In corporations law, the common law rules about actual authority and apparent authority, as stated by Lord Diplock in Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) and Another [1964] 1 All ER 630 can apply where a company is the principal. However, they are supplemented by provisions in the Corporations Act and, in cases where those provisions do not apply, by a special company law rule known as the indoor management rule, which the Court developed and re-stated in Royal British Bank v Turquand (1856) 6 El & Bl 327.
Royal British Bank v Turquand (1856) 6 El & Bl 327
Mr Turquand was the official manager of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. The company had given a bond for £2000 to the Royal British Bank, which secured the company’s drawings on its current account. Two directors and the company secretary signed the bond under seal. When the company was sued, it alleged that under its registered constitution, directors only had power to borrow what had been authorized by a company resolution. A company resolution had been passed but it did not specify how much the directors could borrow.
Jervis CJ stated the court’s judgment, saying that dealings with companies are not like dealings with other partnerships. He said that parties dealing with them were bound to read the statute under which they were incorporated, and as well, the registered constitution. But they were not bound to do more. Finding that the authority might be made complete by a resolution, they 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.
This last sentence was the statement of the indoor management rule, meaning that once the third party had read the incorporating statute and the company constitution, they could make inferences about the existence of board resolution granting authority to act to the director currently being held out to them.
Actual Authority to Act for a Company
An individual gets his or her power to give actual authority to an agent from the mere fact of being a person of full age and having the necessary legal capacity. In the case of a company, an agent's actual authority can arise either directly from an internal governance rule in the Corporations Act, such as, for example, the replaceable rule in s 198A(2) authorizing the board of directors to exercise the powers of the company, or, stated in any constitution the company may have adopted. Otherwise, authority may arise from consent given on behalf of the company by individuals, such as the board of directors, having actual authority to give consent.
Statute Permitting Persons Dealing to Assume Authority Exists
The indoor management rule was adopted in s 129(1) Corporations Act. It was also provided in s 129(2) and s 129(3) that the person having dealings could make assumptions about authority of persons acting for the company. This is an addition to the operation of common law of apparent (ostensible) agency.
Statutorily Permitted Assumptions as to Authority
Section 129 permits assumptions as to authority in several situations. The first is where the company has informed ASIC that someone is a director or company secretary of the company. The second is where someone is held out by the company to be an officer or agent of the company.
Section 129(2) deals with the first situation and provides:
A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
When interpreting this provision and apply it, be careful to note the conjunctive and, as above in bold type.
Section 129(3) deals with the second situation and provides:
A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
Spotting the Issue in Examination Questions
Apply these pieces of law when the fact pattern of the examination question somehow resembles the facts of Royal British Bank v Turquand (1856) 6 El & Bl 327, or, when a director holds himself/herself out on behalf of the company without actual authority and then acts to bind the company in a contract.
Sources:
Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) and Another [1964] 1 All ER 630.
Royal British Bank v Turquand (1856) 6 El & Bl 327.
Corporations Act.
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