Contract Validity and Company Law

This assignment examines the validity of a contract made by Pauline, a director of Two2's Pty Ltd. It analyzes whether the contract is enforceable against the company based on legal requirements for signing and witnessing company documents. The assignment discusses relevant sections of the Corporations Act 2001, including the indoor management rule and its exceptions. It also considers case law precedents like Frank Australia v Paley Properties and Royal British Bank v Turquand to support its arguments.

Running head: COMMERCIAL AND CORPORATION LAW
Commercial and Corporation Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Issue.................................................................................................................................................2
Rule..................................................................................................................................................2
Application......................................................................................................................................5
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9
Bibliography....................................................................................................................................9

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Common law position
At common law, any person dealing with a corporation under the assumption that he or
she is acting in good faith and without any knowledge about irregularity, such person is not
required to make any inquiry about the formality of the internal proceedings of the corporation.
Such person must assume that the company is acting in compliance with all the relevant by-laws
and articles. This principle is called the ‘indoor management’ rule that was established in the
landmark case of Royal British Bank v Turquand1. The fundamental rule of law of agency states
the actions of the agents bind the principal if such actions are within the apparent, deemed or
actual authority of the agent.
Issue
Whether Two2’s Pty Ltd is bound by the contract made by Pauline
Rule
A contract has a binding effect on the parties signing the legal agreement and a valid
contract is enforceable in the court of law.
According to section 125 of the Corporation Act 2001 (Cth) (CA 2001), expressly
stipulates that the performance of an act, which includes entering into an agreement by a
company, shall not be considered as invalid merely on the ground that it is beyond the power of
the constitution of the company2.
1 [1856] 6 EL & BL 327
2 Corporation Act 2001 (Cth) at section [125].

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In Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103, the
court observed that a contract shall be binding upon the company only if such contract is
properly signed by both the directors of a company. A contract that is rendered as valid shall be
enforceable in the court of law. A contract that is not valid shall not be enforceable in court of
law and an invalid contract does not have a binding effect on the company signing such contract.
According to section 124 (2) of the CA 2001 states that the legal capacity of a company
to enter into a contract is not affected by the fact whether such contract would be in the best
interest of the company or not3.
According to section 127(1) of the CA Act 2001, a company is entitled to execute a
document without using a common seal provided such document have been signed by 2 directors
of the company or a secretary and a director of the company. In case of a proprietary company
having a sole director, who is also the company secretary, such director of the company may
execute a document. If a document is executed in the above manner, this would enable people to
depend on the assumptions stipulated under subsection 129(5) with respect to dealings with the
company4.
As per section 127 (2) of the Act, a company with a common seal may execute a
document if the seal is fixed to the document and the fixing of such seal should be witnessed by
2 directors of the company or a company secretary or a director of the company. In case of a
proprietary company where the sole director is the secretary as well, such director should witness
such fixation of seal. This would enable people to depend on the assumptions stipulated under
subsection 129(6) relating to dealings with the company5.
3 Corporation Act 2001 (Cth) at section [124(2)].
4 Corporation Act 2001 (Cth) at section [127(1)].
5 Corporation Act 2001 (Cth) at section [127(2)].

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In Royal British Bank v Turquand (1856)6, the court ruled that any person who is
dealing and entering into a contract with the company in good faith may make an assumption
that such dealing or contract is consistent with the constitution of the company and within the
powers as stipulated in the Constitution.
Further, in the landmark case Northside Developments Pty Ltd v Registrar-General
(NSW)(1990)7, it was held that a representation of authority is conferred upon a person by the
company where such person is working on behalf of the company.
According to section 128 of the Act, a person is entitled to make the assumptions under
section 129 with respect to dealings with the company. The company is not entitled to make
assertions in proceedings with respect to the dealings stating that any of such assumptions were
not correct8.
According to section 129(1) of the Act, a person is entitled to assume that the company
has complied with the provisions of this Act and the constitution of the company that are
applicable to this company as replaceable rules9. Section 129 (2) of the Act entitles a person to
assume that any person who is considered as a company secretary or a director of the company
from the information that is available to the public from ASIC and has also been provided by the
company, has been duly appointed10. The person may also assume that such director or company
secretary is authorized to exercise his or her respective powers and discharge the responsibilities
that are usually performed by a director or a secretary of any similar company.
6 Royal British Bank v Turquand (1856) 6 El & Bl 327.
7 Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146.
8 Corporation Act 2001 (Cth) at section [128].
9 Corporation Act 2001 (Cth) at section [129(1)].
10 Corporation Act 2001 (Cth) at section [129(2)].

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As per section 129(5) of the statute, a person may make assumptions about execution of
a document by the company if the document has been signed in the manner prescribed under
section 127(1) of the Act. In order to make such assumptions, a person may assume that any
person who signs the document and states beneath their signature that they hold the position of a
secretary and a sole director of the company are assumed to occupy both offices11.
Section 129 (6) of the Act states that a person may make assumptions regarding the
execution of a document if the common seal of the company is said to have been fixed to the
document in the manner prescribed under subsection 127(2) of the Act. In order to make any
assumption, a person is required to assume that any person who witnesses the fixing of the
common seal and specifies next to the signature that they are the secretary and sole director of
the company shall be assumed to hold both the offices12.
Application
On the facts here, the managing director of the Two2’s Pty Ltd is conferred with a broad
power to the managing director by the Constitution of the Company. The managing director of
the company can enter into a contract on behalf of the company provided the contract amount is
not beyond $40000. However, in case the contract amount exceeds the stipulated amount at least
two directors of the company must witness it in case the managing director is away on company
business for more than 10 days.
According to section 125 of the Act, if the company enters into an agreement it would
amount to performance of an act which shall be valid and cannot be invalidated merely on the
ground that it is beyond the power of the constitution of the company. Here, since Collin, the
11 Corporation Act 2001 (Cth) at section [129(5)]
12 Corporation Act 2001 (Cth) at section [129(6)].

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managing director, was away on company business for 15 days, Pauline being anther director
signs a contract as director with IT Manufactures Pty Ltd for sum $74,000.
As per the constitution of Two2’s Pty Ltd, if the managing director is away then only two
directors are empowered to sign any contract exceeding $40000 on behalf of the company.
However, as per section 125 of the Act, the contract with IT Manufactures Pty Ltd is valid as it
amounted to performance of an act, which cannot be rendered as invalid only for the reason that
it is beyond the power conferred upon the directors by the constitution of the company.
Now, according to section 124 (2) of the CA 2001 states that the legal capacity of a
company to enter into a contract is not affected by the fact whether such contract would be in the
best interest of the company or not. On the facts here, Colleen is aware of the fact that Sue as the
holder of the secretary of the company has signed the contract. Therefore, she is concerned with
the fact that the contract with IT Manufactures is a good deal, as the contract will serve the best
interest of the Two2’s Pty Ltd.
Now, according to section 127(1) of the Corporations Act 2001, a company is entitled to
execute a document without using a common seal provided such document have been signed by
2 directors of the company or a secretary and a director of the company. As per the facts of the
case, Pauline signs the contract with IT Manufactures Pty Ltd as a director and asked Sue to sign
the contract as the secretary of Two2’s Pty Ltd despite knowing the fact that Sue does not hold
the position of a company secretary. This amounts to the contravention of section 127(1) of the
Act. This is because two other directors or a director and a secretary of the company should have
signed the contract with It Manufactures when the managing director is away on company
business.

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Here, Pauline asked Sue to sign the contract as a company secretary as there were no
other directors available to sign the contract. She recommended the Board to make Sue the
company secretary after the contract was already signed by her. As was observed in Northside
Developments Pty Ltd v Registrar-General (NSW) (1990), any person who is working on
behalf of the company shall be conferred with the representation authority by the company itself.
Here, although Sue was made the company secretary, but she signed the contract as one when
she was not holding the post of a company secretary.
According to Section 129 (2) of the Act entitles a person to assume that any person who
is considered as a company secretary or a director of the company from the information that is
available to the public from ASIC and has also been provided by the company, has been duly
appointed.
Here, the IT Manufactures Pty Ltd is the party dealing with the Two2’s Pty Ltd as it
entered into a contract with the company, which was signed, by Pauline and Sue as the director
and company secretary respectively. However, IT manufactures did not receive any information
from the company and neither there was any information that was available to public from ASIC
regarding Sue being the secretary of the Two2’s Pty Ltd. This amounts a contravention of
section 129(2) of the Act.
Moreover, section 129(5) of the statute states that a person may make assumptions about
execution of a document by the company if the document has been signed in the manner
prescribed under section 127(1) of the Act. Further, in order to make such assumptions, a person
may assume that the person signing the document and stating beneath their signature that they

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hold the position of a secretary and a sole director of the company are assumed to occupy both
offices.
Here, the contract entered into between Two2’s Pty Ltd and IT Manufactures Pty Ltd that
is worth $40000 has not been signed in the manner prescribed under section 127(1) of the
Corporations Act (Cth) which requires a document to be executed if a company director has
signed it and a secretary of the company. Here, although Pauline is the director of the company
but Sue is not the secretary of the company. Furthermore, to make such assumptions under
section 129(5) of the Act, the person dealing with the company must assume that the persons
signing the document and stating the post they hold that is, of a director and a secretary, holds
both the offices.
As per the facts here, despite being aware that Sue was not the secretary of the company,
she signed the contract and stated that next to her signature that she held the position of a
secretary of Two2 is Pty Ltd.
According to Section 129 (6) of the Act states that a person may make assumptions
regarding the execution of a document if the common seal of the company is said to have been
fixed to the document in the manner prescribed under subsection 127(2) of the Act. In order to
make any assumption, a person is required to assume that any person who witnesses the fixing of
the common seal and specifies next to the signature that they are the secretary and sole director
of the company shall be assumed to hold both the offices.
On the facts here, after Colleen returns from England, Sue is made the secretary of the
company Two2 Pty Ltd. However, at the time of witnessing the contract the company entered
with the IT Manufactures which amounted $74000, the execution of such contract was not

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witnessed in the manner as prescribed under section 172(2) of the Act, thus contravening section
129 (6) of the CA 2001. This is because execution of document is required to be witnessed by
the director and the secretary of the company where in this case, the execution of the contract
was witnessed only by one director that is, Pauline and Sue who falsely stated to be the Secretary
of the company.
Observation
As observed earlier that section 127 of the Act states that a contract is considered as valid
only if it is signed by both the directors of the company or a director and a secretary of the
company as was also observed in Frank Australia’s case. Further, as per section 129(1) of the
Act, a person is subjected to the assumption that the company has complied with the provisions
of this Act and the constitution of the company applicable to this company as replaceable rules.
Further, any person is subjected to the other significant stipulated under Section 129 (2) of the
Act that from the information available to the public from ASIC and by the company, a person
has been duly appointed as a company secretary or a director of the company.
The indoor management rule in Turqland’s case was approved in Mahony v East
Holyford Mining Co13. The two primary reasons to support the indoor management rule is
firstly, it is an unfair imposition on the outsider to demand proof from the directors that they
have fulfilled all the relevant requirements of articles and by-laws. Secondly, the continuous duty
to verify would be considered as an impractical burden on the business.
However, the only exception to the rule is that it is not applicable where a person dealing
with the corporation has actual knowledge about the lack of authority of the director or the
13 [ 1874-75] LR 7 HL 869

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officer. Moreover, it shall also not eb applicable under sus[icious circumstances which puts the
outsider on notice to inquire about the actual authority of the corporate officer as was stated in B
Liggett (Liverpool) Limited v Barclays Bank Limited14.
Conclusion
Two2’s Pty Ltd is not bound by the contract made by Pauline.
14 [1928] 1 KB 48

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Reference List
Corporation Act 2001 (Cth)
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103
Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146
Royal British Bank v Turquand (1856) 6 El & Bl 327
Bibliography
Cole, Steven. "Good governance and the curious case of the alternate director." Governance
Directions 68.10 (2016): 603.
Dagwell, Ron, Graeme Wines, and Cecilia Lambert. Corporate accounting in Australia. Pearson
Higher Education AU, 2015.
Keay, Andrew. "The public enforcement of directors' duties: a normative inquiry." Common
Law World Review 43.2 (2014): 89-119.
Overland, Juliette. "Corporate Social Responsibility Reporting and Directors’ Duties: The
Australian Experience." Corporate Social Responsibility in the Global Business World. Springer
Berlin Heidelberg, 2014. 135-152.
Ryan, Meagan. "Signing and witnessing documents: Execution requirements for Australian
companies." Proctor, The 35.6 (2015): 34.
Smith, Helen. "Australia's Company Law Watchdog: ASIC and Corporate Regulation." (2015):
145.

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