The Court of Appeal in Bishop Warden Property Holdings Ltd v Autumn Tree Ltd  NZCA 285 has confirmed the danger of assuming that a single director of a company has authority to contract on behalf of the company (except in the case of a company that has only one director).
In LawTalk 920, I discussed the first instance decision of Hinton J (see “Autumn Tree – The dangers of assuming you can safely contract with a single director”, LawTalk 920, August 2018). The Court of Appeal has now issued its decision in an appeal against the High Court judgment.
The Court of Appeal judgment confirms the decision and reasoning of Hinton J in relation to the main issue in the case – namely the limited customary authority of a single director acting alone.
However, the Court of Appeal departs from Hinton J in its interpretation of the proviso to s 18(1) of the Companies Act, a provision of some considerable importance in assessing the validity of contracts entered into by a company.
The Court of Appeal also adds comments of interest in relation to the validity of transactions entered into in breach of the rules relating to major transactions (s 129) or in breach of the director’s duty to act in the best interests of the company (s 131).
The main issue concerned whether one of two directors of a property holding company (Autumn Tree) could be said to have apparent authority to enter into a contract to sell the company’s property. Was the fact that the director (“Tina”) was held out to be a director enough to amount to apparent authority to contract on behalf of the company?
Bishop Warden, which alleged it had a contract with Autumn Tree, sought to rely on s 18(1)(b) and (c) of the Companies Act. However, both of those provisions could only assist Bishop Warden if it could show that the contract was within the customary authority of Tina as a director of Autumn Tree.
On this issue, the Court of Appeal’s reasoning is essentially the same as that of Hinton J. The Court notes (at ) that “the customary authority of one director of a board acting alone (as opposed to a sole director) is very limited” and in particular relies on the High Court of Australia decision in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.
The Court of Appeal, like Hinton J, concluded (at ) that “One of two directors of a property development company does not customarily have authority unilaterally to enter into a significant property transaction.” Section 18 did not therefore assist Bishop Warden and the agreement was not binding.
Interpretation of proviso
Although not essential for its decision, the Court of Appeal went on to discuss the correct approach to interpretation of the proviso to section 18(1) which is relevant where one of the subparas of section 18(1) does apply. Here the Court of Appeal took a different approach to Hinton J, and to some Australian authority (such as Bank of New Zealand v Fiberi Pty Ltd (1993) 14 ACSR 736 (NSWCA)).
Section 18(1) provides that the company may not assert certain matters against a person dealing with the company (such as non-compliance with the company’s constitution, or the lack of authority of a corporate agent who has apparent authority to bind the company) unless the proviso applies.
For example, if a party to a contract with a company could otherwise rely on apparent authority in accordance with s 18(1)(c), the proviso will defeat that reliance where the contracting party knows about a defect in actual authority or in some cases where the contracting party has constructive knowledge of the defect.
There has been some inconsistency in the case law as to when constructive knowledge of a defect is enough for the proviso to apply. The wording of the proviso suggests that a person’s constructive knowledge will defeat reliance on apparent authority where that constructive knowledge occurs “by virtue of his or her position with or relationship to the company”.
At first instance, Hinton J thought that even if Bishop Warden could rely on s 18(c) there was a strong case that the proviso to s 18 would apply to defeat Bishop Warden’s claim on the basis of constructive knowledge (at ). In my previous article, I suggested that this part of Hinton J’s judgment could not be reconciled with the leading case on the application of the proviso, Equiticorp Industries Group Ltd v The Crown (No 47)  2 NZLR 481 (at 722-723).
Equiticorp approach still correct
The Court of Appeal has now confirmed that the approach taken by Smellie J in Equiticorp remains the correct approach (see  and -).
The court noted the intention behind the proviso was to change the common law so that constructive knowledge of a defect would not be fatal to a third party’s attempt to enforce a contract. That intended law reform would be undermined if the proviso applied where a third party had constructive knowledge of a defect arising out of just the particular transaction. Accordingly, the Court of Appeal endorsed the approach of Smellie J under which a contracting party would only be affected by constructive knowledge of a defect in authority where the party had an “ongoing relationship” with the company.
In the absence of an ongoing relationship with the company, a contracting party’s ability to rely on the apparent authority of a corporate agent will only be defeated by actual knowledge of a defect in authority. However, the Court did note (at ) that “wilful blindness” would amount to a form of actual knowledge.
This approach to the proviso undoubtedly provides more protection for parties contracting with a company and would likely, for example, have led to a different result on the facts of Bank of New Zealand v Fiberi Pty Ltd.
Two final observations can be made about matters mentioned only briefly by the Court of Appeal but which are of some importance.
First, the Court did not appear to see s 17 of the Companies Act as a complete answer on the question of whether a major transaction entered into in breach of s 129 is invalid (see ). That must with respect be correct (as s 17 deals only with questions of the capacity of a company itself not with the authority of corporate agents). However, it is not consistent with the earlier (and much criticised) decision of the Court of Appeal in Hansard v Hansard  NZCA 433 at .
Secondly, the court in a mere footnote reference (footnote 3 at ) suggests that if there had been a breach by Tina of her fiduciary duty to act in the best interests of the company, that would make the contract voidable by the company in equity. That also seems correct (at least unless the other contracting party is innocent) – see for example, Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143. However, the potential invalidity of transactions at equity for breach of directors’ fiduciary duty is something often overlooked.
Overall, the Court of Appeal’s judgment in Autumn Tree is of considerable importance to the topic of company contracting. It reaffirms the danger of relying on the ability of one director (on a board of more than one) to contract on behalf of a company. It also clarifies the correct interpretation of the proviso to s 18(1) and in so doing provides more protection to innocent third parties contracting with a company. Finally, the judgment signals a change in approach on the question of validity of major transactions, and provides a reminder that a director’s breach of fiduciary duty may also impact on the validity at equity of transactions entered into by a company.
John Land is a senior Competition Law specialist and Commercial Litigator at Bankside Chambers in Auckland and also Teaching Fellow at Auckland Law School, lecturing in company law. He can be contacted on 09 379 1513 or at email@example.com