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Can one director sign on behalf of the company?

28 February 2018

In practice, it is common for one director to sign on behalf of the other directors. Whether or not this binds the company is not always clear. In a recent case the court decided that one out of the two directors registered on the Companies Office register did not have authority to sign an agreement and bind the company to the sale of its property.

Agreement signed by one director

In the recent case a company owned a property which had been purchased for development. At the time the sale agreement was signed there were two directors on the Companies Office register, although both the removal of the director who signed the agreement and the regularity of the appointment of the second director were in question.

The sale price was significantly below the value of the property. The company challenged the validity of the agreement. The court had to decide whether the director who signed the agreement had legal authority to sign on behalf of and bind the company.

An agent’s legal authority

The directors are agents of the company. In the context of agency law, legal authority can be either:

  • “Actual” authority; or
  • “Apparent” authority.

Actual authority can be:

  • “Express” - which is when the authority is given by express words; or
  • “Implied” – which is when the authority might be necessary to carry out the role, when it is usual for the particular undertaking, when it is customary in the trade or profession, or when the circumstances indicate that authority ought to be implied.

 

Apparent authority is when there is no actual authority, but the company makes an express or implied representation that the director has authority to bind the company. Note that the representation must be by the company, not by the agent.

Did the director have actual authority? 

The Court found that the director who signed the agreement had no actual authority. This conclusion was supported by the fact that the sale was a “major transaction” for the company. As required by the Companies Act, it had not been approved by a 75% vote of the shareholders.

Did the director have authority on any other basis?

The Court also found the director had no authority on any other basis to sign the agreement. The judge said that one director out of two directors does not have ostensible authority to act on behalf of the company and a director of a property developing business would not customarily have authority to enter into a significant property transaction on behalf of the company.

But…there might be different circumstances

The decision in this case would apply to most companies where there are two or more directors. The position could be different for some companies. A finding of implied or apparent authority can also depend on how the law is applied to the facts of the case. This is where a difficulty in deciding whether the company is bound by the actions of its agent often arises. In order to be sure a transaction entered into by a company is legally binding, professional advice should be sought.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott