PERKINS v NATIONAL AUSTRALIA BANK No. SCGRG-98-1212 Judgment No. S280 [1999] SASC 280

Supreme Court of SA|1999-08-06|Before: Nyland JJ, Mr J, Olsson J, Mullighan J

PERKINS (as Liquidator of Sparrow Green Pty Ltd in Liquidation)

I agree with the reasons published by Nyland J and the order which she proposes.

This is an appeal by the National Australia Bank Ltd (the Bank) from a decision of a trial judge who determined that two instruments, namely a Deed of Debenture and a Debtor Finance Facility Agreement (DFF) were invalid and of no force or effect.

The Bank was defendant in the original proceedings and Frederick Charles Perkins (Perkins) was the plaintiff. Perkins brought the proceedings in his capacity as the liquidator of Sparrow Green Pty Ltd (Sparrow Green). The action raised the validity of the two instruments to which the seal of Sparrow Green had been affixed prior to Perkins' appointment as liquidator. The validity of the documents will determine whether the Bank is a secured or unsecured creditor of the company.

Sparrow Green was incorporated on 13 August 1983. At that time, Mr M A Green (Green), and Mr J Sparrow (Sparrow) were appointed as the directors of the company. Green was also appointed company secretary. Sparrow and Green were the sole shareholders. In April 1997, Green and Sparrow agreed that Sparrow would resign from the company and that Green and his wife would buy Sparrow's interest. Sparrow was to transfer his shares to Green on 1 July 1997 and resign as director on that date. On 30 June 1997, Sparrow resigned as a full-time employee of the company but he did not resign as director. The trial judge found that he did not resign as director until 12 February 1998. At that time a meeting of directors was held at which both Green and Sparrow were present. It appeared that at the date of the trial, Sparrow remained a shareholder of the company.

The trial judge found that prior to 12 February 1998, Sparrow did not give any notice of resignation nor was there any evidence of an oral resignation accepted by the company prior to that date. The trial judge also found that prior to 30 June 1997, Sparrow and Green had both taken part in the management and decision making process of the company but Sparrow had no part in the management and control subsequent to 30 June 1997.

In about June 1997, the company and Mr and Mrs Green wished to restructure their financial affairs. Mr Ian Swan (Swan), an accountant in the firm which attended to the company's affairs, approached the Bank for assistance. He arranged for Green to see Mr L H Blight (Blight) the business banking manager for the bank. That meeting took place on 25 June 1997. There were a number of other meetings and eventually by letter dated 27 August 1997, the Bank informed the company that it would agree to lend money to the company by means of the DFF. The facility enabled the borrower to draw down funds from time to time against the debtors of the borrower. When the debtor paid the company, the company in turn paid the Bank and reduced the amount borrowed. The moneys lent were to be secured by a debenture and the guarantee of Green.

The same letter stated that the agreement would not come into force until six conditions precedent had been fulfilled or waived by the Bank. Condition 2 stated that:

"A copy of your company's and each incorporated guarantor's Certificate of Incorporation and Memorandum of Articles of Association certified by two directors as being true, correct and up to date must be delivered to the Bank."

The judge found that the company did not comply with Condition 2. Although Blight acknowledged in evidence that he had received a copy of the Memorandum of Articles of Association at some unspecified date early in July 1997, the documents had not been certified by two directors. The judge found that there was no evidence of an express waiver by the Bank. Condition 4 required the company to deliver to the Bank a copy of a resolution by the board of directors of the company duly authorising acceptance of the facility and execution of the agreement and the securities given by them.

At some unspecified date, the company sent a statement to the Bank in purported compliance with the Bank's fourth condition precedent, which said:

"At a meeting of the Board of Directors of Sparrow Green Pty Ltd on September 8th, 1997 it was passed that the company accept the documents tabled regarding the acceptance of the facility and the execution of the agreement offered by the National Bank's Debtor Finance Facility."

This statement was signed by Green as managing director. The judge found that the statement was in the possession of the Bank before 29 September, the date on which the debenture was executed. No minutes of a meeting on 8 September 1997 were, however, proved. At that time Sparrow had indicated his intention to resign and was taking no part in the management of the company. He was not acting as a director. Green was the only person purporting to act as director. The judge found that no meeting occurred or, if it did, Green was the only director present so that a valid meeting could not be held: see Article 112. No resolution was proved appointing Green as managing director.

The relevant Articles of Association of the company are Articles 88 and 148. Article 88 provides that the number of the directors of the company shall be at least two and not more than ten.

Article 148 relates to the use of the common seal and provides as follows:

"The directors shall provide a common seal of the company and they shall have the power from time to time to destroy the same and substitute a new seal in lieu thereof. Subject to the provisions of Article 127 every instrument to which the seal is affixed must be signed by two directors or by one director and the secretary or such other person as the directors may appoint for the purpose."

The common seal was affixed to both the debenture and the DFF but in the presence of Green only. The judge found that an officer of the Bank had added to the execution clause of the debenture the statement:

"I have witnessed the company's seal in my capacity as sole director and company secretary."

In September and early October 1997 Green executed a number of documents relating to the lending facility. The debenture was executed by the company on 29 September 1997. In the judge's recital of the facts he mentions that the company also intended to lease a motor vehicle from the Bank. Before the lease was executed, Blight conducted a search of the company which disclosed that Sparrow was still a director. Blight gave evidence that when he met Green on 30 September for the purpose of executing the lease of the motor vehicle, he referred to his search of the company. He said to Green that Sparrow still appeared to be a director. He said Green confirmed that Sparrow had resigned, that he, Green, was the sole director, that he had signed the documents which were to be lodged at ASIC by Swan, and that the company was what he called "a sole director company". Blight maintained that one of the Bank's conditions for the loans was that the Bank would be provided with a form giving notice of Sparrow's resignation as director. He said that at about one week after the documents had been signed he rang Swan to enquire about the form which had not been received by the Bank. Swan assured him that the form had been executed, but not lodged, and that he would see that the form was lodged at ASIC.

Green, however, denied that Blight had asked him about the resignation of Sparrow as a director. Green also denied that it was a condition of the loan that the Bank would be provided with a copy of the notice to ASIC of Sparrow's resignation. Swan also denied that Blight rang him to enquire about the lodging of the form. The judge preferred the evidence of Green and Swan concerning the notice of Sparrow's resignation. He found that the Bank did not make it a condition of the loan that the company give notice in writing of Sparrow's resignation as director. This appeared to be because a dispute had broken out in late 1997 between Green and Sparrow concerning Sparrow's resignation as a director, and Swan did not intend to prepare and lodge the notice until the dispute had been resolved.

The judge further found that the Bank knew the terms of the company's constitution. It knew that there was only one director, and it knew that the company was acting irregularly in that one director only was purporting to bind the company in a way unauthorised by its constitution and with no resolution of the board granting authority.

On 2 October 1997 the company began drawing down on the lending facility provided to it and the company continued to draw against the facility until it was placed in administration on 2 March 1998.

It was an agreed fact that even after the appointment of Perkins as administrator of the company on 2 March 1998, the company continued to borrow funds from the Bank by utilising the DFF.

On or shortly after 19 March 1998, Perkins put the Bank on notice that there might be a question as to the execution by the company of the financial documentation. After receiving that notice the Bank refused to provide the company with any further funds.

The judge found that Green believed he had authority to act as sole director and intended to bind the company when he executed the debenture and the DFF. He further found that the Bank knew that the documents had not been executed in accordance with the Articles of Association. He concluded that Green did not have actual or ostensible authority to bind the company. He held that the documents were not validly executed and the company was not bound by them. For similar reasons, the judge also held that the Bank could not rely on the indoor management rule.

On the hearing of the appeal, Mr Wells QC for the Bank submitted that neither the debenture nor the DFF had to be executed as a deed under seal in order to be enforceable. The thrust of Mr Wells' submissions was, however, that even if Green, as one of the directors of the company, could not attest to the affixing of the company seal alone as a sole director, nevertheless he had actual or ostensible authority to bind the company. Mr Wells did not rely on the indoor management rule but proceeded on the basis that this was "a simple case of authority". He submitted that Green had actual authority because Sparrow and Green, as the only directors and shareholders at the relevant times, had agreed that upon Sparrow's resignation as a full-time employee, Green would have sole responsibility for the management of the company. Green thereafter exercised sole responsibility for its management. Further, he had ostensible authority. By that same agreement and with the acquiescence of the board of directors, namely Sparrow and Green, the two of them had held Green out as having sole responsibility for the management of the company and the Memorandum and Articles of Association of the company did not prevent Green from being so authorised.

In considering Green's authority, the learned trial judge referred to the judgment of the High Court in Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146. He indicated that he had applied the approach by Brennan J in that case (at 171-174) as well as the observations of Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2QB 480 at 503 to 505 which were approved by the High Court in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 33 CLR 72 at 78. He said that Green would have had actual authority only if he were acting with the authority of the company and his actions were subsequently ratified. He went on to say that:

"There is no suggestion of ratification in this case. If Green were to have actual authority to bind the Company in this transaction, he would have to find that authority in the constitution of the Company or in some antecedent act, such as a resolution of the board which bound the Company. It is apparent that Green did not have any authority under the Memorandum & Articles of Association of the Company which vested the management and control of the business of the Company in a minimum of two directors. Furthermore, no director acting alone has power to bind the company unless he has been authorised by resolution of the board or by the members in general meeting: re Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230; Northside Developments (supra) per Dawson J at 205; Brick & Pipe Industries v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649 at 672. There was no resolution either appointing Green managing director or vesting any authority in him to manage and control the company. Green, therefore, did not have actual authority to bind the Company."

Mr Wells submitted, however, that Haycraft Gold did not stand for the proposition for which it was cited by the learned trial judge. He submitted that the absence of a resolution did not exhaust the ability of the company, through its directors, to authorise one of its directors to act. He further submitted that the learned trial judge had failed to consider whether, absent a resolution, there was any other way in which Green could be so authorised.

Mr Wells also took issue with the findings by the judge on the issue of ostensible authority. The learned trial judge said that:

"The Company would be bound if Green had been held out by the Company as having authority to bind it in this lending transaction and the Bank relied on that ostensible authority. ... (T)he capacity of the Company is limited by its constitution so that no representation can estop the Company from denying the authority of the agent to do on behalf of the Company an act which is not permitted by its constitution. ... (T)he fact that the Company can only make a representation through an agent has the consequence that the Company is bound only if the representation as to the authority of the agent is made by some person who has actual authority to make the representation. ... The representations were made by Green. He did not have actual authority to bind the Company. Furthermore, the Bank knew the limitations upon his authority. The Bank cannot, therefore, rely on any ostensible authority on the part of Green."

Mr Wells argued, however, that the representations were not made by Green alone. The relevant representations were those made by both Green and Sparrow as at the date Sparrow resigned as employee of the company.

Mr Wells referred to the evidence of Green as to the terms upon which he and Sparrow had parted. In his judgment, the trial judge reproduced part of the evidence of Green relied on by the Bank to establish that Sparrow had not taken any part in the management of the company after 30 June 1997. Mr Wells referred, however, to a number of other passages of evidence which I set out hereafter (tr 52-53, AB 312-313):

"Q. Am I right that until negotiations occurred between you and Mr Sparrow in 1997 Mr Sparrow and you shared the management of the company Sparrow Green Pty Ltd. A. 1997 - 98 - yes, '97 that's right. Q. So am I right that up until the time - for the period between incorporation and when Mr Sparrow left the company, which I'll describe more helpfully in a moment, you and Mr Sparrow shared the management of the company Sparrow Green Pty Ltd. A. Yes. Q. And am I right that the management of the company, and when I say the company I'm referring (to) Sparrow Green Pty Ltd at all times, was carried out only by you and Mr Sparrow; that is you're the only two people who were involved in the management of the company - A. Yes. Q. - until Mr Sparrow left. A. Yes. Q. In 1997 I'm right, aren't I, that there was a falling out between you and Mr Sparrow. A. Yes. He wanted to retire and so yes. Q. In 1997 there were discussions between you and Mr Sparrow about Mr Sparrow retiring from the company and you buying his shares. A. Either myself or the company buying the shares, yes. Q. Am I right that Mr Sparrow resigned as an employee of the company on 30 June 1997. A. That's right."

At transcript p 55 (AB 315) there appears the following passage referred to by the learned trial judge:

"Q. Am I also right that after Mr Sparrow had left on 30 June 1997, he had no further involvement of any sort, in the management of the company. A. Correct. Q. Am I right that Mr Sparrow did not attempt to interfere in any way in the decisions that you made, for and as the company after 30 June 1997. A. He tried to say a few things, but he didn't interfere directly, no. Q. Was it the basis of Mr Sparrow leaving the company that it was accepted by him that you would become the person solely responsible for the management of the company from that time. A. Yes." The evidence then resumes (tr p55): "Q. When I talk about the management of the company after 30 June 1997 am I right that you were the only person who was managing, both in the sense of day to day management and in the sense of important decisions. A. Yes Q. Am I right that Mr Sparrow was not involved in the management of the company either in the sense of important decisions or in the sense of day to day management of the company. A. That's right. Q. Am I also right that Mr Sparrow didn't ask to be involved in the management of the company in either of those senses after he left. A. No."

Mr Wells submitted that the inference to be drawn from the whole of this evidence was that Sparrow and Green together had authorised Green to act as he had. The board continued to be Sparrow and Green but by agreement, Sparrow stood aside and permitted Green to carry on the business of the board and that was permitted by the Articles. Sparrow was not called as a witness. Mr Wells submitted that in accordance with Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, an adverse inference should be drawn against Perkins as a result of his failure to call Sparrow.

"Green and Sparrow were the only shareholders in the Company. Circumstances may exist where shareholders, by their conduct, represent that persons have authority to act as directors .... In this case, it was not proved whether Sparrow knew that the Company was applying for financial assistance from the Bank, and Sparrow himself did not in any way hold out Green as having power to bind the Company. In addition, there was nothing to suggest that the Articles would be changed to permit the Company to be managed and controlled by one director only."

Mr Wells submitted that these conclusions disclosed two errors on the part of the learned trial judge. Firstly, there was no requirement on the part of the Bank to prove that Sparrow knew that the company was applying for financial assistance. Sparrow had agreed to the management and control of the company being conducted by Green. This was simply a re-financing matter and nothing more. Further, it was not necessary for Sparrow to in any way hold Green out as having power to bind the company. The issue was whether the directors had done so, and on the evidence referred to above, they had done just that.

In support of his argument, Mr Wells referred to 195 Crown Street v Hoare [1969] 1 NSWR 193. That case was concerned with the execution of a lease. Mr Wells referred in particular to the judgment of Asprey JA with whom Walsh J agreed, and in particular at 201:

"The document to be operative as a lease did not require to be under seal. It would be sufficient if it complied with s 23c(1)(a) of the Conveyancing Act 1919, as amended. Accordingly, being in writing it needed to be signed by the person creating the interest in land (ie the plaintiff) or by its agent thereunto lawfully authorized in writing." And further at 202: "That only leaves the question whether Mr Scheinberg had the implied authority of the plaintiff to do what he did. He was one of three ordinary directors of the plaintiff which is a proprietary company and had no formally appointed managing director. In his evidence Mr Scheinberg deposed to the fact that he was the director of the plaintiff who had taken the principal part in the management of the plaintiff. He said that he saw every lease and that he had to sign them. He handled all the negotiations with the defendant and the assignees. This evidence was not made the subject of challenge and his cross-examination by the defendant's counsel proceeded on the footing that he had the management and control of the leasing of the subject property and handled all the negotiations in regard thereto. The plaintiff accepted the rent from the defendant pursuant to the memorandum of lease and again upon the whole of the uncontradicted evidence the only conclusion reasonably to be drawn from it is that Mr Scheinberg had the authority of the plaintiff to sign the memorandum of lease with the defendant."

This decision was cited and relied upon in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) (unreported, HCA 24) by the High Court which held (at [23]):

"... if the company seal is affixed to a contract that does not have to be sealed, and the sealing is not done or witnessed as the articles of association require, the document may nevertheless constitute a contract binding on the company". And at [24]: "If, then, the deed of company arrangement is to be treated as a contract, its execution by affixing the company seal and attestation by an officer of the company, authorised to do so (in this case) by all the corporators and the members of the board, amounted to execution by the company notwithstanding that the document was not sealed in accordance with the company's articles. (All the corporators agreeing that the instrument should be executed, there is no separate question about whether the company assented to it. The question is about the sufficiency of the manifestation of assent.)"

Mr Wells also referred to the decision in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (supra) which was relied on by the trial judge. In particular he referred to the dicta of Lord Diplock. Having analysed the relevant law with respect to this issue, Lord Diplock set out (at 506) the four conditions which must be fulfilled to entitle a contractor to enforce against a company, a contract entered into on behalf of the company by an agent who had no actual authority to do so. He said:

"It must be shown - 1. that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; 2. that such representation was made by a person or persons who had 'actual' authority to manage the business of the company either generally or in respect of those matters to which the contract relates; 3. that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and 4. that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent."

In summary, Mr Wells submitted that the debenture in this case was a simple contract which had been signed by or on behalf of the company by someone authorised to do so, namely, Green. In the case of the DFF, for the same reason, there was either a simple contract or, alternatively, an oral contract which adopted as its terms those matters set out in the DFF. Green had either actual or ostensible authority to enter each of these transactions and that was the end of the matter.

It is clear from the argument presented by Mr Wells that the resolution of this matter turns on the issue of Green's authority to execute the relevant documents. Mr McNamara appeared as counsel for Perkins on the hearing of the appeal. He distinguished the cases relied upon by Mr Wells on the basis that none was directly relevant to the circumstances of this case. All were cases in which there had not been any question of an internal want of authority on the part of those executing the relevant instrument or fixing the common seal. Mr McNamara submitted that the trial judge had correctly found that Green did not have the actual authority to enter into the instruments upon which the Bank sought to rely.

As I understand the matter, the Bank at trial argued that Green acting alone had actual authority to bind the company. This is obviously untenable given the terms of the Memorandum and Articles of Association of which the Bank had actual knowledge. The issue is therefore whether Mr Wells is correct in submitting that the agreement reached in June 1997 enabled Green to act alone. Mr McNamara submitted, in my view correctly, that the authority contended for in this respect, even if conferred, would have been beyond the power of the board and therefore nugatory as was found by the trial judge. Directors only have the powers conferred on them by the Articles of Association. A director does not have implied authority to bind the company except by joining in a resolution at a board meeting: see Haycraft Gold (supra). No evidence of any additional actual authority on the part of Green was proved. No evidence was adduced as to any resolution of the board conferring authority on Green to execute the instruments. Nor was anything to this effect adduced from Green in the course of his evidence.

It would have been possible for Sparrow and Green to have met and to have resolved to delegate powers to Green. They could have made Green the managing director. Neither of these events occurred. The evidence relied on by the Bank simply establishes that Sparrow stepped aside from the day to day management of the company. There was nothing to indicate that Sparrow was aware of the company's intention to re-finance its affairs which by reason of the debenture involved encumbering all its assets and undertakings.

Once Sparrow left there was a board consisting only of one director. This was contrary to the Articles of Association. Until such time as the articles were changed, or Sparrow was replaced, the company was in a situation in which it could not act. Accordingly, in my view, the trial judge dealt correctly with the issue of ostensible authority. An alleged agent cannot confer authority on himself or herself by his or her own acts. In this case, the only holding out had been by Green.

As the judge found, the Bank had knowledge of the true extent of Green's authority and that knowledge disentitled it from relying on ostensible authority. The Bank knew that the seal was affixed to the instruments otherwise than in accordance with the Memorandum of Articles of Association. There was no evidence to suggest that the Bank had a belief in a false state of affairs induced by any act of the company or reliance on any representation of the company. The Bank was well aware of the problem. Blight knew from a reading of the articles that only the board could resolve to use the common seal. He knew that Sparrow was still a director at the time that it was affixed. Blight knew that the articles had not been changed to make the company into a sole director company. Notwithstanding those matters, Blight drafted the execution clause to the debenture pursuant to which Green signed as sole director.

Although Mr Wells criticised Perkins for his failure to call Sparrow, it seems to me that the criticism could equally be levelled at the Bank. If Sparrow had authorised Green to act to the extent which is now sought to be maintained, the Bank could have called Sparrow to give evidence that he had given the relevant authority to Green. At the end of the day I do not think this is a case in which either party could fairly have looked for a Jones v Dunkel (supra) inference against the other.

In my opinion, the learned trial judge correctly concluded that Green had neither the actual nor ostensible authority to bind the company. The Bank had knowledge of the relevant facts. The documents were not validly executed. I would therefore dismiss the appeal.

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Judgment (55 paragraphs)

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Cases Cited (3)