Statutory assumptions for lenders dealing with companies - useful but are they limited?

In brief

The New South Wales Court of Appeal has focused on the need for parties seeking to rely on the assumptions in sections 128 and 129 of the Corporations Act to have had 'dealings' with the company. It has held that 'dealings' with a company can be with someone who has actual or ostensible authority to negotiate on behalf of the company; it need not be with someone who has actual or ostensible authority to enter into the particular transaction. So it saved the statutory assumptions from being robbed of much of their use. But the decision leaves possible questions when a party's only 'dealing' with the company is the receipt of the relevant document, or the party needs the assumptions to establish it had 'dealings'. Partner Diccon Loxton and Lawyer Alicia Lyons report.

Background

Section 128(1) of the Act provides that a person is entitled to make the assumptions in s129 in relation to 'dealings with a company'.

Frenmast was one of three companies set up in connection with a licorice manufacturing business carried out by the Tiricovski brothers. It owned land that it leased to the second company, which in turn manufactured the licorice and sold it to the third.

ANZ had provided facilities to Frenmast, guaranteed by the other companies and some of the brothers, and provided loans to the other companies. It then sought a guarantee from Frenmast in relation to loans to one of the companies and loans to one of the brothers, Robert Tiricovski. 

The guarantee (together with associated acknowledgements) was purportedly executed by Frenmast, in accordance with s127(1)(a) or (b) of the Act, by Robert Tiricovski, a director and the company secretary, and Vlado Tirikovski, a director. Vlado's signature was forged.

ANZ sued on the guarantee and relied on the assumption in s129(5) of the Act that the document had been duly executed.

The primary judge held that ANZ was not entitled to rely upon that assumption because it had not had any dealings with Frenmast in respect of the guarantee; there was no evidence of any dealings between ANZ and the company in respect of the guarantee before its execution. To the extent that there were dealings between ANZ and Robert, he did not have actual or ostensible authority to give the guarantee on the company's behalf, so these were not relevant dealings 'with the company'.

The Court of Appeal decision

The Court of Appeal overturned the decision, with Justice Meagher giving the leading judgment.

There were two issues on appeal:

• whether ANZ had dealings with Frenmast concerning the giving of the guarantee that were sufficient to allow it to rely on the assumptions; and
• whether the expression 'dealings with a company' in s128(1) describes any transaction or negotiation between someone acting on behalf of the company with actual or apparent authority to do so, or whether it only describes dealings with someone who has actual or ostensible authority to enter into the transaction to which the dealings are said to relate.

Did ANZ have dealings with Frenmast concerning the giving of the guarantee?

Justice Meagher held that ANZ did have dealings with Frenmast concerning the giving of the guarantee. ANZ had sent letters of offer to Robert to vary the existing facilities and to provide for the taking of a new guarantee from the company. Among other things, those letters of offer enclosed acknowledgements and a form of guarantee to be signed by the company. The acknowledgements and guarantee were signed by Robert and also had Vlado's forged signature. Robert returned them to the ANZ, purporting to act on Frenmast's behalf.

What is the meaning of 'dealings with a company'?

According to Justice Meagher, the next question was whether Robert had actual or ostensible authority to engage in relevant communications on the company's behalf. His Honour held that he did: by allowing him to undertake negotiations with ANZ on such matters over several years, the other directors and shareholders of the company (Vlado and another Tirikovski brother), had created actual or ostensible authority in Robert to be the point of communication between ANZ and the company. Accordingly, ANZ was entitled to make the assumptions in s129 of the Act. It was not necessary that Robert also have actual or ostensible authority to enter into the guarantee itself.

ANZ did not have notice that Robert was acting in his own interests and contrary to the interests of Frenmast. It was entitled to assume, by reason of ss 128 and 129(4), that Robert was properly performing his duties to the company. It was not obvious, or necessarily the case, that the proposed guarantee was not in the company's interests. In broad terms, it was entitled to assume 'corporate benefit'.

Director signing as 'secretary'

Vlado's purported signature appeared as 'company secretary' when he was in fact a director of Frenmast, but Justice Meagher held that ANZ was still entitled to rely on s129(5), as the guarantee was purportedly executed by two directors of the company.

Comment

The court eventually came to a reassuring conclusion – that ANZ was entitled to rely on s129 of the Act – but the case leaves questions as to the statutory regime's operation. These relate to the extent of the requirement of a 'dealing' with someone with actual or ostensible authority – a gateway before the section can be relied on. In an earlier case, Chief Judge in Equity Hodgson, in a passage quoted by Justice Meagher, had indicated that it was a requirement  that there need to be dealings relating to the document in question (in the sense of negotiations, or other steps in relation to the contemplated transactions).²  Justice Meagher seemed to focus on the negotiation as constituting the dealing itself.

What then happens when an outside party, such as a bank, is seeking to rely on the statutory assumptions in relation to a document, like a guarantee, where there may be no other dealings? This can arise in two situations.

The first is when the only possible 'dealing' with the company is the document itself; there is no other correspondence.

The second is where it is necessary to rely on the statutory assumptions in order to be able to say that there were dealings: eg where the relevant preliminary correspondence is a forgery, or has been signed by directors without authority to deal.

As to the second situation, some comfort can be taken from the fact that the Court of Appeal held that ANZ was able to rely on the statutory assumption in s129(4) in holding that Robert had apparent authority to 'deal' on behalf of the company.

In relation to the first situation, there can be some comfort taken from the fact that the relevant activity the court regarded as being 'dealings' included the forwarding by ANZ of the form of guarantee to the company for execution, and the signing of the guarantee.

Nevertheless, some clarification would be useful to shed a little light on the remarks in Soyfer.

For the moment, standard due diligence procedures in relation to the execution of guarantees and other documents should suffice in most situations, but lenders and others should be wary of situations where it would be open to a party to allege there had been no dealings of any kind.