Indoor Management Rule & Contract Validity

This assignment examines the validity of a contract entered into between Two2’s Pty Ltd and an IT manufacturer. The analysis focuses on the application of the Indoor Management Rule and Section 129 of the Corporations Act 2001 (Cth). The scenario involves potential irregularities in the signing process, raising questions about the authority of the individuals involved and the enforceability of the contract.

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

1COMMERCIAL AND CORPORATION LAW
Table of Contents
Introduction (Common Law Position).............................................................................................2
Issue.................................................................................................................................................2
Relevant law....................................................................................................................................2
Application......................................................................................................................................4
Observation......................................................................................................................................7
Conclusions......................................................................................................................................8
Reference List..................................................................................................................................9
Bibliography....................................................................................................................................9

2COMMERCIAL AND CORPORATION LAW
Introduction (Common Law Position)
According to the provisions of common law, a person who indulges in a transaction with
a corporation having an assumption that her actions are without any knowledge of irregularities
and in actually bona fide, does not have the liability of making an inquiry in relation to the
compliance of the organizations internal proceedings. The person has the right of making an
assumption that the functioning of the organization is in compliance with all legal provisions.
This particular principle had been provided through the Royal British Bank v Turquand1 case
and is known as the “indoor management rule”. In addition the basic provisions in relation to the
law of agency provide that the principle is bound by the actions of the agent where the actions
have been conducted within the actual or apparent authority of provided by the principle.
Issue
The issue which has been identified in relation to the given situation is that whether the
organization Two2’s Pty Ltd is bound by the contract entered upon by Pauline.
Relevant law
Section 125 of the Corporation Act provides that an act which is contrary to the
constitution of the company is not invalid only because the constitution does not allow it.
Where a contract is signed properly and in a valid manner it is binding upon the
company even if it is not within the powers provided by the constitution as provided through the
case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd2
1 [1856] 6 EL & BL 327
2 [2014] SASCFC 103.

3COMMERCIAL AND CORPORATION LAW
It has been provided by Section 124(2) of the Act that the company can get into a
contract in a legal manner even in case the contract is not beneficial to the company.
The provisions of section 127(1) of the CA a document has to be legally executed by the
organization. the legal procedures states that a document may be executed by the organization
even without using its common seal in situation where it has be properly signed by the at least
two directors of the company or one director and one company secretary of the organization.
Any person dealing with the company would have the right to rely upon assumptions provided in
section 129(5) of the CA if the documents have been executed in compliance to this section.
As provided through section 127 (2) of the Act, where the common seal of the
organization is used , even than the organization is required to execute the document in the
manner provided under subsection 127 (1) and the a person dealing with the company would
have the right to rely upon assumptions provided in section 129(6) of the CA.
It had been stated by the court in the case of Royal British Bank v Turquand that a person
who indulges in a transaction with a corporation having an assumption that her actions are
without any knowledge of irregularities and in actually bona fide, does not have the liability of
making an inquiry in relation to the compliance of the organizations internal proceedings.
In situation where a person is working on behalf of the company the authority of
representation in relation to the company is conferred on such person as provided in the case of
Northside Developments Pty Ltd v Registrar-General (NSW)(1990)3.
As stated through the provisions of section 128 of the CA a right of making an
assumption is provided to a person with respect to section 129 under this section and in addition
3 Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146.

4COMMERCIAL AND CORPORATION LAW
the organization is not provided the right to assert that the assumptions made by the person is not
correct.
It has been provided through the provisions of section 129(1) of the Act that a person has
the right to make an assumption that the provisions of law, the constitution of the company and
the replaceable rules have been complied with by the organization. As per the provisions of
section 129 (2) of the Act a person has the right to make an assumption that a person has been
duly appointed as the director or company secretary based on the information provided by the
ASIC. An assumption can also be made by the person that the directors and the secretary have
been provided with due power to indulge in the transaction.
Section 129(5) of the legislation an assumption can be made by a person is relation to a
document been properly executed if it has complied with the requirements provided through
section 127(1) o the CA. Thus any person who has executed the document may be assumed as
the secretary or director of the company.
As provided by the provisions under section 129 (6) of the legislation an assumption in
relation to the due execution of a document may be made by a person if the document have been
executed with the use of common seal under section 127(2). Thus any person who has executed
the document may be assumed as the secretary or director of the company.
Application
It has been given out through the fact of the case study that according to the constitution
of the company broad powers have been provided to managing directors of the company.
However the constitution limits the power of the director to enter into a contract which has a
value of more than $40000. In the given situation it has been provided to us that the contract

5COMMERCIAL AND CORPORATION LAW
which has been entered upon by the director is worth $74000. In relation to the occurrence of this
situation it has been provided by the constitution of the company that two directors have to sign
such contract where the managing director is away for 10 days or more.
As provided by the provisions of Section 125 of the Corporation Act an act which is
contrary to the constitution of the company is not invalid only because the constitution does not
allow it. Therefore in the given situation where the managing director Collin is not able to attend
business proceedings for a period of 15 days the other director Pauline has signed a contract
worth $74000 with another company the act will not merely be invalid as it is contrary to the
provisions of the constitution. This is because the constitution limits the power of the director to
enter into a contract which has a value of more than $40000 but the application of section 125
validates any activity contrary to the constitution.
Coming to the provisions of section 124(2) it can be stated that the company can get into
a contract in a legal manner even in case the contract is not beneficial to the company. Therefore
contract which has been entered upon by the other director would be valid irrespective of its
consequences on the organization.
Applying the provisions of section 127(1) of the CA in this case it can be stated that a
document has to be legally executed by the organization. the legal procedures states that a
document may be executed by the organization even without using its common seal in situation
where it has be properly signed by the at least two directors of the company or one director and
one company secretary of the organization. In this case Pauline has asked to Sue to pretend as the
Company secretary of the company with respect to signing the contract with the other company
where it was eve dent that Sue is actually not the company secretary of the company. Here the

6COMMERCIAL AND CORPORATION LAW
provisions of section 127(1) have been contravened in relation to the transaction and the
document has not been executed properly.
As there were no other directors available Sue was asked by Pauline to act as the
company secretary as no other director were present to sign. After the contract had been signed it
was recommended by the Pauline that sue should be made the company secretary of the
company. In the case of Northside Developments Pty Ltd the court held that any person
working on behalf of the company can be conferred upon the authority by the company.
Although Sue has been appointed as the company secretary when the contract was signed she
was not the secretary. However as she was working on behalf of the company apparent authority
will be conferred.
Applying the provisions of section 129(2) of the legislation it can be stated that the third
party would have right to assume a person as a director or secretary in case it is depicted so
through the registers of ASIC. In this situation the third party who had entered into a contract
with the company did not have any information in relation to the Sue being the company
secretary from the ASIC. Thus they did not make an effort to gain the information from the
ASIC and violated the provisions of section 129(2) of the legislation.
In addition as provided by Section 129(5) of the legislation an assumption can be made by a
person is relation to a document been properly executed if it has complied with the requirements
provided through section 127(1) of the CA. Therefore the third party may assume that the
persons signing the contract on behalf of the company are in reality the director and company
secretary of company.

7COMMERCIAL AND CORPORATION LAW
In the situation the contract is not only worth more than $40000 as restricted by the
constitution but also have not been signed in accordance with section 127(1). However in the
given situation there is a right provided to the IT Company for making an assumption that the
contract have been signed duly by the director and company secretary of the company.
Further through the application of section 129 (6) of the legislation an assumption in relation to
the due execution of a document may be made by a person if the document have been executed
with the use of common seal under section 127(2). As per the facts provided in the situation
although Sue has been appointed as the company secretary when the contract had been signed
she was not holding the position it will be assumed by the it company that she was actually the
company secretary and this assumption cannot be falsified by the organization.
Observation
It has already been observed that a document executed by the company is to be
considered as valid only if is signed by two directors or a director and a company secretary of the
company. This observation had also been done in the Frank Australia’s Case. Moreover
according to the provisions of section 129(1) of the CA the third party may assume that all
regulatory requirements in relation to the constitution and legislations have been met. In addition
a person under section 129(2) can rely on the information obtained through the registers of ASIC
in relation to the position of director or company secretary of the company.
The provisions of the indoor management rule as provided in the Turqland’s case had
been duly approved in the case of Mahony v East Holyford Mining Co4. The two most
important reasons which provides support to the indoor management rule are that it would be
4 [ 1874-75] LR 7 HL 869

8COMMERCIAL AND CORPORATION LAW
unfair to impose on the third party the burden of showing that all regulatory requirements have
been met and the duty of continuously doing verification.
However the indoor management rule is also subjected to a certain exception. The
exception states that where a person is dealing with the corporation and has real knowledge that
the organization has not complied with existing law or has misrepresented a person as a director
than the application of the indoor management rule cannot be done. In addition as provided by
the case of B Liggett (Liverpool) Limited v Barclays Bank Limited5 where the circumstances are
suspicious and the third party is required to make an inquiry reasonably the rule cannot be
applied.
Conclusions
The contract which has been entered into between Two2’s Pty Ltd and the IT
manufacturer via Pauline and Sue is not binding.
5 [1928] 1 KB 48

9COMMERCIAL AND CORPORATION LAW
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.