Northside Developments Pty Ltd v Registrar-General [1990] HCA 32;

Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; - HCA 1990 case summary — Zoe

[90]

"The first is that the capacity of a corporation is limited

by its constitution, that is, in the case of a company

incorporated under the Companies Act, by its memorandum and

articles of association; the second is that a corporation

cannot do any act, and that includes making a

representation, except through its agent.

Under the doctrine of ultra vires the limitation of the

capacity of a corporation by its constitution to do

any acts is absolute. This affects the rules as to the

'apparent' authority of an agent of a corporation in two

ways. First, no representation can operate to estop the

corporation from denying the authority of the agent to do

on behalf of the corporation an act which the corporation

is not permitted by its constitution to do itself.

Secondly, since the conferring of actual authority upon an

agent is itself an act of the corporation, the capacity to

do which is regulated by its constitution, the corporation

cannot be estopped from denying that it has conferred

upon a particular agent authority to do acts which by

its constitution, it is incapable of delegating to that

particular agent.

...

The second characteristic of a corporation, namely, that

unlike a natural person it can only make a representation

through an agent, has the consequence that in order to

create an estoppel between the corporation and the

contractor, the representation as to the authority of the

agent which creates his 'apparent' authority must be made

by some person or persons who have 'actual' authority from

the corporation to make the representation. Such 'actual'

authority may be conferred by the constitution of the

corporation itself, as, for example, in the case of a

company, upon the board of directors, or it may be

conferred by those who under its constitution have the

powers of management upon some other person to whom the

constitution permits them to delegate authority to make

representations of this kind. It follows that where the

agent upon whose 'apparent' authority the contractor relies

has no 'actual' authority from the corporation to enter

into a particular kind of contract with the contractor on

behalf of the corporation, the contractor cannot rely upon

the agent's own representation as to his actual authority.

He can rely only upon a representation by a person or

persons who have actual authority to manage or conduct that

part of the business of the corporation to which the

contract relates."

[110]

17. The rule is most frequently invoked in connection with the execution of instruments which give a security when the point in issue is the satisfaction of a condition governing the authority to execute the instrument in the instant case. Where the rule applies, it covers the passing of any necessary resolution by the board authorizing the company's officers to affix the seal and attest the sealing. Thus in The Royal British Bank v. Turquand, the plaintiff sued on a deed which was alleged and admitted to be sealed with the company's common seal. The question was whether the seal had been affixed without authority, the want of authority consisting in a supposed absence of a resolution by the company in general meeting authorizing the execution of the deed. The deed was executed as security for the company's bankers who extended credit to the company in the carrying on of its business. The constitution of the company authorized the execution of such a deed for the purpose of borrowing. Jervis C.J., in the Exchequer Chamber, held that even if no resolution of the company in general meeting had been passed, the Bank "would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done": p 332 (p 888). Other cases in this category include County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company and Re Scottish Loan and Finance Co.Ltd. (1944) 44 SR(NSW) 461. In South London Greyhound Racecourses, Ld. v. Wake (1931) 1 Ch 496, Clauson J. held that the rule did not apply to a guarantee sealed without authority of the company's board, saying (at p 509) "that the affixing of the seal is a matter for which the authority of the board of directors and not of a single director is required." Although his Lordship correctly stated the condition governing the actual authority of directors to affix the seal, a person dealing with the company in good faith might have assumed that the board had given its authority to the fixing of the seal. However, there was a distinction between that case and Turquand's Case. In Turquand's Case, a security was given for the company's debt; in Wake's Case, a share certificate was issued and delivered to a creditor as security for the debt of a third party. In Turquand's Case, the security was given for the purposes of the company's business; in Wake's Case, the share certificate was not issued for the purposes of the company's business but for the benefit of an unrelated debtor company. Having regard to this ground of distinction, the decision in Wake's Case is supportable but, for reasons presently to be mentioned, I am respectfully unable to agree with his Lordship that, because a board resolution was lacking, the share certificate in Wake's Case was a forgery falling within the principles of Ruben v. Great Fingall Consolidated (1906) AC 439.

[124]

20. When a creditor is put on inquiry, he cannot rely on the apparent regularity of execution of the instrument of guarantee and the indoor management rule but must be satisfied that the relevant officers and agents of the company had the company's authority to execute an instrument pledging the credit or assets of the company to guarantee another's debts. If the debtor be a director of the company, the fact that the debtor vouches for the due execution of the guarantee does not necessarily exhaust the inquiries which the creditor is bound to make, for the debtor-director may not be authorized to state the scope of his own or others' authority to the guarantee. However, where the giving of a guarantee by a company to secure another's debt is for the purposes of the company's business (as in British Thomson-Houston Co. v. Federated European Bank, Ld.) or where the circumstances are such that the company represents that the guarantee is given for the purposes of its business or for its benefit, and there are no other circumstances to put a party on inquiry, the indoor management rule applies. In re Hapytoz Pty. Ltd. (in liq.) [1937] VicLawRp 13; (1937) VLR 40 was seen to be such a case. Hapytoz' managing director executed a guarantee (which was held to have been executed in formal conformity with the articles) to secure a debt owing by another company which had a common board and common shareholders (four in number) and carried on a similar business. The creditor insisted on the guarantee as a condition of continuing to supply goods to the debtor company. Martin J. held (at p 46) that "the creditor was entitled to assume that (the managing director) had the power to give the guarantee requested." His Honour accepted the argument that "the act done was one which usually would be delegated to a managing director." It is not necessary to examine the facts of this case except to say that, had it been found that the creditor was put on inquiry, that result would not have been surprising.

[125]

21. It has been said that a forgery does not bind a company and that the indoor management rule does not avail a party who assumes the validity of a forgery: Ruben v. Great Fingall Consolidated, at p 443. That observation has given rise to some confusion in the application of the rule, the term "forgery" being used in two senses. In Ruben v. Great Fingall Consolidated, Lord Loreburn L.C. was speaking of a forgery in the strict sense, that is, of an instrument bearing a false seal or signature. As the rule is founded on estoppel, it does not cover a forgery in that sense. A company cannot give authority to fix a false seal and it is difficult to envisage a case in which there would be ostensible authority to write a false signature. It is possible that a company would be estopped from denying that a forgery in the strict sense is binding upon it, but such cases would be exceptional and would depend upon a representation that the company was bound by the forgery. On the other hand, when the seal and the signatures are genuine the question is simply whether the company has given actual or ostensible authority to the persons who affixed the seal, attested the sealing or countersigned the instrument to do so. Sometimes an instrument bearing a genuine seal and genuine signatures but executed without the authority of a company has been described as a forgery: see, for example, Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826 and Wake's Case. If such an instrument is a forgery, it is a forgery in a looser sense. A forgery in the strict sense is binding on a company only if the company be estopped from denying both the falsity of the seal or signature and the authority of the persons affixing the false seal or writing the false signature to do so. But an instrument bearing a genuine seal and genuine signatures, though it be described as a forgery, is binding on the company if the company be estopped from denying the authority of the persons affixing the genuine seal and writing the genuine signatures to do so. Such an instrument, being regular in form, is binding on the company if it be executed for the purposes of the company's business or otherwise for the company's benefit and the party relying on it is not put on inquiry as to the authority of the persons who executed it to do so. If it transpires that the instrument was executed without the authority of the company, though it was apparently regular in form executed by officers or agents acting within the scope of their ordinary authority to execute such instruments, and used for the purposes of the company's business or otherwise for its benefit, the loss will fall on the company unless the party dealing with the company was put on inquiry. But if the party dealing with the company was put on inquiry and failed to make inquiry or, on inquiry, was not reasonably satisfied that the instrument was executed with the company's authority, the company will not be estopped from denying that it is bound by the instrument.

[186]

25. It adds nothing to speak of "the peculiar significance of the common seal as the external physical symbol of an act of the body corporate itself - a corporate act": Lindgren, "The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in Turquand's Case", [1973] MelbULawRw 18; (1973) 9 Melbourne University Law Review 192, at p 194. That view must depend on treating the act of affixing the seal as an act, not simply of an agent, but of an organ of the company itself. The organic theory, which was originated by Lord Haldane L.C. in Lennard's Carrying Company Limited v. Asiatic Petroleum Company Limited (1915) AC 705, at pp 713-714 (see also H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham and Sons Ltd. (1957) 1 QB 159, at pp 172-173, and The Lady Gwendolen (1965) P 294, at pp 342-345, 355-356), has been used to impose liability upon companies beyond that which could be imposed by the application of the principles of agency alone. It is an approach which has been particularly useful in criminal cases where the liability of a company has depended upon a mental element: Director of Public Prosecutions v. Kent and Sussex Contractors Ltd. (1944) KB 146; R. v. I.C.R. Haulage Ltd. (1944) KB 551; John Henshall (Quarries) Ltd. v. Harvey (1965) 2 QB 233; Reg. v. McDonnell (1966) 1 QB 233. But the organic theory merely extends the scope of an agent's capacity to bind a company and there must first be authority, actual or apparent. It is only then that a person may be regarded not only as the agent of a company, but also as the company itself - an organic part of it - so that "(t)he state of mind of (the agent) is the state of mind of the company": H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham and Sons Ltd., per Denning L.J. at p 172. Thus the application of the theory depends in the first instance upon there being authority, that is to say, agency. This point is made in the third edition of Gower's The Principles of Modern Company Law, (1969), at pp 150-151:

[198]

33. Having reached that conclusion, it is also strictly unnecessary for me to consider whether Barclays was, in any event, put upon inquiry. Nevertheless, I may indicate briefly that in my view such was the case. The very nature of a transaction may put even an outsider dealing with a company upon inquiry as to the authority of persons purporting to act for it: Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246, at pp 284-285. Here the moneys involved were substantial and were lent by Barclays for purposes which had no apparent connection with any business carried on by Northside Developments Pty. Limited. Nor did the loan appear to serve any interest which Northside Developments Pty. Limited might have. Any relation between Northside Developments Pty. Limited and the companies to which the loan was made did not go beyond the fact that the companies shared the same registered office as Northside Developments Pty. Limited and also had as officers Robert Sturgess and Gerard Sturgess. But this did not provide any explanation for the transaction. Indeed, the latter circumstance rather suggested that the two Sturgesses may have stood to gain in some way by the transaction. The plain fact of the matter was that Barclays took a mortgage over the land of Northside Developments Pty. Limited as security for the indebtedness of companies with which the Sturgesses, father and son, were connected and with which Northside Developments Pty. Limited was not relevantly connected. It was the case of a director attempting to have a company apply its property for the benefit of other companies in which he had an interest: cf. E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555, at p 569. In my view, these circumstances were sufficient to put Barclays upon inquiry to ascertain whether the seal of Northside Developments Pty. Limited was properly affixed to the mortgage. There was no evidence that Barclays made any inquiry and the consequence is that no reliance could be placed upon the rule in The Royal British Bank v. Turquand, even if it were otherwise applicable.

At a glance

Court

Decision date

Source

Judgment (235 paragraphs)

Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 170 CLR 146 (28 June 1990)

Parties

Legislation Cited (2)

Cases Cited (9)