A company can enter into a contract in several ways. However, most people do not check that the person signing a contract on behalf of a company has the authority to do so. If they don’t have authority, then their signature might not bind the company and the contract may not be valid or enforceable against the company.
So, what can you do to ensure that a contract is correctly signed? You can check that the person or persons signing either:
- holds a power of attorney by obtaining a copy of the power of attorney; or
- has been authorised by the Board of Directors by obtaining a copy of the Board’s resolution; or
- is a director or secretary of the company by obtaining a current company extract from ASIC to verify that then checking that they have signed in accordance with section 127 of the Corporations Act 2001 (Cth) (Corporations Act).
What does section 127 of the Act say?
Section 127(1) of the Corporations Act says that a company may enter into a document if it is signed by:
- 2 directors of the company; or
- director and a company secretary of the company; or
- for a proprietary company that has a sole director who is also the sole company secretary–that director.
What is the benefit of ensuring a company signs a contract in accordance with section 127?
If a contract has been signed in one of the ways set out in section 127, then you do not have to verify that the person(s) signing has authority and you can rely on the assumption that the document has been properly executed by the company.
What happens if there is a sole director and no secretary of the company?
That situation falls outside section 127. So, the protection of section 127 does not apply. The easiest thing to so is to require the sole director to appoint themselves as sole secretary prior to entering into the contract, then to sign the contract and write “sole director and secretary” next to their signature.
How do you know if someone is actually a director/secretary?
You may assume that anyone who appears on an a company search obtained from ASIC to be a director and/or a secretary of the company has been properly appointed and has the necessary authority.
That being the case, it is critical to obtain a current company extract from ASIC for each party to a contract which is a company.
That said, where someone signs a contract and states next to their signature that they are the sole director and sole company secretary of the “Pty Ltd” company, section 129(5) of the Corporations Act says you may simply assume that they hold both positions – we would recommend that you obtain a current company extract anyway.
What if the contract was signed fraudulently, though?
What if one Director has forged another Director’s signature? The assumptions permitted under the Act are strong in that, under section 128(3) of the Corporations Act, the assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document.
That said, you are not entitled to rely on an assumption under the Corporations Act if at the time you knew or suspected that the assumption was incorrect.
And what about signing electronically under section 127?
Believe it or not, there currently exists uncertainty in Australia about whether a company is able to sign a document electronically under section 127. There is a risk that a contract signed by a company in accordance with section 127 but signed electronically (through the use of electronic signatures, such as Docu-sign and/or Adobe Sign, as opposed to the exchange of an electronic/pdf copy of a properly signed contract) may be invalid or unenforceable. This is because the Corporations Act is excluded from the operation of the Electronic Transactions Act 1999 (Cth).
The question really becomes:
If a contract is signed in accordance with section 127, but done so electronically, can the other party to the document rely on the assumptions in section 129 about the validity and binding nature of the contract?
The preferred view seems to be that the answer to this question, as the law currently stands, is no.
So, there is a risk that where, for example, 2 directors sign electronically, their company may later try to get out of the contract and, when it does that, there might be difficulties in relying on the assumptions under the Act.
And, while a contract signed by 2 directors electronically may still be valid under common law, there is still uncertainty which might involve significant legal expense to work out.
Until the position is made clear, if companies wish to sign contracts electronically, the safest approach to try to ensure validity and enforceability of contracts, and to be able to rely on the assumptions in section 129, would be for companies to sign physical paper copies of contracts in accordance with section 127 at the same time as signing electronically (preferably in duplicate so each company can have an original for their records) and the special conditions of the contract should refer to the intention to sign a subsequent hard copy of the contract.
When you are arranging for company buyers and sellers to sign a contract of business sale:
- always obtain a Current Company Extract form ASIC for each company party to identify the directors and secretary;
- always insist that a company execute in accordance with section 127 of the Corporations Act;
- if a company has a sole director but no secretary, insist that the director be appointed sole secretary so that they can sign as sole director and secretary;
- if signing electronically, until the law is clarified on this point, always get the parties to also sign a physical copy of the contract (preferably in duplicate so each company can have an original for their records).
Reliance on content the material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.