Case highlights risk of assuming a director has authority to contract

Friday 22 March, 2019

It is common practice for a director to sign documents on behalf of the company. A recent case[1] serves as a reminder that it cannot be assumed, unless the company only has one director, that a contract signed by a single director is enforceable against the company.  The Court of Appeal recently affirmed the case[2]. 

Often in the course of dealing with a company it is taken for granted that a director has authority, either actual or apparent, by virtue of their position as director.  Section 18 of the Companies Act 1993 (“Act”) prevents a company from asserting against a third party that a director, or a person held out by the company as a director, does not have the authority that a director of a company in the same business would customarily have, except when the third party has knowledge to the contrary.

The Autumn Tree case concerned an agreement for the sale of a property, at an undervalue and with a delayed settlement, by a company formed for the purpose of developing the land - its only significant asset.  The vendor challenged the validity of the agreement on the basis the director had no authority to bind the company.

The agreement was said to have been signed by the director shortly after resigning (although the validity of the resignation was questionable) and another director being appointed, but prior to any resignation being notified to the Companies Office. As a result, both directors were recorded as current directors at the Companies Office at the time the agreement was signed.

Evidence indicated that the outgoing director was not authorised to sell the property, either before or after resignation. The property was the company’s only significant asset meaning the sale was a “major transaction” in terms of section 129 of the Act. Major transactions are required by the Act to be approved by special resolution (a resolution approved by a majority of 75%, or higher if the constitution requires) of shareholders.  A special resolution was not passed.

The terms of the director’s appointment, circumstances of the sale, and lack of shareholder approval by way of special resolution, all supported the court’s conclusion that the director had no actual authority to enter the agreement. On the basis of the court’s finding that a director of a property-developing company would not customarily have the power to enter into a transaction of this nature, section 18 of the Act was found not to assist the purchaser.

The Court of Appeal has now clarified that if section 18 of the Act did apply, constructive knowledge (knowledge that would have existed if reasonable care was exercised) would not remove the protection of section 18 where such knowledge arose only from the contract in question. “Wilful blindness”, however, was indicated by the Court to amount to a form of actual knowledge.

The overriding message of the case is that the customary authority of one director acting alone is usually very limited.  In the absence of customary authority, the express approval of a majority of the directors (including by way of a board resolution) is required to bind the company. If you have concerns regarding a director’s authority in any transaction, we recommend seeking legal advice at an early stage.