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Autumn Tree - The dangers of assuming you can safely contract with a single director

03 August 2018 - By John Land

Many lawyers consider that it is safe to assume that a director of a company has authority to contract on behalf of the company. The recent decision of Hinton J in Autumn Tree Ltd v Bishop Warden Property Holdings Ltd [2017] NZHC 2838 (17 November 2017) reiterates that this is not a safe assumption (except in the case of a company that has only one director).

A third party dealing with a company director will often not know whether the director, in fact, has specific authority for a particular transaction. However, a third party may assume that the director has usual or customary authority arising simply from their position as a director. Hinton J’s decision confirms that is not a valid assumption. A single director on a board of more than one has “very limited” customary authority. Nothing in s 18 of the Companies Act 1993 changes that.

Validity of sale

The Autumn Tree case concerned the validity of the sale of the company’s property at 18 Appleyard Crescent, Meadowbank, Auckland to Bishop Warden Property Holdings Ltd. Autumn Tree was incorporated to buy and develop the property.

The agreement for sale of the property was entered into on 3 August 2017 on behalf of Autumn Tree by Xioayuan Niu (Tina).

As at 2 August 2017 Tina was the sole director and 20% shareholder in Autumn Tree.

However, on the morning of 3 August 2017 Tina apparently advised that she wanted to surrender her shareholding in Autumn Tree. She also advised that she had resigned as a director of Autumn Tree and wanted Lanhua Zhang (Anna), the daughter of another shareholder, to take over as director of the company.

The change of shareholding was registered at the Companies Office that morning. Anna was registered as a new director of Autumn Tree early that afternoon. However, Tina’s removal as a director was not recorded at the Companies Office until 5 August.

Tina and Bishop Warden entered into the agreement for sale and purchase of the property on the evening of 3 August 2017 (sometime after 6:10pm). Tina purported to sign as director of Autumn Tree.

No actual authority

Hinton J held that Tina did not have actual authority to enter into the agreement. The judge proceeded on the basis that Tina was still a director at the time of the sale and purchase agreement. That was not, in fact, clear. However, even if Tina was still a director at that time, she was not sole director and there was no evidence of her having express authority to enter into the agreement.

Actual authority was not present in the absence of a board resolution to approve the sale, or provide Tina with authority to enter into the agreement. Further, in this case, actual authority was also negatived by the absence of a special resolution of shareholders (as the transaction was a major transaction under s 129 of the Companies Act).

The real battleground in the case was on whether Bishop Warden could rely on apparent authority and s 18(1)(b) and/ or (c) of the Companies Act. The Court of Appeal have said that Section 18(1) “affirms and extends” the common law indoor management rule (Norman v ANZ National Bank Ltd (2012) 21 PRNZ 261 at [23]). The indoor management rule (and its statutory reenactment in s 18(1)) is essentially a presumption of regularity. A person dealing with a company is entitled to assume that the company’s internal requirements have been complied with unless they have knowledge to the contrary.

Section 18(1)

Section 18(1) relevantly provides: “A company ... may not assert against a person dealing with the company or with a person who has acquired property, rights, or interests from the company that –

…(b) a person named as a director of a company in the most recent notice received by the Registrar under section 159 … does not have authority to exercise a power which a director of a company carrying on business of the kind carried on by the company customarily has authority to exercise:

(c) a person held out by the company as a director… of the company ... does not have authority to exercise a power which a director… of a company carrying on business of the kind carried on by the company customarily has authority to exercise: … unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge of the matters referred to in any of paragraphs (a), (b), (c), (d), or (e), as the case may be [of this subsection].”

There was a question as to whether s 18(1)(b) could be relied on at all as the most recent notice to the Companies Office by autumn did not name Tina as a director.

Section 18(1)(c) effectively restates the common law principle of usual apparent authority. It requires a holding out by the company of a person as having a certain position. Hinton J was prepared to assume that the Companies Register could be relied on as the basis for finding that Autumn Tree was “holding out” Tina as a director. At the time when the sale and purchase agreement was signed the Companies Register recorded both Anna and Tina as directors. Accordingly, Autumn Tree could be said to have held out both Anna and Tina as directors at that time.

However, Bishop Warden could only obtain protection for the agreement under either s18(1)(b) or (c) to the extent that Tina was, in purporting to enter into the contract, in fact exercising a power that a director of a property holding company “customarily has authority to exercise”.

Not exercising a power

Hinton J found that Tina was not exercising a power that a director of a property owning company would customarily have authority to exercise.

Hinton J said at [51]: “The position as to customary authority varies significantly between the customary authority of a sole (or managing) director and a director who is one of a board. The customary authority of one of a board acting alone, is very limited.”

A sole director of a company will have usual authority to contract. This is because a sole director of a company will comprise the board of the company and will therefore have the full powers of the board to manage the business and affairs of the company (s 128 Companies Act).

However, a single director who is one of a board of directors is in a different position. Among other authority, Hinton J relied on the High Court of Australia decision in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 (HCA) [at 205] where the Court said the position of director does not carry with it any ostensible (apparent) authority to act on behalf of the company.

No authority

Hinton J concluded that one of the two directors did not customarily have authority to unilaterally enter into a significant property transaction.

That meant that Bishop Warden could not rely on ss 18(1)(b) or (c) and Tina did not have authority to enter into the agreement. The mere fact that Autumn Tree could be said to have held out Tina as one of two directors on the Companies Register, did not mean that Tina had the authority to sell the property on behalf of the company. The attempted reliance by Bishop Warden on the apparent authority of Tina to act for Autumn Tree failed.

Hinton J, went on, obiter, to refer to the potential application of the proviso to s 18. If a third party to a contract with a company can rely on apparent authority in accordance with s 18(1)(c), the proviso will defeat that reliance where the third party knows about the defect in actual authority or in some cases where the third party has constructive knowledge of the defect in actual authority. 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”.

Constructive knowledge

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 [66]). However, given that Bishop Warden had not dealt with Autumn Tree before, Hinton J’s obiter comment that constructive knowledge could be enough for the proviso to apply cannot be reconciled with the leading case on the application of the proviso, Equiticorp Industries Group Ltd v The Crown (No 47) [1998] 2 NZLR 481 (at 722-723). In that case, Smellie J held that a third party would only be affected by constructive knowledge of a defect in authority where the third party had an “ongoing relationship” with the company. (In the absence of an ongoing relationship with the company, a third 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.)

Nevertheless, Hinton J’s view on the limited extent of the customary authority of a single director is well supported by precedent and academic commentary. While some lawyers have expressed surprise at the suggestion that a single director has limited authority to contract, that position is consistent with previous high judicial authority (such as the High Court of Australia decision in Northside) and leading company law texts (such as Watts, Campbell and Hare, Company Law in New Zealand 2nd edition, 2016 at 11.8.1). This means that it is not safe to assume that a single director of a company has authority to contract on behalf of the company (unless the director is the sole director of the company in question).

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 john.land@bankside.co.nz

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Last updated on the 3rd August 2018