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02 Aug 2010

Sometimes you do have to sweat the small stuff

by Jonathan Algar, John Elliott

The fact that you're a very big company doesn't mean you needn't follow the legal rules for the execution of documents.

Background

A large insurance company claimed to be a creditor of Ungul, a property developer. Ungul was in voluntary administration.

A meeting of Ungul's creditors was called for 11 June. The insurance company's solicitors contacted the administrator and said that:

  • the notice of the meeting had only been received on 9 June;
  • the insurance company would be submitting a proxy;
  • because of the size of the insurance company, its directors were spread around Australia and did not normally "deal with day to day affairs such as this meeting", so it had been impossible to get them to sign the proxy;
  • instead, the proxy would be signed by the insurance company's "executive manager".

The administrator said that the proxy had to have the common seal or to be signed by a director (as required by section 127 of the Corporations Act). The signature of someone who purported to be an "executive manager" just didn’t cut it.

The insurance company's solicitors repeated their intention to submit a proxy signed by the "executive manager". They said that this proxy should be accepted by the administrator for two reasons:

  • no other administrator had ever rejected a proxy signed by the insurance company's "executive manager";
  • the administrator could rely on the indoor management rule (a provision of the Corporations Act which says that a person dealing with a company is entitled to assume that an officer of a company has been validly appointed).

The meeting opened, the proxy was rejected and the insurance company took the administrator to court.

Should the proxy have been accepted?

The Court rejected the insurance company's argument that the proxy was saved by the indoor management rule.

The indoor management rule says that a third party dealing with a company can assume that a person:

  • has been validly appointed as an officer of the company; and
  • has the usual powers of such an officer

but only if the company has held the person out to be an officer.

The rule didn't apply in this case for two reasons:

  • there was no evidence that the insurance company had held the person out to be its "executive manager" (all the administrator had was the solicitors' assurance that he was an "executive manager");
  • even if he had been validly held out to be "executive manager", the office of "executive manager" did not imply any particular authority to bind a company.

Systems and short-cuts

The Court pointed out that the insurance company could have saved itself this grief by having a system of delegation in place:

"Most large companies have in place well documented systems of delegation to officers of different ranks. Internal delegations are often accompanied by powers of attorney executed under the common seal embodying, by way of safeguard, limitations and requirements for multiple signatures and sometimes allowing sub-delegation. Arrangements of that kind give those companies a ready and convenient means of proving the authority of officers on any occasion on which it becomes necessary or desirable to do so, particularly in a legal context."

On the evidence before it, said the Court, the insurance company had not been shown to have had any such system in place.

The need for a system of delegation is the obvious lesson from this case. The other lesson is more subtle.

The insurance company's solicitors claimed that no-one had ever rejected a proxy signed by the "executive manager". The administrator's response was that he couldn't speak for other administrators - and, as it turned out, the Court agreed with him.

The other lesson for companies, therefore, is the importance of ensuring that documents are properly executed. For example, short-cuts should be avoided, no matter how much pressure there is to get the documents out the door. Nine times out of ten, the other side in a deal may not notice that documents haven't been properly executed. But it only takes one person to spot that something's wrong, and you've got a real problem.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.