Whilst scanning the recent company law cases I came across one that I think should present as a real red flag for commercial parties generally when contracting with companies.

Autumn Tree Limited v Bishop Warden Property Holdings Limited [2017] NZHC 2838 has brought into focus the level of authority that one director of a company has, when there is more than one director noted at the Companies Office, to bind a company and therefore what a third party can rely upon when entering into agreements with that company which are signed by only one director. An appeal of the High Court's decision was dismissed recently by the Court of Appeal [2018] NZCA 285.

 

The fact scenario

The company (Autumn Tree) initially had only one Director (Tina) prior to the date that the contract was entered into. On the day that Tina entered into an agreement for sale and purchase of real estate she had resigned as a director that morning and another director was recorded as having been appointed on the Companies Office website (at 1.10pm). Tina though signed an agreement for sale and purchase to sell the company's land "as director of Autumn Tree" at 6.10pm and the purchaser registered a caveat to protect their position. It is important to note that Autumn Tree was formed for the sole purpose of buying and subdividing/developing this block of land.

Internally at least, it was clear that Tina had no actual authority to sign the agreement for sale and purchase. But what difference does that make to the validity of the contract?

 

The Companies Act - Authority and agency

Section 18(1) of the Companies Act was relied on by the purchaser. Under that section, a company cannot assert that someone that it has held out as a director has not been duly appointed or does not have authority to exercise the powers that a director of the company carrying on business of the kind carried out by the company customarily would have authority to exercise. As the Court in Norman v ANZ National Bank Limited explained, the justification for this provision is that a person dealing with a company is entitled to assume that the company's internal requirements have been complied with and that the company's offers are acting lawfully (para 41 and Norman v ANZ National Bank Limited [2012] NZCA 356, (2102) 21 PRNZ 261 at [23]).

The question then came down to whether Tina, as one of two named directors, was exercising a power that a non-sole director of a property-developing company would customarily have authority to exercise.

The Court determined that it wasn't and went further to say that the customary authority of one director of a board acting alone is actually very limited. In doing so the Court relied on several cases including an Australian judgment (Northside Developments Pty Limited v Registrar-General (1990) 170 CLR 146 (HCA) at 205) in order to show that a director acting solely in that capacity must act as part of a board to be able to bind the company.

 

So what does this all mean?

The judgements of the High Court and Court of Appeal should serve to reduce the amount of reliance that contracting parties place on the protections of section 18 of the Companies Act. The key lesson to be taken from this case it is that care needs to be taken when dealing with only one director out of a board of directors. Where the consequences of invalidity necessitate, particularly where it is a significant transaction, evidence of actual authority should be obtained by contracting parties.