LAW

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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 4.1 The capacity of the Company The capacity of the agents of a company

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Key points

• Development of legal capacity including the ultra vires doctrine

• Sections 124 & 125 - abolish the ultra vires doctrine

• Agency law and its relationship with sections 128, 129 and 130

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Topic 4.1 Capacity of the company Capacity of the agents of a company AIM: At the end of this topic you should be able to:

•  Outline the ‘corporate capacity’ and the developments under the Corporations Act 2001 (Cth)

•  Apply the principles of agency law to dealings with companies

•  Describe the capacity of agents in relation to companies •  Explain the Indoor Management Rule •  Outline the significance of statutory assumptions under

sections 128 & 129

THE CAPACITY OF THE COMPANY

Capacity of a company Company as separate legal entity with ‘legal capacity and powers of an individual’ s 124 Corporations law > balancing competing interests : •  3rd parties •  the company members & officers •  General law: Doctrine of ultra vires •  Statute: requiring ‘objects’ to be stated in a company’s constitution •  Statute: limiting the power of a company alter its objects

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Pre- Company Law Review Act 1998 (Cth)

Memorandum of association •  External document • Objects clause – business activities Articles of association •  Internal document •  ‘By-laws’

Objects clause • AKA ‘scope of business clause’ •  To protect:

•  Investors • Creditors

Doctrine of ultra vires Ashbury Railway Carriages & Iron Co v Riche (1875) LR 7 HL 653

Constructive notice

Doctrine of Ultra Vires •  Prior to January 1984, company's legal capacity

fixed by objects clause in constitution • Company only had the legal capacity to enter into

a transaction that was within its substantive objects and what was reasonably incidental thereto or implied otherwise the transaction was ultra vires and void

Ashbury Railway Carriage Co Ltd v Riche (1875)

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Doctrine of ultra vires

Drafting practices to achieve a wide legal capacity for the company: 1. Objects clauses > long list of objects and powers. The Courts applied the main objects principle of construction - first few objects taken to be the main objects of the company - the rest were treated as ancillary 2. To counter the main objects rule > a subjectively

worded objects clause and an independent objects clause

Bell Houses Ltd v City Wall Properties Ltd [1966] 2QB 656 Rolled Steel Products Ltd v British Steel Corporation [1985] 3

All ER 52

Ultra vires (narrow) was abolished by statute

• 1961: Legislation significantly modified ultra vires • 1984: Attempted to abolish ultra vires and constructive notice

• 1998: Ultra vires practically abolished , although it still holds relevance particularly in the “wide” sense

Section 124 • A company has the legal capacity and powers of

an individual (s.124) and all the powers of a body corporate.

•  Importantly the company’s legal capacity is granted by statute, not the company’s constitution.

Section 125 •  A constitution may include express restrictions or

prohibitions on the exercise by the company of any of its powers.

•  Alternatively or in addition the company may include a clause in its constitution setting out the objects of the company

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THE CAPACITY OF AGENTS OF A COMPANY

Execution of contract by a company

Initially, at common law, a company could only contract under seal •  It is now possible for a company to execute a

document without its common seal; section 123 Section 127 empowers a company to execute documents and deeds in the prescribed ways: • by the document being signed by two directors, or by a director and a company secretary: section 127(1) •  By fixing common seal, witnessed by same parties: section 127(2)

Contracting with a company

A number of sources of law may apply to assist TP in contracting with a company: •  Law of agency; •  Indoor management rule; note Royal British Bank v

Turquand (1856) 119 ER 886. •  Statutory assumptions - sections128-130 Corporations

Act 2001 (Cth)

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Agents of a company Section 126(1) provides that a company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company.

Principal (P)

Agent (A) Third party (TP)

create legal relations between P and TP scope of authority

AGENCY: Paradigm Case

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Agency Principles

• The law of agency involves relationships between the agent, who acts on behalf of the principal; (in order to bring the principal into a contractual relationship with a third party.)

• The agent is not a party to the contract. • Generally a person can only be an agent if they have been given authority by the principal to act in that capacity.

• That authority can come about in 3 ways:

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1. Actual authority to act for the company

Company expressly authorises the person to bind the company in contract eg section 198A(2)

2. Apparent or ostensible authority

Freeman and Lockyer v Buckhurst Properties (Mangal) Ltd [1964] 2 PB 480 A company can be bound by a contract where the person who acted for it lacked actual authority, if: •  TP was induced to make the contract by the agent being

held out as occupying a certain position in the company •  Representation was made by persons with actual authority Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 78. • Contract was one which a person in the position in

question would usually have actual authority to make;

Apparent authority

Form of estoppel, preventing the principal from asserting that they are not bound by the contract. It also depends on what the TP knows.

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3. Authority by ratification

Purported agent has neither actual nor apparent authority, their actions can still bind the company if the company later ratifies (or adopts) that agent’s actions.

Indoor Management Rule & Constructive Notice

Constructive notice doctrine: TP dealing with a company was taken to know (ie had constructive notice of) the contents of a company’s constitution because the constitution was available for public inspection. Now abolished; s.130 The Indoor Management Rule: Introduced to mitigate the harshness of the doctrine of constructive notice Royal British Bank v Turquand (1856) 119 ER 886 Northside Developments Pty Ltd v Registrar-General (NSW) (1990) 170 CLR 146, 154-5 (Mason J)

The statutory assumptions; sections 128-129 • Enacted to incorporate aspects of the common law corporate agency principles; and

• To repair certain perceived deficiencies in the indoor management rule.

Do not constitute entire/exclusive code. Do not purport to establish corporate contractual liability - merely aids to TPs in establishing that a company is liable on a contract.

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Statutory assumptions about agency •  Sections 128 and 129 provide a set of assumptions

upon which a TP may rely in enforcing obligations owed by a company.

• Does not require that TP has actually made the assumptions prior to contracting

•  The company is not allowed to assert that the matters entitled to be assumed were not correct

Brick and Pipe Industries Ltd v Occidental Life Nominees (1992) 10 ACLC

Section 128

•  TPs dealing with companies are entitled to make certain assumptions

•  Section 128(3) provides that a person is entitled to make the assumptions even if the officer or agent of the company acted fraudulently or forged a document in connection with the dealings.

•  But note section 128(4)

The assumptions under section 129

• Section 129(1) - the company’s constitution/ RR have been complied with

Restates the "indoor management rule" in Royal British Bank v Turquand (1856)

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The assumptions under section 129

Section 129(2) - a person who appears to be a director, or a secretary of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director, or a secretary, of a company carrying on business of the kind carried on by the company.

= legislative adoption of the doctrine of ostensible or apparent authority

The assumptions under section 129 Section 129(3) - a person who is held out by the company to be an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by an officer or agent of the kind concerned Section 129(4) - the officers and agents properly perform their duties to the company.

The assumptions under section 129 Section 129(5) That an officer or agent of the company who has authority to issue a document on behalf of the company has authority to warrant that it is genuine and that an officer or agent who has authority to issue a certified copy of a document on behalf of the company has authority to warrant that it is a true copy Section 129 (6) That a document has been duly sealed by the company if it bears what appears to be an impression of the seal and the sealing appears to have been properly witnessed Section 129(7) A company cannot escape liability for a false document where the issuing officer or agent was authorised to issue a true document.

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Exceptions to section 129

Section 128(4) A person who has dealings with a company is not entitled to make an assumption in s. 129 if at the time the person knew or suspected that the assumption was incorrect. Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146

Key points

• Development of legal capacity including the ultra vires doctrine

• Sections 124 & 125 - abolish the ultra vires doctrine

• Agency law and its relationship with sections 128, 129 and 130

Topic 4.1 Capacity of the company Capacity of the agents of a company AIM: At the end of this topic you should be able to: • Outline the ‘corporate capacity’ and the

developments under the Corporations Act 2001 (Cth)

• Apply the principles of agency law to dealings with companies

• Describe the capacity of agents in relation to companies

•  Explain the Indoor Management Rule • Outline the significance of statutory assumptions

under sections 128 & 129

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Next week Lecture: Topic 4.2 Members’ rights and remedies Tutorial/Collaborate: Attempt Activities 4.2.1 and 4.2.2