The importance of directors’ signatures

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The recent decision of the Supreme Court of Western Australia in Lopez & Verge v Pawski [2017] WASC 338 has reinforced an important lesson regarding the formalities required for a properly executed agreement by company directors.

Background

The Liquidators of Wealthsure Pty Ltd sought directions from the Court relating to the enforceability of a purported General Security and Loan Facility Agreement (The Agreement). The Agreement essentially pledged all of Wealthsure’s assets to the lender in return for a number of loans. The Agreement was signed by the Managing Director at the time but was not signed by the second director. A critical question then was whether the Agreement was enforceable despite the fact it was only signed by one of two directors.

Section 127 of the Corporations Act 2001 (Cth) (The Act) states that a company has executed a document where it has been signed by 2 directors. The first defendants unsuccessfully relied on section 126 of the Act which relevantly states that an individual can exercise a company’s power to make a contract where that individual is acting with express or implied authority. Their reliance on section 129 of the Act, which outlines that a person who appears to be a director has the authority to exercise certain powers “customarily exercised” or performed by a director of a similar company, also failed.

Decision

The Court’s explanation for rejecting the section 126 and section 129 arguments put forward was largely based on the fact that pledging all of the company’s assets to a lender without approval was a significant undertaking for the company. It was not considered to be customary for a managing director to do such an act without having approval from the Board and therefore could not be validly executed with only one director’s signature.

Key Takeaway

Where contractual arrangements are entered into, both parties should ensure those agreements are validly signed by two directors or a director and company secretary of the company. Where an agreement is only signed by one director, a counterparty should ensure that director has authority to bind the company by virtue of the company constitution or under the Act.

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