10] Brew Harris, Third Party Suspicion of Lack of Authority on the Part of the Company Agents-A Comparative Study and a Suggested Rule (Cambridge University Press, 2018)
[11] Andrew Pugliese, George Nicholson, and John Bezemer, An observational analysis of the impact of board dynamics and directors’ participation on perceived board effectiveness (Oxford university press, 2018)
[12] Corporations Act 2001, s132
[13] Cooper grace ward lawyers, Has the company correctly signed the contract (2016) <https://www.cgw.com.au/publication/company-incorrectly-signed-contract/>
[14] Lea Sealy, and Sandy Worthington, Sealy & Worthington’s Cases and Materials in Corporations Law (Oxford University Press, 10th edition, 2013)
[15] Sand Bottomley, Peter Spender, and Biel Nosworthy, Contemporary Australian Corporate Law (Cambridge University Press, 2017)
[16] Ray Barker, The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members (John Wiley & Sons Inc., 2016)
[17] LR 2 CP 174
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