What happens if a director incorrectly signs a contract?

Current as of January 2018

 

Section 127 of the Corporations Act 2001 (the ACT) states that a company can execute a document if the document is signed by its directors with or without a common seal. The method of executing documents with a common seal stamp is no longer widely practised in Australia (and is outside the scope of this article – but directors need to be aware of any documents stating “signed under seal”).

Section 127 (1) of the Act states:

A company may execute a document without using a common seal if the document is signed by:

  1. A director of the company, or
  2. A director and a company secretary of the company, or
  3. For a proprietary company that has a sole director who is also the sole company secretary – that director

This results in a person dealing with the company being allowed to assume that a document has been duly executed if the document appears to have been signed in accordance with section 127 (1).

However, a person cannot make that assumption if they knew or suspected that assumption was incorrect at the time.

Therefore, if there is any doubt about the signatories’ authority, an ASIC search of the company you are contracting with should be conducted.

In a recent case of a company purchasing property, one director signed the contract and struck out the words “sole director/sole secretary”. The court found that due to the absence of a second signature that the contract had not been executed properly under section 127 and so the contract was unenforceable.

A simple solution under section 126 of the ACT allows a company to authorise a single director to sign as an agent on behalf of the board, if the company’s constitution allows and if the company has passed a resolution appointing a director to act as an agent.

The moral of the story – to ensure the contract is enforceable, make sure the properly authorised person is signing it.

 

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