Execution of documents16 May 2023
- A company can sign contracts and deeds by persons who have appropriate authority.
- Execution in accordance with s 127 of the Corporations Act is best practice.
- Companies should implement proper protocols regarding who within the company has authority to execute under s 126 of the Corporations Act.
In the first of our Director Information Series, we considered the importance of a shareholders’ agreement as an instrument that records the rights and obligations of shareholders and company executives as they embark upon a business venture.
The effective execution of documents by a company is the next important topic in the Series. While the authority to execute a document on behalf of a company is something that a shareholders’ agreement might contemplate, it is prescribed in the Corporations Act 2001 (Cth) (Act) and may also be provided for in the company’s constitution.
How can a company execute documents?
A company is a legal entity that can enter into commercial arrangements and sign documents such as contracts and deeds, which are binding upon it. However, as a company is not a physical entity, it cannot physically execute a document. Consequently, a person or persons within the company must be given the authority to execute binding documents on behalf of the company.
The most straightforward form of valid execution by a company is in accordance with s 127 of the Act, which provides that a company may execute a document:
- by two directors, or a director and company secretary, or (if there is one director who is also the company secretary) the sole director signing it, or
- by affixing the company’s common seal in the presence of, and witnessed by, the company’s sole director, or two directors, or a director and company secretary.
However, a company can also validly execute a document under s126, which permits an individual acting with the company’s express or implied authority to execute documents on behalf of the company. There is no requirement under the Act for the execution of the document by directors or an authorised individual to be witnessed.
If a document has been formally executed in accordance with the provisions of ss 126 or 127 of the Act, the party dealing with the company is entitled to assume that the document has been duly or properly executed by the company. That is the case even if an officer or agent lacked actual authority including by acting fraudulently. However, if the other party to the agreement is aware that the person who executed the document did not in fact have authority to bind the company that party will not be entitled to rely upon the execution as being valid and binding on the company.
Authority to act on behalf of the Company
The assumption about execution by an agent under s126 can undoubtedly create significant potential risk for a company. While a very useful tool for many larger corporate entities, the section can create headaches for directors because of the risk of an individual within the organisation acting without the express authority of the Board. It can also create uncertainty for parties dealing with the agent on behalf of the company. It is not uncommon for a company to deny the authority of someone who has purported to act as agent in binding a company on execution.
The clearest way for a company to give an individual authority to bind it in commercial negotiations is expressly and in writing usually achieved by passing a Board resolution, which gives the agent power to act on behalf of the company. The resolution should be framed in a narrow compass to give the agent authority to bind the company in a specific context. For example, actual authority can be limited in various ways to contracts or agreements of a particular nature such as employment agreements, or for a limited value, or in certain circumstances only. A party dealing with an individual who acts in compliance with the company’s actual authority can have comfort that agreements reached are binding and enforceable.
Actual authority can also be implied. This often occurs when a person is appointed in a role that conveys such authority, such as managing director or chief financial officer. If a managing director holds themselves out as having the authority to bind the company, and the company does not take steps to limit the apprehension of authority, then a party dealing with a managing director may have the right to assume that this individual has the relevant authority to act. Directors should keep a close eye on the actions of all senior executives, to ensure that these executives are not acting outside the limits of their authority.
Ostensible, or apparent, authority is an area of greatest risk to a company because of the inherent vagueness of the concept. Ostensible authority arises where an agency relationship is created by the appearance of the agent’s authority, rather than agreement or inference from a position of authority. If a reasonable person would believe that a person has authority to act, they will be the ostensible agent for the company.
For ostensible authority to exist, the following circumstances must be in place:
- the company, or someone with actual authority, must make a representation that the individual has authority, and
- the contracting party must have relied upon the representation (not knowing that the person didn’t have authority).
The question as to whether an individual had ostensible authority usually arises after the fact: when an individual who purported to have authority executes a document, and the company is trying to extricate itself by alleging the person was not authorised to enter into that agreement or arrangement. If a contracting party can show that it had reason to believe the individual had authority from the company’s own representations, then the contract will be binding.
This topic necessarily requires a brief consideration of how execution of documents has changed as a result of the electronic execution provisions introduced across Australia in response to the COVID pandemic. The temporary measures that enabled electronic execution while most of the country was locked down were made permanent in early 2022.
The amendments to execution under the Act enable authorised persons to execute documents by any electronic means – this can include physically signing and scanning in, adding an electronic signature, or using a program like DocuSign or Adobe Sign (the various methods have been described as “technology neutral”). The biggest amendment to the legislation is that deeds can be electronically signed by agents of a company without a witness.
While the change in law is undoubtedly intended to facilitate transactions, the ability for an agent to execute documents without a witness and electronically undoubtedly creates greater opportunity to bind a company without its knowledge. Company directors should be aware of this additional risk and increase vigilance with respect to giving or implying authority.
How can I best protect my company?
We always recommend that our corporate clients implement an internal procedure that require documents to be executed in accordance with s 127 of the Act or with clearly defined authority under s 126 in order to guard against persons unknowingly binding the company. It is also recommended that the shareholders’ agreement for the company clearly delineates the power of the Board to delegate authority to the company executive/s.
Directors should be aware of the risks of appointing individuals to roles within the company that might imply authority, such as the roles of managing director and chief financial officer. The contracts under which senior executives are appointed must clearly define the scope of that officeholder’s authority. Further, where an executive is enabled to bind the company, the Board must pass resolutions that precisely describe nature and limits of executive authority.
Companies should also be disciplined with who is held out as having authority to act on its behalf. This can involve implementing and maintaining strict guidelines about what persons can do and say on behalf of the company and ensuring that any misunderstandings in this regard are clarified immediately. Companies can also include in their outgoing documents statements describing the level of authority required for the document to be validly executed.
On the other side of the equation, when companies are entering into agreements with parties who execute documents other than by directors, it is prudent to seek evidence that the party executing on behalf of the other party has authority to bind the company. Evidence may include sighting a Board resolution or a direct communication with a director of the other party.
Our experts can assist with ensuring your company implements best practice regarding execution of documents, as well as assisting to resolve issues relating to agents without authority executing documents.