1010-Law Mono21

CORPORATE AUTHORITY AND
DEALINGS WITH OFFICERS AND

AGENTS
Larelle Chapple
Senior Lecturer
TC Beirne School of Law
The University of Queensland
and
Phillip Lipton
Associate Professor
School of Accounting and Law
Royal Melbourne Institute of Technology University
CCH AUSTRALIA LIMITED

AND
CENTRE FOR CORPORATE LAW AND SECURITIES REGULATION
FACULTY OF LAW
THE UNIVERSITY OF MELBOURNE
2002
ii
Published in Melbourne by the Centre for Corporate Law and Securities Regulation and
CCH Australia Limited
The Centre for Corporate Law and Securities Regulation

Faculty of Law
The University of Melbourne
Vic 3010
Australia
Phone: 61 3 8344 5281

Fax: 61 3 8344 5285
Email: cclsr@law.unimelb.edu.au
Website: http://cclsr.law.unimelb.edu.au
CCH Australia Limited

CAN 000 063 197
101 Waterloo Road
North Ryde NSW 2113
Australia
Phone: 61 2 9857 1300

Fax: 61 2 9857 1600
Chapple, Larelle
Lipton, Phillip
Enforcing Contracts in Dealings with Corporate Officers and Agents
ISBN 0 7340 2197 6
© 2002 Larelle Chapple and Phillip Lipton
This publication is copyright. Except as permitted under the Copyright Act 1968 (Cth),
no part of this publication may in any form or by any means (electronic, mechanical,
microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval
system or transmitted without the specific written permission of the publisher.
Centre for Corporate Law and
Securities Regulation
The Centre for Corporate Law and Securities Regulation was established in January
1996. Its objectives are to:
• undertake and promote research and teaching on corporate law and securities
regulation
• host conferences to disseminate results of research undertaken under the auspices
of the Centre or in other programs associated with the Centre
• develop and promote links with academics in other Australian universities and in
other countries who specialise in corporate law and securities regulation
• establish and promote links with similar bodies, internationally and nationally,
and provide a focal point in Australia for scholars in corporate law and securities
regulation
• promote close links with peak organisations involved in corporate law and secu-
rities regulation
• promote close links with those members of the legal profession who work in cor-
porate law and securities regulation
The Director of the Centre is Professor Ian Ramsay.
The Centre has an Australian Advisory Board chaired by The Hon Mr Justice Ken Hayne
of the High Court of Australia and comprising senior legal practitioners, company direc-
tors and directors of the Australian Securities and Investments Commission and the
Australian Stock Exchange. The Centre also has an International Advisory Board com-
prising leading judges and corporate law academics.
The Centre’s previous publications include:
• Ian Ramsay (ed), Company Directors’ Liability for Insolvent Trading (jointly
published with CCH)
• Ian Ramsay, Geof Stapledon and Joel Vernon, Political Donations by Australian
Companies
• Geof Stapledon, Sandy Easterbrook, Pru Bennett and Ian Ramsay, Proxy Voting
in Australia’s Largest Companies
• Asjeet Lamba and Ian Ramsay, Share Buy-backs: An Empirical Investigation
• Jeffrey Lawrence and Geof Stapledon, Do Independent Directors Add Value?
• George Gilligan, Helen Bird and Ian Ramsay, Regulating Directors’ Duties –
How Effective are the Civil Penalty Sanctions in the Australian Corporations
Law?
• Vivien Goldwasser, Stock Market Manipulation and Short Selling (jointly pub-
lished with CCH)
• Pamela Hanrahan, Managed Investments Law (jointly published with CCH)
• Ian Ramsay and Geof Stapledon, Corporate Groups in Australia
• Ian Ramsay, Geof Stapledon and Kenneth Fong, Institutional Investors’ Views on
Corporate Governance
iv
• Cally Jordan, International Survey of Corporate Law in Asia, Europe, North

America and the Commonwealth
• Ian Ramsay (ed), Corporate Governance and the Duties of Company Directors
• Ian Ramsay and Richard Hoad, Disclosure of Corporate Governance Practices
by Australian Companies
• Megan Richardson (ed), Deregulation of Public Utilities: Current Issues and
Perspectives
• Geof Stapledon and Jeffrey Lawrence, Corporate Governance in the Top 100:
An Empirical Study of the Top 100 Companies’ Boards of Directors
• Ian Ramsay (ed), Gambotto v WCP Ltd: Its Implications for Corporate
Regulation
• Phillip Lipton, The Authority of Agents and Officers to Act for a Company:
Legal Principles
The Centre’s contact details are:
Tel: 61 3 8344 5281

Fax: 61 3 8344 5285
E-mail: cclsr@law.unimelb.edu.au
http://cclsr.law.unimelb.edu.au
v
Preface
This monograph was written with the purpose of bringing up to date an earlier mono-
graph The Authority of Agents and Officers to Act for a Company: Legal Principles by
Phillip Lipton. This was necessary due to several changes and developments in the law
since the original monograph was written in 1996.
The Company Law Review Act 1998 came into effect on 1st July 1998 and while
retaining the broad thrust of the previous legislation, introduced some significant differ-
ences in wording. It remains unclear to what extent these differences alter the meaning
and operation of the legislation and previous common law however we believe that it is
useful to revisit the legislation in the context of the history of the common law rules
underpinning the statutory provisions and the policies these rules sought to implement.
The various attempts to codify the common law are also important to consider in order
to enhance the understanding of the objectives sought to be met by the current legisla-
tion.
In addition to these legislative amendments, there have also been several recent cases
that cast light on the operation of the legislation and its purposes. This monograph com-
pares and contrasts these cases so as to assess whether a preferred approach may be dis-
cernible which would enable the law to be applied in a consistent and commercially real-
istic manner.
The consideration of these issues has resulted in a work that departs significantly
from the earlier monograph to the extent that it is substantially a new work rather than a
revised edition.
We wish to thank Professor Ian Ramsay, Director of the Centre for Corporate Law
and Securities Regulation, Faculty of Law, University of Melbourne for his encourage-
ment for us to proceed with this work and agreeing to publish it.
Larelle’s contribution to this monograph is derived substantially from material in her
doctoral thesis as well as prior publications, which are referenced in this monograph.
Accordingly, it is appropriate to express gratitude to her prior co-authors, Ms Janine
Pascoe from Monash University and Dr David Morrison from the University of
Queensland. Professor Bryan Horrigan (The University of Canberra) has provided valu-
able advice on the thesis version of the material and the Law School at Queensland
University of Technology, Brisbane has graciously granted the use of facilities and
resources. In this regard, the support of Professor Paul von Nessen is acknowledged.
Many of Larelle’s colleagues at the University of Queensland have sustained and
supported her endeavours, including Ms Brenda Marshall, Dr Pam Kent, Mr Scott Hirst,
Professor Colin Ferguson and Dr Mary-Rose Cooney – to mention a few. Financial sup-
port from the Commerce Research Fund, School of Commerce, The University of
Queensland, is gratefully acknowledged.
Last but not least, Larelle wishes to thank her family: Mark, Jeremy and Jack
Chapple.
vi
vii
Contents
Centre for Corporate Law and Securities Regulation . . . . . . . . . . . . iii
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
List of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
List of Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Actual and Apparent Authority of a Company’s Agent. . . . . . . . 4
3. The Indoor Management Rule at Common Law . . . . . . . . . . . . 18
4. Exceptions to the Rule in Turquand’s Case . . . . . . . . . . . . . . . . . 26
5. The Statutory Reformulation of the Indoor

Management Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6. The Statutory Assumptions: Section 129 . . . . . . . . . . . . . . . . . . . 71
7. The Indoor Management Rule and Forgeries . . . . . . . . . . . . . . 104
8. The Limitations to the Statutory Assumptions . . . . . . . . . . . . . 109
9. Implications for Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
10. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Appendix I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Appendix II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
viii
List of Figures and Tables

Figures
Figure 4.1 The common law rule and its provisos . . . . . . . . . . . . . . . . . . . . . . . . 27
Figure 5.1 Breach of constitution and offences for breach of
statutory duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Figure 5.2 Breach of constitution and disqualification orders . . . . . . . . . . . . . . 60
Figure 5.3 Comparison between direct effects and indirect effects
of breach of the company’s constitution . . . . . . . . . . . . . . . . . . . . . . . 64
Figure 8.1 Degrees of knowledge: Baden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Figure 8.2 Degrees of awareness to pinpoint “suspicion” . . . . . . . . . . . . . . . . 126
Tables
Table 2.1 Acquiescence by board as the critical factor in de facto
managing director cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 5.1 Indoor management rule cases involving banks and
financiers as outsiders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Table 5.2 Major similarities and differences of significance in
indoor management rule cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table 5.3 The history of statutory indoor management rule . . . . . . . . . . . . . . 50
Table 8.1 The legislative history of the exceptions to the rule. . . . . . . . . . . . . 110
ix
List of Cases
A
Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703…53, 112,
119
Advance Bank of Australia Ltd v FAI Insurances Ltd (1987) 2 NSWLR 464, 5ACLC
725…5, 54
Agip (Africa) Ltd v Jackson [1991] Ch 547…88
Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd (1973) 131 CLR 60…31, 39
ANZ Ltd v Australian Glass and Mirrors Pty Ltd (1991) 9 ACLC 702…74, 75, 77
ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd [1991] 2 QdR 360…58,
67, 69, 76, 85, 101, 139, 153
Australian Breeders Co-operative Society Ltd v Jones (1998) 16 ACLC 100…66
Australian Capital Television Pty Ltd v Minister for Transport & Communications
(1989) 7 ACLC 525…41, 51, 72, 119
Austalian Securities and Investments Commission v Hallmark Gold NL (1999) 30 ACSR
688…53
B
Baden, Delvaux and Lecuit v Societe Generale pour Favoriser le Developpement du
Commerce et de l’Industrie en France SA [1983] BCLC 325…29, 87, 89, 90, 92, 121,
124
Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48…8, 12, 32, 41, 42, 46, 47,
51, 52, 78, 79, 80, 87, 111, 113, 119, 120, 123, 128, 133, 135, 140
Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557…8, 11, 46, 78, 114
Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232…46, 72, 97, 115
Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662…41, 105
Barnes v Addy (1874) LR 9 Ch App 244…87, 90, 94, 152
Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (No 2) (1987) 5 ACLC
38…66, 144
Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 33 ACSR 1…130, 148
Beach Petroleum NL v Johnson (1993) 115 ALR 411…34
Bell Resources Holdings Pty Ltd v Commissioner for ACT Revenue Collections (1990) 8
ACLC 533…41, 112, 118
Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393…88
Belven Enterprises Pty Ltd v Lydham Pty Ltd (1996) 14 ACLC 1478…71, 73, 97
Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93…37
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC
253…6, 11, 12, 46, 47, 71, 77, 78, 81, 86, 99, 101, 102, 112, 113, 116, 119, 131, 135,
136, 137, 140, 147, 151
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 9 ACLC 324…
46, 53, 97, 149
British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176…46,
72, 97, 115
x Corporate Authority and Dealings With Officers and Agents
C
195 Crown Street v Hoare [1969] 1 NSWR 193…100
CAC v Guardian Investments Pty Ltd [1984] VR 1019…124
Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62…58
Chisum Services Pty Ltd (1982) 1 ACLC 292, Re…33
City of Camberwell v Cooper [1930] VLR 289…55
Clay Hill Brick Co v Rawlings [1938] 4 All ER 100…16
Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 5 ACLC 1027…15
Collingridge v Sontor Pty Ltd (1997) 15 ACLC 1681…66
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373…88, 121
Corpers (No 664) Pty Ltd v NZI Securities Australia Ltd (1989) ASC 55-714…16
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty
Ltd (1975) 133 CLR 72…10, 23, 102
Custom Credit Holdings Ltd v Creighton Investments Pty Ltd (1985) 3 ACLC 248…31,
32
D
Daniels v Anderson (1995) 13 ACLC 614…86
Darvall v North Sydney Brick and Tile Co Ltd (No 4) (1988) 6 ACLC 1095…54, 63
David Payne & Co Ltd [1904] 2 Ch 608, Re…55
Ding v Sylvania Waterways Ltd (1999) 17 ACLC 531…63
Dawson v Westpac Banking Corporation (1989) 7 ACLC 1,175…74
Dawson v Westpac Banking Corporation (1991) 66 ALJR 94…98
Duke Group Ltd v Pilmer (1998) 16 ACLC 567…54, 65
Duke Group Ltd v Pilmer (1999) 17 ACLC 1329…34
Duck v Tower Galvanizing Co [1901] 2 KB 314…28
E
Edward Love & Co Pty Ltd [1969] VR 230, Re…54, 55, 65
Efron’s Tie & Knitting Mills Pty Ltd [1932] VLR 8, Re…31, 33, 99, 137
English and Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700…29, 88
Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424…16
Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952…6, 7, 11, 12, 46,
47, 78, 89, 90, 101, 131, 137, 139, 140, 153
Equity Nominees Ltd v Tucker (1967) 116 CLR 518…39, 99
Ernest v Nicholls (1857) 6 HLC 401… 20, 34, 103
F
Farrow Finance Company Ltd v Farrow Properties Pty Ltd (1998) 16 ACLC 897…34
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480…7, 9,
16, 23, 76, 77, 79, 80, 102
List of Cases xi
G
Greater Pacific Investments Pty Ltd v Australian National Industries Ltd (1996) 39
NSWLR 143…78
Grove v Flavel (1986) 4 ACLC 654…86
H
Hampshire Land Co [1896] 2 Ch 743, Re…34
Hapytoz Pty Ltd [1937] VR 40, Re…31, 37, 39
Haycraft Gold Reduction & Mining Co [1900] 2 Ch 230, Re…101
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549…6, 16, 30, 118
Hilton International Ltd v Hilton (1988) 4 NZLC 96-265…86
Houghton & Company v Nothard, Lowe and Wills Ltd [1927] 1 KB 246…37
Houghton & Company v Nothard, Lowe and Wills Ltd [1928] AC 1…34, 35
Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156…19, 28, 109
Hughs v NM Superannuation Pty Ltd (1993) 11 ACLC 923…7, 19
I
International Sales & Agencies Ltd v Marcus [1982] 3 All ER 551…88
Introductions Ltd v National Provincial Bank Ltd [1970] 1 Ch 199…54
Irvine v Union Bank of Australia Ltd (1877) 2 App Cas 366…35
J
Jeffree v NCSC (1989) 7 CLC 556…86
Jon Beauforte (London) Ltd [1953] 2 WLR 465, Re…35, 55, 58
Jovista Pty Ltd v Pegasus Gold Australia Pty Ltd (1999) 17 ACLC 524…95
K
KL Tractors Ltd (1961) 106 CLR 318, Re…55
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722…86
Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16…11, 12, 33,
46, 48, 85, 89, 92, 107, 108, 114, 115, 128, 129, 130, 131, 136, 139, 140, 141
Kreditbank Cassel (GmbH) v Schenkers Ltd. [1927] 1 KB 826…37, 104, 105, 145
L
Linter Group Ltd v Goldberg (1992) 10 ACLC 739…34
Lyford v Media Portfolio Ltd (1989) 7 ACLC 271…72, 80, 112, 118, 119
xii Corporate Authority and Dealings With Officers and Agents
M
3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185…123
Madi Pty Ltd (1987) 5 ACLC 847, Re…74
Mahoney v East Holyford Mining Co (1875) LR 7 HL 869…38, 73, 103
McNamara v Flavel (1988) 6 ACLC 802…86
Mancini v Mancini (1999) 17 ACLC 1570…99
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC
500…34
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699…123
Mirimbiak Nations Aboriginal Corporation v Peninsula Prestige Cars Pty Ltd [2000]
VSC 556…9
Morris v Kanssen [1946] AC 459…18, 19, 24, 26, 28, 30, 32, 109, 117, 118
Myers v Aquarell Pty Ltd [2000] VSC 429…46, 48, 75, 100, 101, 136
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 15 ACLC 1,057…71, 97, 100
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 17 ACLC 861…98, 100
N
NAB v Sparrow Green Pty Ltd (1999) 17 ACLC 1665 …11, 12, 13, 46, 48, 75, 79, 80,
129, 130, 135, 138, 139, 151
Nece Pty Ltd v Ritek Incorporation (1997) 15 ACLC 813…16
Nicholson v Permakraft (NZ) Ltd [1985] NZLR 172…86
Ninety Five Pty Ltd v Banque Nationale de Paris [1988] WAR 132…88, 89, 121
Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611…7, 14, 15, 20,
30, 31, 32, 38, 39, 43, 46, 47, 51, 55, 73, 85, 86, 87, 94, 97, 103, 104, 109, 111, 113, 114,
116, 120, 128, 133, 140, 145, 147, 149
Northside Developments Pty Ltd v Registrar-General (1987) 5 ACLC 642…32, 47, 105,
145
O
Ooregum Gold Mining Company of India v Roper [1892] AC 125…66
P
Panorama Developments (Guilford) Ltd v Fidelis Furnishings Fabrics Ltd [1971] 2 QB
711…7, 15
Perkins v NAB (1999) 30 ACSR 256…46, 116, 122, 136
Pyramid Building Society v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679…11, 12, 46,
48, 78, 79, 80, 115, 128, 130, 135, 140, 15
Q
Qintex Ltd (1990) 8 ACLC 811, Re …16
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266…123, 124
List of Cases xiii
R
Rama Corporation Ltd v Proved Tin & General Investments Ltd [1952] 2 QB 147…35,
37, 38, 74
Registrar-General v Northside Developments Pty Ltd (1989) 7 ACLC 52…24
Reid Murray Holdings Ltd v David Murray Holdings Pty Ltd [1972] 15 SASR 386…86
Richard Brady Franks Ltd v Price (1937) 58 CLR 112…83, 86, 96
Richardson v Landecker (1950) 50 SR (NSW) 250…95
Ring v Sutton (1979) 5 ACLR 546…86
Rogers v The Royal College of Ophthalmologists (1991) 9 ACLC 1497…66
Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246…5,
88, 101
Royal British Bank v Turquand (1856) 119 E R 886…1, 18, 38, 50, 103, 146
Royal Brunei Airlines v Tan [1995] 2 AC 378…89
Ruben v Great Fingall Consolidated [1906] AC 439…20, 104, 145
S
Scottish Loan Finance Co Ltd (1944) 44 SR(NSW) 461, Re…31, 39
Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd [1998] 3 VR 133…11, 12, 33, 46, 48,
78, 80, 92, 128, 129, 130, 131, 135, 136, 139, 151
Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd (1996) 14 ACLC 670…46, 78, 115
South London Greyhound Racecourses Limited v Wake [1931] 1 Ch 496…39, 104, 105
Southern Cross Commodities Pty Ltd v Ewing (No 2) (1988) 6 ACLC 647…34
Spies v The Queen (2000) 18 ACLC 727…86
Spedley Securities Ltd v Southern Sea Farms Ltd (1991) 9 ACLC 1367…123
Story v Advance Bank Australia Ltd (1993) 11 ACLC 629…45, 46, 47, 52, 72, 99, 107,
113, 131, 138, 140
Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 9 ACLC 1018…60, 62
T
Tilley v Egan [2000] QCA 356…96
Tivoli Freeholds Ltd [1972] VR 445, Re…62
Trevor v Whitworth (1887) 12 App Cas 409…66
Tummon Investments Pty Ltd (1993) 11 ACLC 1139, Re…7, 16
U
United States Surgical Corporation v Hospital Products International Pty Ltd [1983]
NSWLR 157…90
V
xiv Corporate Authority and Dealings With Officers and Agents
W
Walker v Wimborne (1976) 137 CLR 1…86, 91
Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15…63
Westpac Banking Corporation v Dawson (1990) 8 ACLC 681…98
Z
List of Abbreviations
AC English Law Reports, Appeals Cases
ACLC Australian Company Law Cases
ACSR Australian Corporations & Securities Reports
ALR Australian Law Reports
All ER All England Law Reports
App Cas Law Reports, Appeal Cases, House of Lords
ASC Australian Securities Commission
BCLC Butterworth’s Company Law Cases
Ch English Law Reports, Chancery
Ch App Law Reports, Chancery Appeals
ChD English Law Reports, Chancery Division
CLERP Corporate Law Economic Reform Program
CLR Commonwealth Law Reports
DLR Dominion Law Reports
ER English Reports
HL Cas Clark’s Reports, House of Lords
HCA High Court of Australia
KB Law Reports, King’s Bench Division
LR HL Law Reports, English and Irish Appeals House of Lords
M&W Meeson and Welsby’s Reports, Exchequer
NSWLR New South Wales Law Reports
NSWR New South Wales Reports
NSWCA New South Wales Court of Appeal
NZLR New Zealand Law Reports
QB Law Reports, Queen’s Bench Division
QLS Queensland Law Society
SASR South Australian State Reports
SR(NSW) State Reports, New South Wales
VLR Victorian Law Reports
VR Victorian Reports
WAR Western Australian Reports
WLR Weekly Law Reports
xvi Corporate Authority and Dealings With Officers and Agents
Chapter 1
Introduction
The legal fiction of the separate legal entity principles enables companies to be bound by
contracts entered into with outside parties. However, for the company to be bound by the
contract, several “internal” transactions must have occurred. These internal transactions
are not necessarily observable to the outside party. First, as a result of registration of the
company, the company has been granted contractual capacity, but the scope and limita-
tions on its powers need to be identified. Second, the company will have appointed offi-
cers and agents to act on its behalf, but the scope of their authority must be identified.
Third, regardless of the scope of authority expressly granted, the general law imposes
inherent restrictions on the exercise of authority by corporate agents, for example, they
must exercise the company’s powers according to the fiduciary constraint to act in the
best interests of the company.
If the scope of these internal transactions is exceeded or otherwise abused by corpo-
rate officers, it has consequences for the contracts entered into with outsiders. To min-
imise the risk of unenforceability for the outsider, the general law, followed by statutory
codification, developed some principles to assist the outsider in enforcing contracts.
Sections 128–129 of the Corporations Act1 purport to comprise a statutory adoption of
the common law rule known as the Rule in Turquand’s case2 or the “indoor management
rule.” This rule formed the common law basis of the application of agency principles to
companies. Its essence was to allow outsiders dealing with a company to assume that the
internal proceedings of a company were properly carried out.
The Rule in Turquand’s case has traditionally struck a balance where officers of a
company act without authority. It protects outsiders and enables them to enforce con-
tracts against a company. At the same time the rule was subject to several exceptions that
limited its protection to outsiders who act bona fide. In recent times this issue of corpo-
rate authority has most often arisen in the context of financial transactions where a com-
pany has contested the validity of a document executed under the seal of the company.
From the point of view of lenders such as banks, the most important issue that has arisen
is the scope of exceptions, that is, whether the lender was put on inquiry by the circum-
stances surrounding the formal execution of the contract.
Since 1983, the rule has been codified and set out in the Corporations Act in the form
of assumptions representing the various aspects of the rule and limitations that corre-
spond to the exceptions to the rule. These limitations are now contained in s 128(4) of
the Corporations Act. Whilst there have been three iterations of the statutory indoor man-
agement rule since 1983, there remains uncertainty as to the scope of protection afford-
ed to outsiders dealing with companies. In particular, the statutory limitations to some
1 See Appendix I, where the current and former provisions in the Corporations Act are reproduced.
2 Royal British Bank v Turquand (1856) 119 ER 886.
2 Corporate Authority and Dealings With Officers and Agents
extent differ from the common law exceptions, especially as the Corporations Act does
not explicitly provide for an inquiry exception. However, case law demonstrates that
judges may be prepared to interpret the limitations in s 128(4) consistently with the pol-
icy behind the common law rules.
The most recent statutory reform to corporate contracts and authority of agents
occurred with the Company Law Review Act 1998. Operational since 1 July 1998, the
Company Law Review Act 1998 inserted new provisions relevant to corporate contracts
and agents, dealing with:
1. the role of the corporate constitution and simplification of corporate powers and
ultra vires;3
2. the procedures for companies entering into external contracts; and
3. the scope of protection conferred to third parties entering into these contracts.4
It is timely to re-examine the statutory rules for corporate contracts. The reforms
superficially appear to be a mere simplification of the prior statutory regime, which itself
was subject to some uncertainty in application. This monograph describes the common
law rules surrounding the principles of agency law in their application to companies.
Central to the common law position is the doctrine of constructive notice and the Rule in
Turquand’s case and its exceptions. One of the features of agency law in its application
to companies was that an outsider dealing with a company was taken to have construc-
tive notice of the company’s public documents. In this context, the most important of
these documents was the company’s constitution, in particular where it contained a
restriction on the authority of the company’s officers or agents. This doctrine of con-
structive notice operated in favour of the company and against the outsider by deeming
that the outsider was aware of the restriction of authority. Therefore the company as prin-
cipal was not liable under a contract entered into by an officer or agent who exceeded the
authority conferred by the constitution.
The Rule in Turquand’s case recognised that in some cases, an agent may act with-
out authority, however this would not be apparent to an outsider even after reading the
constitution. The rule protected the outsider and operated against the company unless
certain exceptions arose which resulted in the loss of this protection.
Of course, agents exercise authority within the context of the company as a separate
legal entity, with its own contractual capacity. All companies’ capacity to enter into con-
tracts has been affected by developments in the doctrine of ultra vires. “Ultra vires”
means “beyond power” and when used in company law, refers to corporate capacity,
where transactions outside the formal objects and powers stated in a company’s consti-
tution were previously void.
The corporate debt or finance contract provides a compelling application of the rules
of agency and the interaction with the statutory rule. This is due primarily to the preva-
lence of litigation. Litigation over the last decade shows that lenders, as outsiders, are
involved in disputes with companies in enforcing corporate borrowing or securities trans-
3 The Company Law Review Act 1998 inserted new Chapter 2A – Registering a company, and new Part 2B.1 –
Company powers and how they are exercised.
4 The Company Law Review Act 1998 inserted new Part 2B.2 – Assumptions people dealing with companies are enti-
tled to make.
Introduction 3
actions. The magnitude of such contracts, the degree of formality that surrounds their for-
mation and the degree of scrutiny that lenders are subjected to in relation to borrowers
and security providers indicate a need for practical guidelines to maximise enforceabili-
ty of these types of corporate contracts.
Within this framework, the principles of agency law with respect to implied actual
authority and apparent authority are applicable to contracts with companies because an
agency relationship arises as a result of the appointment of an officer or a holding out
that such an appointment has been made. Accordingly, we commence this monograph by
reviewing, in chapter 2, the general principles of agency as they apply to corporate con-
tracts.
Following the analysis of the Rule in Turquand’s case and its exceptions and limita-
tions contained in chapters 3 and 4, chapter 5 discusses the history and background of
statutory reform to the indoor management rule, and related doctrines, such as construc-
tive notice and ultra vires. Chapter 6 analyses in detail the statutory assumptions in s 129.
In a number of respects, these assumptions incorporate the common law agency princi-
ples. The primary focus is considering whether the statutory indoor management rule
achieves its stated purpose of clarifying and codifying the Rule in Turquand’s case. The
purpose of the legislation was stated as being to “ensure that a person who deals in good
faith with persons who can be reasonably supposed to have the authority of the compa-
ny should be protected against later [claims] by the company that the persons purporting
to act for it lacked authority”.5 Whilst chapter 7 briefly digresses to examine the common
law rule against forgeries and the extent to which the Corporations Act now abrogates it,
chapter 8 discusses the scope the limitations to the statutory rule contained in s 128(4).
It is suggested that the current statutory limitations do not substantially depart from their
common law derivation.
As borrowing and security contracts indicate a particular instance of vulnerability,
chapter 9 sets out a number of practical implications for lenders arising from the analy-
sis of both the common law and statutory provisions relating to corporate authority.
Finally, chapter 10 offers our summary and overall conclusions, detailing the scope
of legislative reform and suggesting future reforms to the statutory rule and its limitations
to reflect the policy of the Rule in Turquand’s case with greater clarity than at present.
5 Explanatory Memorandum, Companies and Securities Legislation (Miscelleneous Amendments) Act 1983, [188].
Chapter 2
Actual and Apparent Authority

of a Company’s Agent
Company Contracts
As a company is an abstract entity, it can only enter into contracts through the actions of
a natural person. Section 126 provides that a company’s power to make a contract may
be exercised by an individual acting with the express or implied authority of the compa-
ny. A contract may also be made with or without a common seal. Section 127 prescribes
how written contracts are to be executed, whether by seal or not.
Sections 126 and 127 indicate that a company may enter into a contract directly
through one of its organs, usually the board of directors, or through a person who repre-
sents the mind and will of the company. The clearest way in which this occurs is by the
affixing of the company seal. This type of situation is governed by the organic theory of
company law that largely lies outside the law of agency but draws upon it.
A company may also enter into a contract indirectly through an agent. The agent may
be an officer or employee of the company. Whether a company will be liable under a con-
tract for the acts of an officer or agent is governed by the general law of agency. These
agency principles have been modified by the Corporations Act so as to recognise the
abstract nature of companies. The agency rules that are particularly applicable to com-
panies are also affected by the common law rules known as the doctrine of constructive
notice and the Rule in Turquand’s case. The Corporations Act now governs these rules,
in ss 128–130. This monograph is primarily concerned with these provisions but as they
presuppose and are based on the above rules and general agency principles, it is first nec-
essary to examine the common law rules. Accordingly, this chapter sets out the founda-
tion principles of agency, whilst the following two chapters examine the scope of the
Rule in Turquand’s case and its limitations.
At common law, a particular feature of the applicability of agency principles to com-
panies was that the acts of an agent could only bind the company if they were within the
objects of the company as stated in its constitution.1 Acts outside the scope of the com-
pany’s objects are ultra vires (“beyond powers”) and were once not binding on the com-
pany. Section 125(2), however, provides that a contract with a company is not invalid just
because it is outside its object clause. Similarly, s 125(1) provides that if a company’s
constitution contains restrictions on powers, contracts are not invalid merely due to non-
compliance with these restrictions. Ultra vires actions have no direct relevance under s
1 Prior to the Company Law Review Act 1998, companies were required to have a memorandum of association and
articles of association. This requirement has been abolished since 1 July 1998. In this monograph, we have adopted
the current term ‘constitution’ when referring to the company’s constituent documents, in preference to the former
concepts of memorandum and articles. For those companies that may still have a memorandum and articles, s 1415
provides that these documents will become the company’s constitution.
Actual and Apparent Authority of a Company’s Agent 5
125, and may only be enforced as statutory contracts in the same way as other contra-
ventions of the company’s constitution, under s 140(1). Ultra vires actions may also be
relevant indirectly, where they form part of an action involving breaches of duty by direc-
tors, oppression or applications for winding up by members.2 These indirect effects of
ultra vires generally involve proceedings of an internal nature. The main purpose for
abolishing the ultra vires doctrine in relation to outsiders has been to afford additional
protection to outsiders in their dealings with companies. Companies can generally no
longer rely on restrictions contained in their constitutions to avoid contractual obliga-
tions.
A distinction is made between acts that are ultra vires the company because such acts
are beyond the power of the company and acts that are within the company’s power but
outside the authority of the company’s officers or agents when exercising the power. In
the latter case the officer or agent is sometimes confusingly described as acting ultra
vires. This confusion has been acknowledged in the past. For example, Slade J in Rolled
Steel Products (Holdings) Ltd v British Steel Corporation3 stated:
“Primarily [ultra vires] is used to describe acts which are beyond the capacity of a company ...
[T]he phrase is also sometimes used to describe acts which are not beyond the capacity of the com-
pany but simply beyond the authority of either the board of directors or a majority of the share-
holders. In many instances the sense in which the phrase is being used is far from clear...”.
Corporate power exercised in the absence of, or in excess of authority, is sometimes

referred to “inherent incapacity”.4 Understanding the effects of inherent incapacity
involves applying the general law of agency to the corporate context, where the compa-
ny is the principal, and its officers are the agents.
Identifying the grant of authority is through elimination: an agent may bind a princi-
pal where the agent has actual authority or apparent authority. (Apparent authority is also
known as ostensible authority or authority by estoppel.) Further, in corporate law, certain
positions on the company board automatically confer a certain grant of power, referred
to as customary authority. Customary authority of particular officers assists in applying
the general concepts of actual and apparent authority to companies. Each of these types
of authority (actual, apparent and customary) is briefly discussed below, with pertinent
examples involving companies and their officers.
Actual Authority
Actual authority arises where the principal has given consent to the agent to act for the
principal.5 This may derive from an express or implied conferral of authority (e.g in the
corporate constitution) by the principal to the agent to do certain acts or enter into a par-
ticular transaction.
2 See Explanatory Memorandum, Company Law Review Act 1998, [8.4]; S Woodward, ‘Ultra Vires Oversimplified:
Changes to Company Powers Under the Second Corporations Act Simplification Bill’ (1997) 15 Company and
Securities Law Journal 162, 169. The ultra vires reforms are discussed in chapter 5.
3 [1986] 2 Ch 246, 286. Approved of by Advance Bank of Australia v FAI Insurances Ltd (1987) 5 ACLC 725, 733
(Kirby P).
4 See for example K Dharmananda, ‘Ultra Vires Goes Ultra Violet’ (1997) 71 Australian Law Journal 622, 622;T
Cain, ‘Ultra Vires in 1984’ (1985) 1 Queensland Institute of Technology Law Journal 31, 31.
5 H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (10th ed, 2001) [13.030].
In a company context, an officer or agent will often have implied actual authority. A
company will usually give consent to an agent to act for it by appointing the agent to a
particular position. Generally, the constitution will confer a wide power of management
on the board of directors.6 In the usual case, the board is the organ of the company for
the purposes of management so that its acts are the acts of the company itself. The
authority of the board in this respect stems directly from the constitution. While the board
is more than an agent as regards contracts between a company and an outsider, it has
actual authority in the same way as an agent may have actual authority to act for the
company.
Usually, outsiders do not deal directly with the board. Rather, they deal with a per-
son to whom the board has delegated some or all of its functions. This person may be
appointed as managing director of the company7 upon whom the directors may confer
any of the powers exercisable by them.
The appointment of a person as managing director results in that person having the
implied actual authority usually associated with that position.8 The implication arises
from the fact of the appointment as managing director and the usual or customary author-
ity of a managing director in the circumstances of the company and the nature of its busi-
ness.
In several cases during the 1990s,9 the phenomenon of the “de facto” managing direc-
tor may be observed. An officer may not actually be appointed as managing director, but
if they act in that capacity with the consent and acquiescence of the board, it is legitimate
to find that they have the authority that goes with that position. It is common for boards
to regard one of their number as the managing director with ultimate responsibility for
the management of the company, however, the formal appointment contemplated by s
198C or similar provisions in the constitution has not been carried out. To facilitate trans-
actions with third parties, the courts have conferred on dominant controllers with acqui-
escing boards the full authority of the company, most noticeably in cases involving cor-
porate groups. This extension of actual authority creates a new category of officer that
has been referred to as the de facto managing director.10
This result was achieved in Brick and Pipe Industries Ltd v Occidental Life Nominees
Pty Ltd,11 where Mr Goldberg, a director was taken to have implied actual authority to act
as the company in circumstances where he held a controlling shareholding and assumed
the role of managing director with the acquiescence of the other directors. Transactions
had generally been entered into without prior reference to the board and no attempt was
made to interfere with his assertion of control over the company’s affairs.
The acquiescence of members of the board to the conferral of actual authority
requires “not merely the silent acquiescence of the individual members of the board, but
6 See s 198A set out in Appendix I (and former Table A art 66).
7 See s 198C set out in Appendix I (and former Table A art 79(1)).
8 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
9 See for example discussed below: Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10
ACLC 253, Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952.
10 See for example P Hanrahan, I Ramsay and G Stapledon, Commercial Applications of Company Law (2nd ed, 2001)
[21–240].
11 (1992) 10 ACLC 253.
the communication by words or conduct of their respective consents to one another and
to [the agent].”12
Normally, the appointment of a person as a director does not carry with it the implied
actual authority to bind the company.13 The power of management under the constitution
is conferred on the board as a collegiate body.
The appointment of a person as secretary of a company confers implied actual
authority to make contracts in connection with the internal administration of the compa-
ny but not in relation to the management of the company in the sense of carrying on the
company’s business.14
Whether a director elected as chair has implied actual authority to bind a company is
not entirely clear. The usual functions of a chairing director do not generally extend to
conducting the company’s business operations15 and a he or she has no more authority to
bind the company than has any other single director.16 The authors of Ford’s Principles
of Corporations Law suggest that as officers who hold the chair commonly receive more
remuneration than do other directors, there may be some things that the director elected
as chair of a public company is impliedly authorised to do beyond the usual authority of
a single director.17 While the usual authority of a director elected as chair is unclear, the
existence of implied actual authority may be determined from the circumstances and con-
duct of the company and its chair in the same way as occurred in the Brick and Pipe case.
This situation involving a director elected as a chair arose in Equiticorp Finance Ltd
v Bank of New Zealand.18 The Equiticorp Group was comprised of companies in its
finance arm and other companies in an industrial arm. Hawkins was chair of the Group
and director of a number of companies. A company in the industrial group borrowed
money from a bank. The bank required early repayment and Hawkins applied assets of
two member companies of the finance arm with the tacit approval of all but one of the
directors of the finance arm companies. There was no formal approval from the boards
of the finance arm companies for the transfer of assets. When the companies went into
liquidation, the liquidator sought recovery of the assets on the ground (among others),
that the payment of the assets was not authorised by the two companies. Clarke and
Cripps JJA, in a majority judgment, held that the business of the various companies in
the Equiticorp Group was conducted under the general authority of Hawkins who under-
took all decisions of significance either with or without consultation with senior mem-
bers of management. In these circumstances, Hawkins had implied actual authority to
apply the assets of the finance companies in the manner in which he directed.
In a dissenting judgment, Kirby P held that no implied actual authority had been con-
ferred on Hawkins. He stated:
12 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 501 (Diplock LJ).
13 Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 645 (Dawson J).
14 Panorama Developments (Guilford) Ltd v Fidelis Furnishings Fabrics Ltd [1971] 2 QB 711 and Northside
Developments, 645 (Dawson J); Re Tummon Investments Pty Ltd (1993) 11 ACLC 1, 139.
15 Hughes v NM Superannuation Pty Ltd (1993) 11 ACLC 923.
17 Supra n 5, [13.090].
18 (1993) 11 ACLC 952.
“Where, however, actual authority is held to be implied, it remains vital to ask the question:
‘authority for what?’ It cannot be an authority at large to do anything at all. Relevantly, it must be
authority to do something apparently in the best interests of the company.”19
Kirby P also found that the other directors were either unaware of the disposal of the
assets or were opposed to it. This did not amount to acquiescence at the time in the trans-
fer of the assets. In his judgment, Kirby P noted that outsiders should be protected in their
dealings with companies that operate in an irregular way and are dominated and effec-
tively controlled by particular individuals. However as the bank knew of the structure of
the Equiticorp Group, “it is to debase the integrity of company law, and the obligations
of companies to operate according to law, to extend the protective principle to cloak Mr
Hawkins with implied actual authority...The suggested imperative of ‘realism’ and the
realpolitic of corporate control does not authorise courts to ride roughshod over the due
observance of company law.”20
This dissenting judgment emphasises the balance of interests that is at the heart of
determining when a company is to be bound by the unauthorised acts of its officers.
These considerations form the basis of the common law principles and the statutory
assumptions and limitations contained in the statutory indoor management rule.
The implied actual authority of an officer may be restricted by the circumstances of
the company. In Bank of New Zealand v Fiberi Pty Ltd21 at first instance, it was held that
one director had not acquiesced to giving the other director implied actual authority usual
for a managing director, where the purpose of the company was to hold the title to the
directors’ family home. This limited function of the company meant that it was unneces-
sary for the company to appoint such an officer.
This case went on appeal and was dismissed by the Court of Appeal on other
grounds.22
Apparent Authority
An agent’s apparent or ostensible authority (the terms “apparent” and “ostensible”
authority have the same meaning) creates the agency relationship because of the appear-
ance of authority conferred on the agent. It does not depend on any agreement or rela-
tionship between principal and agent. It is often the case that an outsider does not know
whether an agent has actual authority and the extent of that authority. Usually, all the out-
sider relies on is the appearance of authority. Depending on the circumstances, the extent
of an agent’s apparent authority may be the same as the agent’s actual authority or it may
exceed the scope of the agent’s actual authority. In some situations a person may have
apparent authority to do particular acts for the principal even though that person has been
given no actual authority to contract. Thus actual and apparent authority rest upon entire-
ly different bases but may often overlap.
19 (1993) 11 ACLC 952, 978.

20 (1993) 11 ACLC 952, 979.
21 (1992) 10 ACLC 1557.
22 (1994) 12 ACLC 48. This case considered the statutory assumptions and limitations and is discussed in chapters 6, 7
and 8.
If an agent’s apparent authority can be established, it creates an agency by estoppel.

This means that as between principal and outsider, the principal is prevented or estopped
from denying that the agent lacked authority. An exercise of agency by estoppel creates
a valid contract between the principal and outsider in the same way as an agent with actu-
al authority creates a contract.
The principal must make the representation of the agent’s authority to the outsider. A
principal is not liable merely on the representations of the agent. Where an outsider deals
with a particular person, it may be difficult to determine whether the dealing is with the
company or only with that person. In particular, is a representation made by a person act-
ing as an officer to be taken as a representation by the company?
The principal may expressly make the representation to the outsider. It is more usual
for the representation to arise by the principal’s conduct. A representation by conduct
may take either one of three forms:
1. It may arise when the principal permits the agent to occupy a particular position.
In such cases the principal represents or holds out that the agent has the custom-
ary authority of a person in such a position. In this respect it is similar to an
agent with implied actual authority resulting from the position occupied.23
2. It may arise when the principal’s conduct permits the agent to carry out particu-
lar tasks on the principal’s behalf that are beyond the scope of the agent’s cus-
tomary authority. For example, a single director may be permitted by the compa-
ny to contract on its behalf in a number of previous transactions. This is a hold-
ing out that the director’s authority is greater than would normally be the case.24
3. It may also arise where the agent holds no formal position in the company but
the principal’s conduct nevertheless leads the outsider to believe that the agent
has authority.25
The most common situation is the second scenario, where a person is allowed by the
board to act as a managing director even though not appointed to this position. Apparent
authority may arise even though implied actual authority may not have been conferred
because the board had not acquiesced to the particular person assuming the role of man-
aging director.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd there were two
controllers of a company formed for the purpose of developing a property. Each held half
of the issued shares and they comprised the board together with a nominee of each. One
of the two controllers was absent for a long period, however the quorum for board meet-
ings was four. The other controller acted as managing director with the approval of the
board even though he had not been appointed. The constitution was of similar effect to s
198C and conferred a power on the board to appoint a managing director. The purported
managing director entered into contracts related to the property development business of
the company. One of these contracts was with a firm of architects, who sought to enforce
the contract after the company refused to pay its fees. The Court of Appeal held that the
company was bound by the acts of its purported managing director. It had represented
23 See now the assumption in s 129(3), discussed in chapter 6.

24 See for example Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
25 See for example Mirimbiak Nations Aboriginal Corporation v Peninsula Prestige Cars Pty Ltd [2000] VSC 556.
through its board that its agent was the managing director of the company. The contract
was within the customary authority of a managing director and the outsider had relied on
this apparent authority. Diplock LJ stated four conditions that must be met in order for a
company to be bound by the acts of an agent where the agent had no actual authority to
so act:
1. a representation must be made to the outsider that the agent had authority to
enter into the kind of contract the outsider seeks to enforce;
2. the representation must be made by someone with actual authority to manage the
company’s business or at least authority in respect of the matters relating to the
contract;
3. the outsider must be induced by the representation to enter into the contract and
in fact relied upon the representation;
4. the memorandum or articles do not deprive the company of the capacity to either
enter into the type of contract concerned or to delegate authority to enter into
that kind of contract to the agent.
The last of these conditions refers to acts that are ultra vires the company in the sense
of being outside the objects clause in the constitution. Ultra vires contracts are now gov-
erned separately under the Corporations Act. The policy behind this statutory reform is
to abolish the doctrine of ultra vires in relation to contracts with outsiders.26 Therefore
under the Corporations Act, a company may be bound by an ultra vires contract entered
into by an agent with apparent authority. The last condition also requires the constitution
to authorise a delegation of authority to enter into the type of contract concerned. This
power to delegate is usually conferred in a form similar to the replaceable rule s 198D.
The condition that has caused the most uncertainty from the outsider’s point of view
has been the second. This requires the representation to be made by someone with actu-
al authority to manage the company’s business or in respect of matters to which the con-
tract relates. In the Freeman and Lockyer case, this did not present a problem to the out-
sider because the board through its acquiescence made the representation or holding out
to the director assuming the role of managing director.
Usually, an outsider will be in contact with someone to whom the board has delegat-
ed authority. It will be difficult for the outsider to determine the nature and extent of this
authority. This becomes critical where the board has represented that someone has appar-
ent authority to bind the company and this person then purports to cloak another person
with apparent authority. Such a situation does not meet the second of Diplock LJ’s con-
ditions.
This fact situation arose in the High Court case of Crabtree-Vickers Pty Ltd v
Australian Direct Mail Advertising Co Pty Ltd27 in which the court approved of the prin-
ciples stated by Diplock L J in Freeman and Lockyer. A managing director was found to
lack actual authority to enter into the contract in question because of limitations on his
power. An employee had been held out by the managing director to have the necessary
authority to enter into a contract on behalf of the company. The High Court applied the
principles formulated by Diplock LJ and held that the employee had no actual authority.
26 Section 125.
27 (1975) 133 CLR 72.
The employee also did not have apparent authority because the representation was made
by someone who himself, as the managing director, only had apparent authority to carry
on management of the company.
In order for the representation in this case to have been made by someone with actu-
al authority, it would need to have been made by either the board or by a committee of
directors which had been delegated the authority to carry on the business of the compa-
ny. It seems curious that a managing director may bind the company through his appar-
ent authority based on a representation by the company and yet, such a person is unable
to represent that someone else has apparent authority. If a company can be bound by a
contract, in circumstances such as arose in Freeman and Lockyer, it is hard to see why
the company cannot be bound by a representation of the same person that holds out that
someone else has authority to bind the company. This problematic result is avoided if the
managing director is regarded as having implied actual authority because the board
acquiesced to his assumption of broad powers.
Accordingly, the Australian cases, such as Brick and Pipe28 and Equiticorp,29 which
have given rise to the concept of the “de facto” managing director, effectively sideline
much of the apparent authority doctrine’s difficulties by permitting outsiders the benefits
that flow from dealing with officers who have actual authority. This is a realistic view of
commercial situations where, like Brick and Pipe, a “Goldberg management style” is
apparent.30
Cases decided subsequent to Brick and Pipe demonstrate however the point beyond
which the principles of implied actual authority will not be flexibly applied. For exam-
ple, in Bank of New Zealand v Fiberi Pty Ltd,31 Sixty-Fourth Throne Pty Ltd v Macquarie
Bank Ltd,32 Pyramid Building Society v Scorpion Hotels Pty Ltd,33 Koorootang Nominees
Pty Ltd v ANZ Banking Group Ltd,34 and National Australia Bank v Sparrow Green Pty
Ltd,35 the outsiders each asserted that the officer they dealt with, in relation to the provi-
sion of a third party security by the company, was the de facto managing director. In each
case, the officer did not have the actual authority to bind the company. The critical fac-
tor in each case was the failure of the outsider to prove a substantial link between the offi-
cer, their assertion of authority, and the acquiescence of the board. De facto managing
directors are not clothed with implied actual authority solely due to their own unilateral
assertions. The results of these cases are summarised in Table 2.1 below. The facts and
details of the cases are examined in more detail in chapters 5, 6 and 8.
28 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253.
29 Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952.
30 L Law and D Morrison, ‘The Brick & Pipe Appeal – Updating Ostensible Authority’ (1992) 10 Company and
Securities Law Journal 330, 333.
31 (1994) 12 ACLC 48.
32 [1998] 3 VR 133.
33 (1996) 14 ACLC 679.
34 [1998] 3 VR 16.
35 (1999) 17 ACLC 1,665.
Table 2.1 Acquiescence by board as the critical factor in de facto managing

director cases
CASE PERSON
ASSERTING ACTUAL ACQUIESCENCE
AUTHORITY DIRECTORS BY BOARD EXPLANATION
Brick and Pipe Goldberg Goldberg, Yes Goldberg was a de facto managing director
Industries Ltd v representing Furst and and so could hold out Furst as secretary.
Occidental Life Furst as Mrs Goldberg.
Nominees Pty Ltd secretary
(1992) 10 ACLC
253.
Equiticorp Finance Hawkins Hawkins was Yes Hawkins was a de facto managing director
Ltd v Bank of only a director and so could make a binding management
New Zealand of one of the decision.
(1993) 11 appellant
ACLC 952. companies.36
Bank of New Doyle Doyle and No Doyle did not have authority as managing
Zealand v Fiberi Arnhold director: Arnhold was not aware of his
Pty Ltd activities; no acquiescence.
(1994) 12
ACLC 48.
Sixty-Fourth Kandy Dr and No Kandy did not have authority as managing
Throne Pty Ltd Mrs Taft director: the Tafts were not aware of his
v Macquarie activities; no acquiescence.
Bank Ltd
[1998] 3 VR 133.
Pyramid Building Lewis Lewis, No Lewis did not have authority as managing
Society v Scorpion Luscombe, director: the others were not aware of his
Hotels Pty Ltd Glasscock & activities; no acquiescence.
(1996) 14 Warfe
ACLC 679.
Koorootang Jeffries Jeffries, No Jeffries did not have authority as managing
Nominees Pty Ltd S Ramsay and director: the Ramsays were not aware of his
v ANZ Banking W Ramsay activities; no acquiescence.
Group Ltd
[1998] 3 VR 16.
National Green Green and Sparrow Green did not have actual authority as
Australia Bank Sparrow resigned from managing director and further, the Bank had
v Sparrow Green the board but actual knowledge that the company required
Pty Ltd (1999) this was not a board of two.
17 ACLC 1665. held to be
acquiescence.
36 “Giles J recorded some doubt about the exact constitution of the relevant boards of directors of the two appellant
companies, EFL and EFSA. However, it appears that, at material times, there were some common directors. They
comprised Mr David Adams, Mr Brian Fitzgerald, Mr Dennis Cowell, Mr David Crick, Mr Brian Chittenden and Mr
Dennis Teroxy. At least, it was not seriously contested that they were directors. Mr Allan Hawkins was a director of
EFSA. He held no office (including director) of EFL. Mr Cowell was the managing director of EFSA and
EFL.”(1993) 11 ACLC 952, 959 (Kirby P).
Where the de facto managing director assertion fails, the outsiders are left with
apparent authority. The strict adherence to the conditions enunciated in the Freeman and
Lockyer case produces considerable difficulties and uncertainty to an outsider. The out-
sider is required to ascertain the validity of a conferral of authority on the managing
director in circumstances where the dealings are not with the board or a committee to
whom authority has been delegated. To the outsider, the circumstances indicate a hold-
ing out by the company because it appears to have allowed the representation to be made.
The application of agency law requires the representation to be made by an organ of the
company, such as its board or a person or persons to whom authority has been delegat-
ed, such as a managing director or committee of directors. In the latter case, the outsider
must hope that the authority was properly conferred on the committee so as to constitute
actual authority. This places outsiders dealing with any person who does not possess
actual authority in a potentially perilous position, yet it may be difficult or impossible for
an outsider to ascertain the nature of the authority.
The operation of the Rule in Turquand’s case and the statutory assumptions is sig-
nificantly compromised if an outsider is expected to delve into the indoor management
of a company in order to determine whether a particular person has actual or apparent
authority. According to Crabtree-Vickers this distinction can be critical in determining
whether a company is bound by a contract. The Corporations Act renders some assis-
tance. For example, s 129(2) and s 129(3) allow the outsider to assume that the compa-
ny’s officers (identified from the public record, or from a holding out) are duly appoint-
ed and have the customary authority of that position. Further, s 201M provides that acts
of officers are not invalid merely because of a defective appointment. However, s 201M
applies to acts of an internal, administrative nature only. Outsiders enforcing contracts
must rely on the s 129 assumptions, but reliance on the assumptions is subject to dis-
qualifying circumstances.
National Australia Bank v Sparrow Green Pty Ltd37 is a case involving the statutory
rule and shows that the statutory assumptions were still not effective to overcome an
absence of authority. In that case, one of the directors ‘retired’ from the business, but the
ASIC register was not altered. The remaining director assumed the role of managing
director, even though there was no formal appointment. The bank was precluded from
enforcing a contract signed by the purported managing director for several reasons, relat-
ing to both the absence of authority, and the absence of the availability of the statutory
assumptions, due to the knowledge exception applying.
Accordingly, the effect of actual authority and whether outsiders may rely on it
depends upon the scope of protection provided by the assumptions in ss 128–129, and is
analysed in chapter 6. As the statutory assumptions incorporate the concept of “custom-
ary authority”, this is defined below.
37 (1999) 17 ACLC 1,665.

Customary Authority
Where an officer or agent of the company exercises authority that is not customary for
someone in that position to normally have, the agent does not have implied actual author-
ity or apparent authority to bind the company. The customary authority of particular offi-
cers is relevant in considering the limits of both implied actual authority and apparent
authority.
Three matters affect the scope of customary authority of a company officer:
1. the size of the company;
2. the nature of its business; and
3. the position held in the company.
As for the first matter, the size of the company influences the size of the board. For
example, a director of a small or closely held company would be expected to have more
involvement in the company’s business. They would be expected to have a wider cus-
tomary authority than an officer of a large public company.39
As for the second matter, the nature of the company’s business also affects the
authority that would reasonably be expected, and reasonably required, of an officer man-
aging that type of enterprise. To this extent, whilst the company’s constitution does not
affect the company’s corporate power, it may limit indirectly the customary authority of
its officers. Ford Austin and Ramsay give the example of a director of a charitable com-
pany being more restricted that an officer occupying a similar position in a commercial
company. Charitable companies are required to have a constitution (s 150) requiring the
company to pursue charitable purposes only. The authority of its officers would have to
be restricted to be consistent with the company’s object.
As to the third matter, the position occupied affects the scope of what an officer is
entitled to do on behalf of the company. In this respect, it is convenient to look at the var-
ious positions and describe the customary authority.
Company director
While it is usual for the board as a whole or a managing director to be conferred with
very wide powers of management, it is not usual for an individual, ordinary director to
have such authority. In Northside Developments Pty Ltd v Registrar-General,40 Dawson
J considered the authority of an individual director:
“The position of director does not carry with it an ostensible authority to act on behalf of the com-
pany. Directors can act only collectively as a board and the function of an individual director is to
participate in decisions of the board. In the absence of some representation made by the company,
a director has no ostensible authority to bind it.”
It should be noted that while the customary authority of directors is limited, they may
still be able to bind the company if there has been a representation or holding out by the
company that greater than usual authority has been conferred.
38 Ford, Austin and Ramsay, supra n 5, [13.390].

39 Ibid.
40 (1990) 8 ACLC 611, 645.
Company secretary
A company secretary may in certain circumstances act as an agent of the company. The
implied actual authority or apparent authority of a company secretary extends to making
contracts on behalf of a company that relate to the administration or internal workings of
the company. In this respect, the customary authority of the company secretary has
expanded substantially over the past century. Lord Denning MR considered this question
in Panorama Developments (Gilford) Ltd v Fidelis Furnishing Fabrics Ltd.41 A compa-
ny secretary entered into a contract for the hire of cars for the purpose of carrying the
company’s major customers. The secretary then used the cars for his own purposes. The
car hirer sued the company on the basis that its secretary had apparent authority to enter
into that contract. Lord Denning stated:
“A company secretary is a much more important person nowadays than he [sic] was in 1887. He is
an officer of the company with extensive duties and responsibilities. This appears not only in the
modern Companies Acts, but also by the role that he plays in the day-to-day business of compa-
nies. He is no longer a mere clerk. He regularly makes representations on behalf of the company
and enters into contracts on its behalf that come within the day-to-day running of the company’s
business. So much so that he may be regarded as held out as having authority to do such things on
behalf of the company. He is certainly entitled to sign contracts connected with the administrative
side of a company’s affairs, such as employing staff, and ordering cars and so forth. All such mat-
ters now come within the ostensible authority of a company’s secretary.”
The role of the secretary clearly does not extend as far as that of the directors. It is
limited to matters of an administrative nature. Dawson J in the Northside case held that
the office of secretary did not carry with it any apparent authority to affix the company
seal and mortgage a company’s land nor to enter into “commercial transactions upon his
own decision which are not of an administrative kind required for the day-to-day running
of the company’s affairs.”42
Where an outsider deals with a secretary or individual director who is acting outside
the usual authority of an officer of the type concerned, the outsider loses the protection
that arises from reliance on apparent authority. From the outsider’s point of view this pre-
sents difficulties because it is rare for the outsider to deal directly with the board. Usually,
the outsider deals with someone whom it may reasonably be assumed has been delegat-
ed to act on behalf of the board. It may be difficult for the outsider to determine whether
the officer or agent is acting with actual or apparent authority and the extent of the
authority conferred by the board.
Managing director
An outsider dealing with a company will usually be in a stronger position if dealings
were conducted with a managing director. The constitution will usually empower the
board to appoint a managing director to exercise such of the board’s powers at it thinks
fit.43 A managing director has the customary authority to do almost all the things related
to management that the board is empowered to do. The usual role of a managing direc-
41 [1971] 2 QB 711, 716–7. The distinction between managerial and administrative acts was also referred to in Club
Flotilla (Pacific Palms) Ltd v Isherwood (1987) 5 ACLC 1,027.
42 (1990) 8 ACLC 611, 645.
43 See s 198C.
tor is “to deal with every day matters, to supervise the daily running of the company, to
supervise the other managers and indeed, generally, be in charge of the business of the
company.”44 This includes engaging persons to do work for the company45 and borrow-
ing money on the company’s behalf.46
The limits on the customary authority of a managing director are not entirely clear.
It does not extend to transactions that are outside ordinary trading transactions.47 In Re
Tummon Investments Pty Ltd48 a person was named in ASIC records as the principal exec-
utive officer and secretary of a company. That person borrowed funds on behalf of the
company but used the funds for his own purposes. At no time did the board of the com-
pany authorise the borrowing on behalf of the company. On the liquidation of the com-
pany, the lender lodged a proof of debt relating to the unsatisfied loans. It was held that
the principal executive officer did not have implied actual authority or apparent authori-
ty to enter into the loan transaction because it was not one that formed part of his admin-
istrative functions and was not entered into in the ordinary course of business. The com-
pany had not made a representation to the other party that the agent had authority to enter,
on behalf of the company, into the kind contract that was sought to be enforced.
The customary authority of a managing director probably does not extend to certain
far-reaching decisions such as purporting to sell the entire business of the company. For
example, in Re Qintex Ltd49 it was held that the office of managing director did not carry
with it the authority to make “critical” decisions after the filing of an application to wind
up the company. In applying Qintex, Lehane J in Nece Pty Ltd v Ritek Incorporation50 in
obiter commented that a managing director may have customary authority where it is
shown that the board consistently recognised the particular managing director’s repre-
sentation of the company in all matters to do with a particular debt and demand leading
to the winding up application.
The chair of the board
The extent of the customary authority possessed by a director elected as chair is also
unclear. In some cases, the courts have regarded the chair as having greater usual author-
ity than ordinary directors and more akin to the usual authority of a managing director.51
This approach was not adopted in Hely-Hutchinson v Brayhead Ltd52 where it was held
that a director elected as chair has the same customary authority as an ordinary director.
In most cases the apparent authority of a chairing director will depend on the conduct of
the company through its board, and in particular, the extent to which it allows the chair
to conduct business of the company. The extent of authority of the chair would then arise
independently of the occupation of the position. It would arise from the circumstances
surrounding the consent or acquiescence of the company to the conduct of the chair.
44 Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424, 427 (Ipp J).
45 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
46 British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176.
47 Corpers (No 664) Pty Ltd v NZI Securities Australia Ltd (1989) ASC 55–714.
48 (1993) 11 ACLC 1139.
49 (1990) 8 ACLC 811.
50 (1997) 15 ACLC 813, 815.
51 British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176; Clay Hill Brick Co v Rawlings
[1938] 4 All ER 100.
52 [1968] 1 QB 549.
Where an officer or agent of a company acts outside the customary authority of a per-
son occupying the particular position concerned, the company may still be liable if it has
held out that its officer or agent possesses greater authority than would be usual. This
holding out must have been made by someone who has actual authority to make such a
representation for the company. Where such a representation has been made, the outsider
may still enforce the contract even though the agent of the company was not validly
appointed or the agent acted outside the customary authority of a person occupying the
particular position concerned.
The Effect of Agency Principles on Enforcing Contracts

If an ‘agent’ without authority enters into a contract, then the principal is not bound,
unless it chooses to ratify the contract, otherwise, a contract entered into by an agent with
no authority is completely void.53
As Table 2.1 above shows, recent cases illustrate that, particularly when the outsider
has made an error in identifying company agents, the contracts are subject to the normal
principles of agency law. If the person purporting to bind the company is not even an
officer, then a finding of absence of authority is likely. There is no particular protection
provided for this type of error. The common law has assisted the outsider to some extent
by the recent trend of widening the concept of “actual authority” in the de facto manag-
ing director situations.
For the other error, that is, correctly identifying the company’s officers, but incor-
rectly attributing authority to transact, the Corporations Act renders some assistance. For
example, s 129(2) and s 129(3) allow an outsider to assume that the company’s officers
(identified from the public record, or from a holding out) are duly appointed and have the
implied authority of that position. Further, s 201M provides that acts of officers are not
invalid merely because of a defective appointment. Insofar as the outsider is dealing with
an officer, we have already mentioned that the constitution and replaceable rules confer
actual authority on officers.54 However, at common law, the content of the constitution
was of greater significance to outsiders due to the doctrine of constructive notice.
“Constructive notice” means that the outsider was deemed to have knowledge of the con-
stitution, which meant not only the grant of authority but also any express limitations on
authority.
The interaction of the common law indoor management rule with the principles of
agency is examined next in chapter 3, whilst chapter 4 considers the effect of exceptions
and limitations on the rule, including opposing doctrines such as constructive notice.
53 C Baxter, ‘Ultra Vires and Agency Untwined’ (1970) 28 Cambridge Law Journal 280.
54 For example, ss 198A and 198C.
Chapter 3
The Indoor Management Rule

at Common Law
The Rule in Turquand’s Case
Outsiders entering into transactions with companies have enjoyed limited protection ever
since the decision in Turquand’s case over 100 years ago. The rule provides that persons
dealing with a company and contracting in good faith may assume that “acts within its
constitution and powers have been properly and duly performed and are not bound to
inquire whether acts of internal management have been regular.”1
The application of this rule gives rise to an irrebuttable presumption that prevents the
company from avoiding a contract by relying on the fact that the proceedings were irreg-
ular and the person acting for the company was unauthorised to do so. This serves to pro-
tect persons “who are entitled to presume, just because they cannot know, that the per-
son with whom they deal has the authority which he claims”.2
At common law, the doctrine of constructive notice operated against outsiders deal-
ing with companies. However, this doctrine did not operate where the directors or other
agents of a company acted outside their authority but this was not apparent from the arti-
cles or other public documents of the company. The Rule in Turquand’s case states that
while persons dealing with a company are taken to have constructive notice of the con-
tents of the company’s public documents, they need not go further to ensure that the
internal proceedings of the company have been properly carried out. In fact, the outsider
can assume that these proceedings were properly carried out.
In Royal British Bank v Turquand,3 the deed of settlement, the equivalent of the mem-
orandum and articles of a company, empowered the board of directors to borrow amounts
as authorised by a resolution of the general meeting of the shareholders. The company
borrowed money from a bank on the authority of two of its directors who authenticated
the company’s common seal. There was no authority given by the general meeting. The
company refused to repay the loan and argued that the bank had constructive notice of
the articles and should have been aware of the lack of authority. It was held that an out-
sider need not inquire into whether such a resolution had in fact been passed. The com-
pany was bound to the bank because the passing of the resolution was a matter internal
to the company.
Jervis CJ said: “... the party here, on reading the deed of settlement, would find, not
a prohibition from borrowing, but a permission to do so on certain conditions. Finding
1 Halsbury’s Laws of England 4th ed 1988, Vol 7(1) para 980. This statement was approved by Lord Simonds in
Morris v Kanssen [1946] AC 459, 474.
2 Lord Simonds in Morris v Kanssen [1946] AC 459, 474.
3 (1856) 6 E&B 327; 119 ER 886.
The Indoor Management Rule at Common Law 19
that the authority might be made complete by a resolution, he would have a right to infer
the fact of a resolution authorising that which on the face of the document appeared to
be legitimately done.”4
The Rule in Turquand’s case grew naturally as a response to the development of the
doctrine of constructive notice. While outsiders had constructive notice of matters they
could discover for themselves from public documents such as the articles, they could not
reasonably be taken to have notice of matters concerning the indoor management of the
company. The rule is primarily one of procedural convenience for the outsider, who can-
not independently access the company’s minute books to corroborate procedural com-
pliance, and therefore should not be required to do so. Accordingly, the company itself
cannot rely upon the rule: Hughes v NM Superannuation Pty Ltd.5
The types of procedural matters the rule applies to include the conduct of meetings
of the company and the affixation of the common seal. For example, a quorum may not
have been present, inadequate notice may have been given or a voting irregularity may
have occurred. The rule also operates in situations where the common seal is not affixed
in accordance with the constitution or the board is not properly constituted. In these
cases, an outsider can generally hold the company liable, although protection is subject
to exceptions.
The rule has been criticised because of uncertainty that has arisen from a large body
of case law. Professor Gower observed: “Unhappily its obscurity increases in direct pro-
portion to the literature upon it, and only its undoubted practical importance makes it
essential to devote some space to it even at the risk of further obfuscation.”6 Gower com-
mented that the history of the development of the rule saw an increase in the limitations
to which the rule was subject. These limitations have become so extensive that the object
of the rule has been obscured.
“The result is that the law has become a jungle of irreconcilable decisions to the benefit of no one
save the legal profession. If this branch of the law is ever codified the draftsman will be well
advised to ignore all case-law of the present century and to go back to first principles and the judge-
ments of the founding fathers of our modern company law. Unhappily a textbook writer has to try
to state the law as he finds it and not as it ought to be.”
The provisos and exceptions that defined the limits to the outsider’s protection are
listed below.
1. The outsider must act in good faith.
2. The outsider must not have actual knowledge to the contrary.7
3. The outsider “cannot presume in his own favour that things are rightly done if
inquiry that he ought to make would tell him that they were wrongly done.”8
4. The outsider cannot assume matters that are inconsistent with public documents,
as the doctrine of constructive notice presumes all outsiders have notice of the
4 (1856) E&B 327, 332.

5 (1993) 11 ACLC 923.
6 L C B Gower, Modern Company Law (2nd ed, 1957) 141. These comments do not appear in the current edition of
this work because statutory reforms in England have largely replaced the common law principles in much the same
way as occurred in Australia leaving only a “few ghostly relics...to haunt us”. (5th ed, 1992) 198.
7 Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156.
8 Morris v Kanssen [1946] AC 459, 475 (Lord Simmonds).
contents of the public documents. (Referred to as the “doctrine of constructive

notice”).9
5. The rule does not apply where the corporate signature is forged. (Referred to as
the “forgery exception”).10
These provisos and exceptions to the common law rule are discussed in detail in later
chapters. This chapter continues by examining the more recent application of the com-
mon law rule in Australia, in Northside Developments Pty Ltd v Registrar-General,11
where the High Court considered the operation of the Rule in Turquand’s case.
The Northside case

The judgment and its significance
The High Court’s decision in Northside represents in Australia the most authoritative
Australian judicial analysis of the common law formulation of the indoor management
rule. The case involved the disputed execution of a third party mortgage document.
Sturgess, a director and shareholder of Northside affixed the common seal of Northside
to a mortgage document that secured a loan from Barclays to a company controlled by
Sturgess. The mortgage was over land owned by Northside and was its only major asset.
The common seal was affixed and signed by Sturgess as director and by his son who pur-
ported to sign as the company secretary. The son had not been appointed under the arti-
cles although a statutory return filed with the Commission named him as the company
secretary. The other two directors, who were also the remaining shareholders, did not
know of or authorise the execution of the mortgage, nor did they know of the purported
appointment of secretary. They had no interest in the borrowing company and Northside
derived no benefit from the transactions.
The transaction only came to the other officers’ notice after Barclays exercised its
power of sale under the mortgage. Hence the involvement of the New South Wales
Registrar of Titles, as there were also statutory issues to resolve under the regularity and
compensation provisions of the Real Property Act 1900 (NSW). This aspect of the case
is not substantially pursued. The crux of the dispute was to examine the legal regularity
of the contract and its execution.
The High Court considered the validity of the mortgage. This depended upon
whether it had been executed by Northside. The case was decided under the common law
rules because the mortgage was purportedly executed in 1979 prior to the 1983 amend-
ments that inserted the statutory rule into the legislation. The High Court held that
Northside was not bound by the mortgage because the affixing of the common seal was
invalid. Although the Rule in Turquand’s case enabled Barclays to assume that the com-
mon seal was properly affixed and the internal proceedings of the company had been
properly carried out in accordance with its memorandum and articles, the circumstances
9 Ernest v Nicholls (1857) 6 HL Cas 401. For the history of the interaction between constructive notice and the indoor
management rule, see I Campbell, ‘Contracts with Companies’ (1960) 76 Law Quarterly Review 115, 120 and K E
Lindgren, ‘History of the Rule in Royal British Bank v Turquand’ (1975) 2 Monash University Law Review 13,
34–35.
10 Ruben v Great Fingall Consolidated [1906] AC 439.
11 (1990) 8 ACLC 611.
of the case should have put Barclays upon inquiry. Because Barclays failed to make fur-
ther inquiries as to whether the common seal was properly affixed, it was unable to rely
on the Rule in Turquand’s case and Northside was not bound by the mortgage.
The circumstances that put Barclays upon inquiry were that the mortgage secured
Northside’s major asset where the transactions were outside its usual business and not for
its benefit. Barclays was prevented from relying on the Rule in Turquand’s case because
it ought to have suspected an irregularity. Although Barclays did not have to have actu-
al knowledge of the lack of authority of Sturgess and his son to affix the company seal,
it had constructive knowledge. These various attributes of knowledge are examined in
more detail when examining the ambit of the rule’s exceptions in chapter 4.
All five justices comprising the High Court agreed with this result. However, each
judge delivered a separate judgment, with detailed analysis as to the basis and operation
of the indoor management rule. A brief summary of the High Court’s analysis is useful
to rationalise the scope of the indoor management rule.
The High Court’s contribution to the development of the common law rule may be
summarised according to four main points:
1. articulation of the theoretical justification for the rule, including its interaction
with principles of agency;
2. discussion of the interaction between the rule, and the constraints imposed on
companies to comply with their mandatory constitutions (i.e the doctrine of ultra
vires, which rendered void contracts beyond the scope of the company’s stated
objects or powers);
3. confirmation that the rules relating to contracts void for forgery involve separate
principles and not part of the rule itself; and
4. clarification of the various aspects of the knowledge exceptions to the rule.
The first two points are discussed below, whilst the knowledge and forgery excep-
tions are discussed in later chapters.
The basis of the indoor management rule
We discussed earlier that the rule balances between the company’s obligation to comply
with its mandatory rules, and the outsider’s inability to check the extent of that compli-
ance. Either the outsiders must incur the search costs to resolve these issues for each
transaction; or, take a commercial risk on each transaction; or expect the law to provide
some resolution between these two extremes.12 Mason CJ in Northside articulated this
balancing exercise, by stating the policy behind the Rule in Turquand’s case in this way:
“What is important is that the principle and the criterion which the rule in Turquand’s case presents
for application give sufficient protection to innocent lenders and other persons dealing with com-
panies, thereby promoting business convenience and leading to just outcomes. The precise formu-
lation and application of that rule calls for a fine balance between competing interests. On the one
12 A comprehensive analysis of the concepts of “risk” and “cost” associated with corporate transactions is provided by
M Whincop, ‘Nexuses of Contracts, the Authority of Corporate Agents and Doctrinal Indeterminacy: From
Formalism To Law and Economics’ (1997) 20 University of New South Wales Law Journal 274. Whincop uses game
theory to describe the costs incurred by both parties to the corporate contract, linking costs to the degree of incom-
plete information. There is a high degree of incomplete information for the external party as to whether the person
they are dealing with has authority of the company to act or not. Whincop argues that the cost allocation solution is
not a simple one, but that the legal rules should attempt to minimise the joint costs of unauthorised transactions.
hand, the rule has been developed to protect and promote business convenience which would be at
hazard if persons dealing with companies were under the necessity of investigating their internal
proceedings in order to satisfy themselves about the actual authority of officers and the validity of
instruments. On the other hand, an over-extensive application of the rule may facilitate the com-
mission of fraud and unjustly favour those who deal with companies at the expense of innocent
creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act
on behalf of companies.”13
Although the reason for the rule is relatively clear, its theoretical foundation is sub-
ject to some debate. The High Court’s judgment typifies this diverse approach. The basic
distinction in approaches in whether the rule is an “organic” manifestation of the corpo-
rate structure and separate legal entity principle, or is simply an application of estab-
lished legal rules, such as agency or estoppel. This debate is briefly described below. The
significance of this debate has ongoing relevance, particularly regarding the interpreta-
tion of statutory reform subsequent to Northside’s case. The statutory provisions are
analysed in later chapters.
The rule and agency principles
The general principles of agency law in their application to companies operate in con-
junction with the Rule in Turquand’s case. The rule facilitates the outsider’s ability to
presume that the company has consented to the transaction, and, particularly where a
company enters into a contract directly itself, that the officers who acted for the compa-
ny were properly authorised to do so. This is particularly relevant where the common seal
of the company was affixed by persons purporting to act as directors or secretary with
authority to affix the company seal. We highlighted above the obscurity surrounding the
Rule in Turquand’s case, which has resulted in significant differences of opinion in
attempts to express the basis of the rule and its inter-relationship with agency principles.
In the Northside case the High Court judges analysed the relation between the Rule
in Turquand’s case and the general agency principles in different terms. However, a
major point of agreement in the five judgments was that the indoor management rule
does not create authority; it merely entitles the outsider, in the absence of anything
putting them on inquiry, to assume procedural regularity in the transaction.14
The first of the three positions, which closely aligns the rule and agency principles,
was represented by Dawson and Toohey JJ.15 Dawson J considered that the rule depends
on the operation of agency law. The person who purports to act on behalf of the compa-
ny must act within his or her actual or apparent authority.
Toohey J stated that the rule originally evolved in relation to irregularities in the
internal management of companies, such as failure to hold proper meetings or pass reg-
ular resolutions. The issues that arise where officers of a company act without authority
are resolved by application of agency rules rather than indoor management rule in the
strict sense. While the rule protects outsiders where there is an irregularity, it does not
extend to confer authority on an officer where that authority does not otherwise exist.
This is apparent from the Freeman and Lockyer16 and Crabtree-Vickers17cases.
13 (1990) 8 ACLC 611, 621-2 (Mason CJ).
14 (1990) 8 ACLC 611, 626, 641 (Dawson J); 646 (Toohey J).
15 (1990) 8 ACLC 611, 626 (Brennan J), 641(Dawson J).
16 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
17 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1976) 50 ALJR 203.
Brennan and Gaudron JJ represented the second approach, relying on estoppel.

Brennan J considered that the rule comes within the framework of apparent authority
which itself is based upon estoppel. The company is prevented from denying the repre-
sentation of authority that it has made. There is no material distinction between acts of
natural persons in affixing the common seal (which are acts of the company itself) or acts
of an agent of the company. For example, the principles of apparent authority established
in Freeman and Lockyer and Crabtree-Vickers cases will resolve issues of the identity of
purported officers, not the Rule in Turquand’s case. Gaudron J thought that the princi-
ples of apparent authority represent an example of estoppel. The Rule in Turquand’s case
is also based on principles that provide the foundation of estoppel.
Mason CJ took the third approach, distinguishing between contracts entered into
directly by the company under its common seal, and those entered into by agents. As a
company could contract directly, categorising the rule as merely grounded in agency was
an insufficient explanation for the reliance placed upon the use of the seal and the pro-
tection afforded to outsiders in the case of a sealed document. Mason CJ held that the
“principle applicable to instruments executed under the common seal of a company is an
organic principle of company law”.18
The ‘organic’ theory of the rule and estoppel
1. The organic theory
The organic theory is an extension of agency rules, recognising that a company may
manifest its consent to be bound as a separate and distinct entity. It attributes certain acts
to be the acts of the company itself. In this way, a distinction is drawn between the acts
of an agent that are binding on a company as a principal and acts which are directly those
of the company. The affixing of the company seal has historically been regarded as a
direct act of the company, generally through its board of directors and is analogous to the
signature of a natural person.19 This theory also finds expression in relation to a compa-
ny’s liability in tort, criminal liability and the division of powers between the board and
general meeting of members.
A company will only be bound by its own act where the persons acting as the com-
pany do so within their actual or apparent authority. The organic theory merely extends
the scope of the capacity of an agent to bind the company directly. It does not enable a
person who acts without authority to bind the company. This includes the situation where
the company seal is affixed. Effectively, the organic principle recognises two separate
issues: the officers’ authority to exercise corporate power, and the officers’ authority to
provide the company’s assent in the proper form. This distinction has been identified as
the difference between “substantive authority” and “formal authority”,20 where:
18 (1990) 8 ACLC 611, 620.

19 See K E Lindgren, ‘The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in Turquand’s Case’
(1973) 9 Melbourne University Law Review 192; K E Lindgren, ‘The Negative Corporate Seal Rule and Exceptions
Thereto’ (1974) 9 Melbourne University Law Review 411. Professor Lindgren discusses the nature of the common
seal and describes how it represents the true expression of the company’s assent that operates independently of the
exercise of the power.
20 I Ramsay, G Stapledon and K Fong, ‘Affixing of the Company Seal and the Effect of the Statutory Assumption in
the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38, 39.
1. “substantive authority” is the existence and scope of the officers’ authority to

enter into the contract; and
2. “formal authority” is the officers’ authority to signify, in the proper form, the
company’s assent.
2. The estoppel approach
Campbell suggests that the principle of estoppel is not an adequate explanation of the
rule.21 While a company may make a representation by means of its articles, if the arti-
cles state that the authority of an agent is subject to a condition, this does not constitute
a representation that the condition has been fulfilled. Therefore, if the articles empower
the board to delegate some or all of its functions, the company does not thereby repre-
sent that a delegation was in fact made.
Campbell was of the view that the Rule in Turquand’s case goes far beyond the prin-
ciple of estoppel as its effect is to hold a company bound by a contract even in the
absence of actual or apparent authority. This view is at odds with that expressed by
Brennan and Gaudron JJ in the Northside case. Campbell does not cite any examples of
where a company was bound by a contract where an agent lacked actual and apparent
authority.
Although the High Court judges in the Northside case adopted different approaches,
they all suggested that in agency situations, the rule did not apply in the absence of
authority. This view has been adopted by the statutory assumptions, particularly s 129(2)
and (3), which rely on agency principles.
Whilst Campbell acknowledges an alternative theory as the basis of the rule, he also
rejects it as inadequate. This theory is expressed by the maxim omnia praesumuntur rite
esse acta –“the presumption that things are in order.”22 This is a rule of evidence which
is rebuttable and shifts the burden of proof. Campbell rejects this theory as the basis of
the Rule in Turquand’s case because the rule gives rise to an irrebuttable presumption.
The company is prevented from giving evidence to show that a transaction was in fact
irregular or unauthorised.23
The authors of Ford’s Principles of Corporations Law24 suggest another theoretical
basis behind the Rule in Turquand’s case which they consider to be the best supported by
weight of authority. This is referred to as the “closed door rationale” for the rule, which
is designed to allow outsiders to make protective assumptions just because they cannot
know that the person with whom they deal has the authority which they claim.25
In the context of a transaction entered into by a company and a bank, Kirby P of the
New South Wales Court of Appeal in Registrar-General v Northside Developments Pty
Ltd26 expressed reservations on this justification of the rule. Outsiders such as banks are
generally in a very strong commercial position to insist on detailed scrutiny of the inter-
nal workings of a company.
21 Campbell (1960), supra n 9, 115. See also A Thompson, ‘Company Law Doctrines and Authority to Contract’ (1956)
11 Univ of Toronto LJ 248, 254.
22 Lord Simonds referred to this maxim in Morris v Kanssen [1946] AC 459, 474.
23 Campbell (1960), supra n 9, 116.
25 See Morris v Kanssen [1946] AC 459, 475 (Lord Simonds).
26 (1989) 7 ACLC 52.
The Significance of the Northside Case

It will be unlikely to find the opportunity for any future judicial contribution on the the-
oretical basis of the common law rule, given statutory reform has been in place since
1984. Northside represents the most authoritative source, although the judgments leave
a legacy of divergent views.
Brennan J, by insisting that the basis of the rule is estoppel, emphasises the relevance
of the awareness and conduct of the outsider in raising the estoppel. The discussion by
Dawson J contributes and assists the development of the rule and its relation to agency.
The judgment of Mason CJ, insofar as His Honour proposes an “organic principle of
company law” regarding the company seal, continues to provoke commentary.27
In any event, Northside still stands for the proposition that the rule is a simple one of
procedural regularity. The differences in theoretical approach serve to highlight different
uncertainties in the boundaries in the application of the rule. For example, the agency
approach emphasises the role of authority as a pre-condition to accessing the rule, where-
as the estoppel approach emphasises the role of the authority principles in alerting the
outsider to the limitations in reliance. The organic view of the corporate seal focuses on
one aspect of the corporate transaction, the significance of the sealed document. None of
the theoretical approaches alter the residual concerns of the outsider as to the scope of
protection afforded to corporate dealings. Campbell acknowledged that:
“The rule is, indeed, unique, having affinities in other legal principles, but having no precise anal-
ogy in the law applicable to transactions between natural persons.”28
The next chapter looks at the development of the exceptions and qualifications to the
common law rule. In the following chapters, we examine the contribution of the statuto-
ry reforms to the operation of the rule.
27 R Grantham, ‘Attributing Responsibility to Corporate Entities: A Doctrinal Approach’ (2001) 19 Company and
Securities Law Journal 168; Ramsay, Stapledon and Fong, supra n 20.
28 Campbell (1960), supra n 9, 116.
Chapter 4
Exceptions to the Rule in Turquand’s Case

Introduction
As we foreshadowed in chapter 1, the Rule in Turquand’s case did not extend to protect
outsiders in all circumstances, such that the scope of the exceptions under the current
statutory version of the rule continues to be a controversial issue. The common law rule
did not apply where the outsider did not act innocently or reasonably in the light of the
circumstances. The common law principles withheld protection to the outsider where
certain exceptions arose. The circumstances excluding the rule may be distinguished as
exceptions relating directly from the rule’s development, and impediments to the rule’s
operation sourced from conflicting common law doctrine.
In the first category, the full exposition of the rule and its exceptions was proposed
by the House of Lords in 1946 in Morris v Kanssen1 as:
“persons dealing with a company in good faith may assume that acts within its constitution and
powers have been properly and duly performed and are not bound to inquire whether acts of inter-
nal management have been regular.2
This emphasises that the rule is primarily one of procedural convenience: the outsider
cannot independently access the company’s minute books to corroborate procedural
compliance, and therefore should not be required to do so. However, Lord Simmonds
qualified the rule by stating that:
“It is a rule designed for the protection of those who are entitled to assume, just because they can-
not know, that the person with whom they deal has the authority which he claims. This is clearly
shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, that is, if
he who would invoke it is put upon his inquiry. cannot presume in his own favour that things are
rightly done if inquiry that he ought to make would tell him that they were wrongly done.” 3
This leads to two major propositions precluding reliance on the rule:

1. The precondition or supposition of the Rule in Turquand’s case is that outsiders
accessing the rule were acting in “good faith”; and
2. That the degree of knowledge, from subjective (actual) knowledge, objective
(reasonably expected to know) to presumed (constructive notice) affects the
availability of the assumptions as to internal regularity.
In addition, it is recognised that the application of the rule in cases since Turquand
has had a varied and not entirely consistent history. This is attributed to the intersection
of other related doctrines that override a rule of mere procedural convenience. For exam-
ple, the scope of protection of the common law was eroded by:
1 [1946] AC 459.
2 Lord Simonds in Morris v Kanssen [1946] AC 459, 474 , citing Halsbury’s Laws of England (2nd ed, 1942) vol v,
423 and approved by Brennan J in Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 626
referring to Halsbury’s (4th ed, 1988), vol. 7(1), [980].
Exceptions to the Rule in Turquand’s Case 27
1. The operation of the rule against forgery, that rendered any contract tainted by
forgery void, despite the Rule in Turquand’s case; and
2. The operation of the doctrine of ultra vires, that rendered any contract beyond
the company’s mandatory constitution void, despite the rule.
In both of these instances, the rule was not effective, as forgeries or ultra vires trans-
actions were rendered void due to an absence of corporate capacity or consent. Corporate
capacity was not a matter of mere procedural convenience that could be assumed. These
doctrines are explained below, to describe the fetters on the common law rule. Their
effect due to statutory reform is analysed in chapter 5 and the rule as to forgeries is
specifically examined in chapter 7.
This chapter summarises the direct exceptions to the common law rule. The interac-
tion of the other provisos is dealt with in subsequent chapters. The structure of this dis-
cussion is presented in Figure 4.1 below. This exercise is necessary to analyse and inter-
pret the scope of statutory reform that occupies the later chapters.
Figure 4.1 The common law rule and its provisos

COMMON LAW
Rule in Turquand
THE RECENT
COMMON LAW
in Australia
The rule and

its provisos
Direct exceptions Other common law

to the rule affecting the rule
Good faith as a Knowledge Ultra vires & Forgery &

condition precedent exceptions void contracts void contracts
Actual Ch 5 Ch 7
knowledge
Imputed
knowledge
The position
of insiders
Due inquiry
Constructive
notice
Meaning of Materiality of “actual Distinguishing

“public knowledge” of public procedural constraint
documents from delegation
Good Faith
Although “good faith” is mentioned by the House of Lords in Morris v Kanssen4 in con-
nection with the indoor management rule, it does not appear to be considered, or applied,
as a separate substantive element. Early literature on the indoor management rule’s evo-
lution does not elaborate upon good faith.5 Good faith commonly invokes standards of
fairness, loyalty and cooperation.6 As an example in company law, creditors against
whom a voidable preference action has been taken may rely on ‘good faith’ as a defence.7
Where good faith is typically applied, it has dual requirement of acting honestly (sub-
jectively) as well as reasonably (objectively). As the indoor management rule has devel-
oped in Australia, good faith more manifests itself in the degrees of knowledge that pre-
clude reliance on the assumptions, rather than as a precondition. This is certainly evident
from the statutory version, which makes no reference to “good faith” as an element of
reliance, although the legislature refers to the adoption of the common law rule and
“good faith” in dealings.8
Lord Alverstone CJ alluded to the connection between any “requirement” of good
faith and the common law rule in Duck v Tower Galvanizing Co,9 stating:
“it has always been held that it is not incumbent on the holder of such a document purporting to be
issued by a company to inquire whether those persons pretending to sign as directors have been
duly appointed … so that there has been ample authority to show that no informality will alter
rights possessed by a bona fide holder for value upon a document that purports to be in order.”
The connection with the good faith element relies on the recognition that the com-
mon law rule is subject to the remedies in equity for the principal to avoid the contract
where the agent has breached their authority, subject to the rights of the bona fide pur-
chaser. The adoption of “good faith” is not really a separate element of the rule, but a
gloss that recognises the other claims under the contract to which the outsider may
become subject, for example, the equitable defence of the bona fide purchaser for value
without notice.
The Knowledge Exceptions

The types of knowledge
A person who has actual knowledge of an irregularity cannot rely on the Rule in
Turquand’s case.10 “Actual knowledge” refers to subjective knowledge and also may be
inferred where the outsider wilfully turns a blind eye. An outsider is also unable to gain
the protection of the rule where they ought to make inquiry. One way of distinguishing
4 [1946] AC 459.
5 For example, I Campbell, ‘Contracts With Companies’ (1960) 76 Law Quarterly Review 115; K E Lindgren,
‘History of the Rule in Royal British Bank v Turquand’ (1975) 2 Monash University Law Review 13.
6 J M Paterson, ‘Limits on a Lender’s Right to Repayment on Demand: Construction, Implication and Good Faith?’
(1998) 26 Australian Business Law Review 258, 261.
7 Section 588FG.
8 Explanatory Memorandum, Corporations Bill 1988, [568]. This is discussed further under the statutory rule, in chap-
ter 5.
9 [1901] 2 KB 314, 318.
10 Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156. See also H A J Ford, R P Austin and I M Ramsay,
Ford’s Principles of Corporations Law (10th ed, 2001) [13.190], who assert actual knowledge refers to subjective
knowledge, or an inference that can be drawn that the person knew, such as where eyes are wilfully shut.
between the actual knowledge and the inquiry exceptions is to categorise the latter as a
type of constructive knowledge. The distinction, however, is not clear cut. For example,
the failure to make inquiries may be due to recklessness or wilful blindness. This may be
captured as actual knowledge, rather than constructive knowledge. The effect of a per-
son being put on inquiry here is that a failure to make reasonable inquiries results in the
inference of actual knowledge. Lord Esher MR expressed this inferred actual knowledge
in English and Scottish Mercantile Investment Co Ltd v Brunton:11
“When a man has statements made to him, or has knowledge of facts, which do not expressly tell
him of something which is against him, and he abstains from making further inquiry because he
knows what the result would be – or, as the phrase is, he ‘wilfully shuts his eyes’ – then judges are
in the habit of telling juries that they may infer that he did know what was against him. It is an infer-
ence of fact drawn because you cannot look into a man’s mind, but you can infer from his conduct
whether he is speaking truly or not when he says that he did not know of particular facts.”
“Constructive knowledge” picks up a wider spectrum of “knowledge” and requires,

as its threshold, the outsider knowing of certain facts that prompt the obligation to
inquire further. The point at which the prompt cuts in divides the definition of “actual”
from “constructive” knowledge. A useful way to describe this intersection is the cut off
between subjective knowledge and objective knowledge. Objectivity is based on a rea-
sonableness test. The definition of constructive knowledge resolves the point of inter-
section: if the outsider knows certain facts, when is it is reasonable to expect them to
make inquiries?
This vague distinction of actual from constructive knowledge is all that may be
retrieved from the common law cases on the rule. However, this distinction has been the
subject of more detailed discussion in the case law dealing with constructive trusts, than
in the company law cases. Constructive trust liability imposed on an outsider depends on
the degree of knowledge of the outsider in participating in another’s breach of duty or
breach of trust. In the constructive trust cases, knowledge is described according to a five
point scale, from actual to constructive.
When discussing the knowledge requirement, the usual starting point is to note the
contribution by Peter Gibson J in the English Baden case,12 in identifying five categories
of “knowledge”:
(i) actual knowledge;
(ii) a wilful shutting of one’s eyes to the obvious;
(iii) a wilful and reckless failure to make inquiries that an honest or reasonable
person would have made;
(iv) knowledge of circumstances which would have indicated the facts to an hon-
est and reasonable person; and
(v) knowledge of circumstances which would have put an honest and reasonable
person on inquiry.
Category (v) knowledge is most controversial, because it imports an objective stan-
dard similar to negligence, which has a profound effect on the company’s liability to out-
siders. If category (v) triggers the rule’s knowledge exception, then it places an active
11 [1892] 2 QB 700, 707–8.
12 Baden, Delvaux and Lecuit v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en
France SA [1983] BCLC 325.
duty on outsiders to enquire into the possibility of internal non-compliance in entering

into the corporate transaction. This approaches the undesirable effect rendering the
indoor management rule’s protection less effective.
Examples of actual knowledge and due inquiry are examined below.
Actual knowledge: the insider exception
A major rationale behind the Rule in Turquand’s case is that it protects outsiders who
have no means of knowing whether the internal proceedings of a company have been
properly carried out. This prevents an insider such as a director from gaining the protec-
tion of the rule. In Morris v Kanssen13 a director was denied the protection of the rule
where shares were issued to the director at a board meeting that he attended.
Where a director purports to act on behalf of a company in a self-interested transac-
tion, it is generally unreasonable for the director to gain the protection of the rule by
claiming a lack of knowledge of an irregularity. A director is presumed to be under a duty
to know the correct procedures.
In unusual circumstances a director may seek the protection of the rule where the
director did not act for the company in relation to the transaction in which he or she was
involved as the other party: Hely-Hutchinson v Brayhead Ltd.14 In such a case, the direc-
tor may be considered as an outsider for the purposes of the rule. An insider may also
include controlling shareholders and perhaps employees and professional advisers. Such
a person who has a “connection or relationship” with the company may be put on inquiry
or be deemed to have actual knowledge in cases where strict actual knowledge cannot be
shown. This appears to have been picked up by the statutory exceptions to the rule, dis-
cussed in chapter 8.
Constructive knowledge and due inquiry
In Northside Developments Pty Ltd v Registrar-General15 all five judges of the High
Court held that a bank was put on inquiry where it sought to enforce a mortgage against
a company. It was put on inquiry as to the authority of the persons who affixed the com-
pany seal to the mortgage document. This was because of the nature of the transaction,
which was of no benefit to the company and appeared unrelated to its business. The mort-
gage secured debts of companies controlled by the person who signed as director but
these companies had no association with Northside, against which the bank sought to
enforce the mortgage. The inquiry exception was triggered because the bank took no
steps to establish that the company’s officers had authority to affix the company seal.
The more specific features of the circumstances giving rise to due inquiry (although
not conclusive), were set out by Mason CJ16 as:
• the powers of the company (if relevant);
• the nature of the company’s business;
• a reasonable apprehension that the transaction is entered into for purposes unre-
lated to the company’s business;
13 [1946] AC 459.
14 [1968] 1 QB 549.
15 (1990) 8 ACLC 611.
16 (1990) 8 ACLC 611, 619–622.
• reliance on the purported actual or apparent authority of those acting or purport-

ing to act on behalf of the company;
• any representations made to the outsider by those acting or purporting to act on
behalf of the company;
• the existence or otherwise of any prior connection or association between the
outsider and the company;
• whether the outsider conducted any search of the public record.
The Northside case represents what may be considered a “high water” mark for due
inquiry, involving a fairly rigorous degree of reasonable conduct imposed on the lender.
The Northside decision is the final chapter on the common law knowledge excep-
tions, although there was pre-existing Australian case law to reconcile with its findings.
Previous Australian authorities involving the due inquiry exception to the rule include:
• Re Efron’s Tie & Knitting Mills Pty Ltd,17
• Re Hapytoz Pty Ltd,18
• Re Scottish Loan Finance Co Ltd,19
• Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd,20 and
• Custom Credit Holdings Ltd v Creighton Investments Pty Ltd.21
As Efron’s Tie, Scottish Loan and Hapytoz involved third party securities, it is par-
ticularly useful to examine whether they are consistent with Northside.
In Efron’s Tie, the rule was unavailable to a creditor who was seeking to enforce a
third party guarantee. Cussen ACJ, foreshadowing Mason CJ in Northside, held that as
the guarantee was provided to secure the director’s personal liability, the bank had con-
structive knowledge that the guarantee was not in the interests of the company and was
bound to inquire into the circumstances of its execution. The guarantee was signed under
common seal.
Hapytoz and Scottish Loan involved a different form of execution of the written con-
tract, as the guarantees were signed under the personal signature of the respective man-
aging directors. In Hapytoz, the third party guarantee was provided to secure the debts of
another company, and as there were no circumstances to put the creditor on inquiry, the
rule applied. The managing director signed the guarantee. Although not cited, Hapytoz is
similar in facts and outcome in Scottish Loan.22
The different forms of execution mean that the relevant assumptions under the rule
to be made by the creditor are different. In Hapytoz and Scottish Loan, the managing
director signed the respective guarantees, so the creditor could assume that the manag-
ing director had authority to sign. The potential conflict between the corporate security
providers and the third party debtor was not was not obvious enough to provoke inquiry,
as in neither case was the signatory to the guarantee the principal debtor (unlike Efron’s
Tie). Even in Hapytoz, the guarantor company shared common directors and common
shareholders to the debtor company.
17 [1932] VLR 8.
18 [1937] VR 40.
19 (1944) 44 SR(NSW) 461.
20 (1973) 131 CLR 60.
21 (1985) 3 ACLC 248.
22 In Scottish Loan, a guarantee was signed purportedly by the managing director Levitus, in favour of the
Commissioner of Taxation, in respect of another party’s (Forbes’) tax debt.
This is the point of distinction between the personal signature cases with the com-
mon seal cases that is not necessarily highlighted by Northside (a seal case). As the result
in Northside shows, where the seal is affixed, the creditor has stronger evidence from the
face of the document whether there is a conflict by a principal debtor committing corpo-
rate assets to a third party guarantee in their favour. For example, in Northside, the lender
failed to distinguish between Sturgess’ personal interests and his other corporate inter-
ests. Although the method of execution seems to be a compelling point of distinction
between the creditors’ constructive knowledge in these cases, caution must be exercised
in extrapolating this to more modern cases. Brennan J in Northside commented that “had
it been found that the creditor [in Hapytoz] was put on inquiry, that result would not have
been surprising.”23
It may not only be the manner of execution that provides objective facts from which
an outsider may need to inquire further. In Custom Credit Holdings Ltd v Creighton
Investments Pty Ltd,24 the financier was told by one director that the company’s solicitor
had doubts as to the validity of the execution of the documents. Having this fact revealed
gave rise to the reasonable obligation on the financier to inquire further.
Accordingly, the common law exception of due inquiry arises when either:
• the person dealing with the company has a particular relationship with the com-
pany and is in a position to know about the company’s internal management
(regardless of their actual knowledge);25
• the actual knowledge (by subjective knowledge or reckless indifference) pos-
sessed by the outsider would lead a reasonable person to doubt the efficacy of
the assumption.26
The matters of knowledge that trigger the doubt include:
1. the circumstances of the company.27
2. The nature of the transaction itself. As alluded to by Mason CJ in Northside: “A
person, even one who has no special relationship with the company concerned,
may be put upon inquiry by the very nature of the transaction...”.28 Further, in
Northside Developments Pty Ltd v Registrar-General at first instance, Young J
distinguished between conveyancing transactions and ordinary commercial trans-
actions in holding that “in a conveyancing transaction, especially one involving a
large amount of money or very valuable land, a court would very easily come to
the conclusion that a reasonable person, acting in such a transaction, would make
inquiries.”29 This refers to the standard beyond constructive knowledge into con-
structive notice.
3. The identity of its officers.30
23 (1990) 8 ACLC 611, 633.
24 (1985) 3 ACLC 248.
25 Morris v Kanssen [1946] AC 459.
26 Custom Credit Holdings Ltd v Creighton Investments Pty Ltd (1985) 3 ACLC 248.
27 The word “circumstances” captures all the indicia from Mason CJ’s judgment in Northside, above.
28 (1990) 8 ACLC 611, 617.
29 (1987) 5 ACLC 642, 649. The abolition of constructive notice is discussed in the next chapter.
30 Although not a common law case, Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 followed Northside.
As the identity of officers is a matter of public record, a reasonable and prudent lender would, as a matter of routine,
obtain this information: per Priestley JA in Fiberi. Referring to the cases decided under the statutory rule (discussed
in chapters 5–8), there is a consistent correlation between failure to search and rely on the public record and the
unsuccessful lender.
4. The conflicting interests of those officers.31

5. The assets being offered as third party security are trust assets. The significance
of the borrower/security provider being a trustee did not arise from Northside or
any previous common law cases. This factor is added as a result of developments
since Northside. Based on the result in Sixty-Fourth Throne Pty Ltd v Macquarie
Bank Ltd32 and Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd,33 the
outsider would always need to inquire about the trust deed to ensure that a third
party security is permitted.34
Imputed knowledge
Both actual and constructive knowledge requires evidence of some accumulation of facts
by the outsider. A practical issue that affects corporate or institutional outsiders is the
question of the acquisition of knowledge. To be more precise, where the outsider is a cor-
poration, how does the court ascertain a corporation’s knowledge? The issue of imputed
knowledge has arisen in the more recent cases on the statutory rule, although it relies on
underlying common law authorities.
In a commercial transaction, there are several layers of responsibility within the insti-
tution to bring the contract to fruition. A typical chain of command, as represented by the
recent cases Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd35 and Sixty-Fourth
Throne Pty Ltd v Macquarie Bank Ltd,36 involves the bank’s officers dealing face to face
with the company’s officers, and those officers in either case may be different from the
actual decision makers in the corporation. The knowledge of the bank officer with
responsibility for the account is imputed to the bank.37 The bank also engages profes-
sional legal and valuation services. The chain of command is such that the bank accu-
mulates disparate pieces of information about the transaction and the parties to it.
Essentially, it is a question of fact for the court to ascertain the nature and effect of the
accumulation of knowledge. In Koorootang Nominees Pty Ltd v ANZ Banking Group
Ltd,38 counsel for the bank argued that the communication breakdown evident from the
bank records and witness’ recollections amounted to honest confusion, not knowledge
about the transaction. Hansen J confirmed that a company has the knowledge of its offi-
cers. His Honour extended this to the situation of a solicitor who has been engaged by
the outsider to investigate a particular transaction. As a question of fact, Hansen J
resolved that the bank’s actual knowledge of some matters (that Koorootang was a
trustee company) lead to constructive knowledge of others (e.g. that the officer of
Koorootang misapplied the trust assets for his personal interests).
31 Re Efron’s Tie & Knitting Mills Pty Ltd [1932] VLR 8. Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd
provides a post-Northside example. Once the bank knew that the director who represented the borrower also repre-
sented the third party security provider, and that there was no business connection between the two, then the bank
ought to have made further enquiries of the other directors or beneficiaries of the trust, represented by the security
provider.
32 [1998] 3 VR 16.
33 [1998] 3 VR 16
34 These cases are discussed in chapters 5 to 8.
35 [1998] 3 VLR 16.
36 [1998] 3 VR 133.
37 Re Chisum Services Pty Ltd (1982) 1 ACLC 292.
38 [1998] 3 VR 16.
This accumulation of knowledge has limits, for example, in Sixty-Fourth Throne,

Tadgell JA declined to find that the aggregation of all the knowledge of a corporation was
sufficient to find a fraudulent state of mind of the corporation.39 Also, where the direc-
tor is acting in fraud of the company, or in breach of duty, then their knowledge of their
own breach will not be imputed to the company.40
However, where there is evidence that both parties to the contract have common
directors, then the knowledge of the director about a breach of duty will be imputed to
the company taking the benefit of the breach of duty. This is the case provided the com-
mon director is acting within the scope of their authority as director of the benefiting
company, to enter into the contract.41 In such a case, the company benefiting from the
breach of duty will have actual knowledge of the breach.
Constructive Notice
Common law development
At common law, an outsider dealing with a company was deemed to have notice of the
public documents of the company. This is known as the doctrine of constructive notice
and is a modification of the general rules of agency as applied to companies. The appli-
cation of this doctrine meant that where the authority of an agent was limited by a com-
pany’s constitution, an outsider dealing with the company was taken to have read and
understood these documents and to be aware of the agent’s lack of authority. The outsider
could not then hold the company liable despite any representations to the contrary made
by the company. This doctrine was also applicable in cases where a company acted out-
side its objects as stated in the constitution. The doctrine corresponded to the situation in
agency law where the third party is aware that the agent has exceeded their authority and
is unable to bind the principal.
The doctrine of constructive notice was well established by 1857. Lord Wensleydale
said:
“The stipulations of the deed, which restrict and regulate [the directors’] authority, are obligatory
on those who deal with the company; and the directors can make no contract so as to bind the whole
body of shareholders, for whose protection the rules are made, unless they are strictly complied
with”.42
This doctrine enabled a company to rely, as against an outsider, on any limitations

imposed on the powers of its organs, as disclosed in the constitution or other public doc-
uments. Thus a company was not bound by a contract with an outsider, if its constitution
showed that the person who purported to act as agent, did not have the requisite author-
39 [1998] 3 VR 133, 145–6.

40 Re Hampshire Land Co [1896] 2 Ch 743, JC Houghton & Co v Northard Lowe & Wills Ltd [1928] AC 1. Followed
in Australia in The Duke Group Ltd v Pilmer (1999) 17 ACLC 1, 329 (first instance, not mentioned in the High
Court appeal [2001] HCA 31) and Beach Petroleum NL v Johnson (1993) 115 ALR 411.
41 Farrow Finance Company Ltd v Farrow Properties Pty Ltd (1998) 16 ACLC 897, 931 (Hansen J); Linter Group Ltd
v Goldberg (1992) 10 ACLC 739; Southern Cross Commodities Pty Ltd v Ewing (No 2) (1988) 6 ACLC 647.
See R Grantham, ‘Corporate Knowledge: Identification or Attribution?’ (1996) 56 Modern Law Review 732.
Grantham reviews and criticises New Zealand developments, particularly Meridian Global Funds Management Asia
Ltd v Securities Commission [1995] 2 AC 500, on knowledge attribution to companies.
42 Ernest v Nicholls (1857) 6 HLC 401, 41.
ity or exceeded authority. For example, former Table A, art 66(2) empowered the direc-
tors to borrow money and to charge any property of the company as security. This power
may, in the constitution of some companies, be subject to certain limitations. Under the
doctrine of constructive notice, outsiders were taken to be aware of the existence of any
such limitations contained in the constitution. If the directors gave security on a loan that
was in excess of their specified borrowing powers, the outsider could not hold the com-
pany to be bound by the act of the directors because the outsider was taken to know of
the limitation on the directors’ authority. This was so, even in the absence of actual
knowledge of the limitation.
The doctrine of constructive notice applied to public documents such as the consti-
tution, and notices of special resolutions.43 The doctrine operates against the outsider and
in favour of the company.44
The doctrine of constructive notice is unfair because it precludes any examination of
the state of actual knowledge of both parties to the contract. For example, the company
itself may rely on restrictions in its constitution to preclude enforceability of a transac-
tion, even where the company may have misrepresented its capacity.45 The doctrine of
constructive notice routinely caused confusion to outsiders and attracted criticism. For
example, Professor Ford in 1978 noted that:
“Most contracts are made with companies without inspection of their memoranda for the reason
that the insistence on inspection would slow down commerce intolerably. ... But the doctrine of
constructive notice operates regardless of the nature of the transaction and it served no useful pur-
pose when it enabled a company … to avoid liability on a contract entered into in circumstances
where no reasonable person would ask to see the memorandum.”46
It is difficult to find support for the doctrine: Campbell47 suggests that the function of
public documents, in particular the memorandum and articles was to restrict powers
which would otherwise exist at common law. Montrose48 thought that this doctrine dif-
ferentiated companies from partnerships because restrictions in partnership agreements
did not affect third parties.
Constructive notice and the indoor management rule
In particular, the doctrine of constructive notice complicated the indoor management
rule’s efficient operation. The rule’s interaction with constructive notice has been
described49 as both:
• a “modification” of constructive notice, as it allows the outsider to make
assumptions consistent with the public documents; and
• the “converse” of constructive notice, as the rule may operate in favour of the
outsider, whereas constructive notice operates in favour of the company.50
43 Irvine v Union Bank of Australia Ltd (1877) 2 App Cas 366.

44 Houghton & Co v Nothard Lowe and Wills Ltd [1928] AC 1 and Rama Corporation Ltd v Proved Tin and General
Investments Ltd [1952] 2 QB 147.
45 Re Jon Beauforte (London) Ltd [1953] 2 WLR 465.
46 H A J Ford, Principles of Company Law (2nd ed, 1978) 90.
47 I Campbell, ‘Contracts with Companies’ (1959) 75 Law Quarterly Review 469, 476.
48 J L Montrose, ‘Apparent Authority of an Agent of a Company’ (1934) 50 Law Quarterly Review 224, 237.
49 I Campbell, ‘Contracts with Companies’ (1960) 76 Law Quarterly Review 115, 117.
50 Rama Corporation Ltd v Proved Tin & General Investments Ltd [1952] 2 QB 147, 149.
The operation of the indoor management rule as a protection for outsiders is adverse-
ly affected by the doctrine of constructive notice, for four reasons:
1. the doctrine demands notice of “public documents”, so there is an issue as to the
meaning of what constitutes public documents;
2. There is confusion caused by some common law cases as to whether the out-
sider’s actual knowledge of the public documents overrides constructive notice;
3. the distinction between procedural regularity and substantive limitations on pow-
ers, as revealed in the public documents; and
4. the continuing role of “notice”.
1. The meaning of “public documents”

All companies legislation has required the filing of documents at regular intervals
(e.g. annual returns), and upon the happening of certain events, all of which inform out-
siders, including:
• incorporation or registration;
• changes of officers;
• allotment of shares;
• notices of special resolutions, which generally by their very nature relate to
changes in the constituent documents;
• notices relating to external administration.
If we assume that all documents filed with the regulator are “public documents”, con-
structive notice is counterproductive to the simple rule of procedural regularity. If doc-
umentary evidence of a company’s decision is required for the public record, then con-
structive notice necessarily imposes the proviso that the assumption may only be made
if it is consistent with the content of the public record. For example, if a matter ought to
be decided by special resolution, then the indoor management rule allows the outsider to
assume that the procedure has been carried out. However, the doctrine of constructive
notice fixes the outsider with notice of documents lodged, or not lodged. The outsider
cannot assume that the special resolution has been held when that assumption is incon-
sistent with the public record. In this sense, constructive notice interferes with proce-
dural regularity assumptions in cases where the irregularity is apparent on the face of the
constitution or other public document.
Notification of external administration and routine changes of officer both alert out-
siders to a change in the identity of officers authorised to exercise corporate power. In
this way, the interaction between the public record and the outsider can be positive, as it
allows the outsider to confirm the officers’ identity.
The rule is enhanced if the negative aspects of constructive notice are minimised and
the positive aspects retained. This can be seen with the statutory version of the rule. For
example, the public record as to the identity of officers is necessary and conclusive to the
making of certain statutory assumptions, although the outsider does not have to prove
that they actually checked and relied on the public record at the time of entering into the
transaction. The statutory version of the rule and the statutory abolition of constructive
notice, are discussed in chapters 5 and 6.
2. The materiality of the outsider’s actual knowledge of the public documents

Constructive notice disregards the outsider’s actual knowledge. However, common law
indoor management rule cases unnecessarily complicated the operation of the rule by
emphasising the outsider’s actual knowledge of the public documents compared with the
actual content of the public documents.
For example, in Rama Corporation Ltd v Proved Tin and General Investments Ltd,51
the outsider’s failure to read the articles but subsequent reliance on the wide powers of
delegation permitted, was one factor that precluded reliance on the rule. That is, con-
structive notice of the articles could not be used in favour of the outsider to argue for the
rule’s application. Whether the Rama case is also authority for the corollary, that is, at
common law, a person with actual knowledge of a power in the company’s articles to del-
egate is entitled to assume that the board has delegated its powers, is an open question.
Slade J in Rama approved of earlier authority52 to the effect that an outsider might rely
on their actual knowledge of the articles that delegation might take place, as part of the
circumstances for a person dealing with that officer, bona fide, to rely on the rule.53 Slade
J declined to follow contrary dicta in cases such as British Thomson-Houston Co v
Federated European Bank Ltd54 that a person need not know of the articles at all or
inquire as to delegation.
Antipodean cases have, perhaps more correctly, placed less emphasis on whether the
outsider read the constitution prior to entering into the transaction. In Re Hapytoz Pty
Ltd,55 the creditor accepted a guarantee executed by the managing director. The creditor
was entitled to accept that the managing director had the authority to do this, without
checking that the constitution actually permitted the appointment and delegation of pow-
ers to a managing director. Similarly, in Re Scottish Loan Finance Co Ltd56 Nicholas CJ
held that the outsider did not have to know that the company had a power to appoint a
particular person as managing director to rely on the power of appointment in the con-
stitution.
These Australian cases bear some similarity to the British Thomson-Houston case, as
all three involved guarantees signed on behalf of the company by the managing direc-
tor.57 Knowledge of the constitution should not matter in cases that may be decided on
the grounds of actual implied authority,58 as in all three cases, it was not disputed that the
signatory was managing director. Cases such as Rama and the case it followed Houghton
& Co v Nothard Lowe & Wills Ltd have different outcomes as they involved dealings by
51 [1952] 2 QB 147.
52 Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93, 102 (Lindley LJ); Kreditbank Cassel GmbH v Schenkers [1927] 1
KB 826, 832–833 (Bankes LJ); Houghton & Co v Nothard Lowe & Wills Ltd [1927] 1 KB 246 (Bankes LJ, Atkin
LJ, Sargant LJ).
53 There was a short-lived attempt made in 1984 to overcome this debate from Rama. Section 68B, repealed in 1986,
provided that a person could not assume that an officer or agent had authority, merely because the memorandum or
articles of the company provided authority could be delegated to an officer or agent.
54 [1932] 2 KB 176, 182.
55 [1937] VLR 40.
56 (1944) 44 SR (NSW) 461.
57 In British Thomson-Houston Co v Federated European Bank Ltd [1932] 2 KB 176, Pal signed as “Chairman” but it
was assumed that this was equivalent to the position of managing director.
58 Northside Developments Pty Ltd v Registrar-General (1990) 11 ACLC 611, 640 (Dawson J): “knowledge of such an
article [of delegation] is not essential for the application of the indoor management rule where apparent authority
can be established without reliance upon it.”
the outsider with a single director only. Ultimately, Sargant LJ in Houghton held that the
outsider could not assume that the director they were dealing with had more than the cus-
tomary authority of a director. The rule did not apply, even if the outsider had actual
knowledge and not merely constructive notice of the power of delegation in the consti-
tution.
Dawson J in Northside concludes the debate by arguing that:
“ … the notion that potential authority under an article might, without more, be treated as actual
authority by an outsider to the company who knows of the article was something which obviously
went beyond the reasonable requirements of business convenience and was difficult to sustain upon
principle.”59
3. Distinguishing procedural requirements in the public documents from substantive

provisions affecting exercises of power
As the discussion on actual knowledge above indicates, some English cases have dis-
tinguished between a requirement in the constitution that is merely procedural, from an
assumption that a more substantive matter has occurred, such as a power of delegation.
This indicates that common law cases applying the rule may be separated into two cate-
gories: first, those that have been decided as procedural exercises of power, in which
case the rule has generally been successful in enabling the outsider to enforce their con-
tract. For example, in Turquand, Jervis CJ contributed an important precedent by noting
that the constitution did not prohibit borrowing, but amounted to a permission to do so
upon certain procedural conditions.60
The second type of case are those that have been argued as an attempt by the outsider
to assume something more than a procedural regularity, namely, that a delegation of
power has occurred. As we saw in the Rama case,61 the rule generally cannot be used to
assume that a particular delegation has taken place. Although the distinction between
procedural constraint and substantive delegation may be identified, it is not consistently
applied in the common law cases. For example, in Mahoney v East Holyford Mining Co,62
the constitution permitted the shareholders to appoint directors to exercise the manage-
ment powers of the company. The bank was enforcing cheques signed by directors where
the company argued that the directors were not properly appointed. Due to a representa-
tion, the bank could assume appointment. That is, the delegation of the power to the
board was treated as a procedural matter relating to the manner of their appointment, not
a matter of delegation.
Constructive notice highlights the procedural regularity, and so defines the scope of
the assumption allowed to be made by the outsider.63 Should the rule also apply to exer-
cises of power subject to more substantive requirements, such as an express power of del-
egation, or an explicit limitation on its exercise? The constitution in Turquand could have
been interpreted as a substantive limitation, and not a procedural condition. The common
law cases demonstrate the difficulty of categorising a requirement in the constitution as
59 (1990) 11 ACLC 611, 640 (Dawson J).

60 (1856) 119 ER 886, 888.
61 Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147.
62 (1875) LR 7 HL 869.
63 Campbell (1960), supra n 49, 117: “The officials in the company cannot be assumed to have greater capacity that the
articles permit.”
a mere procedural constraint, and the results in the Australian common law cases suggest
that this is a largely unnecessary exercise. Australian cases on the common law rule high-
light two features of the rule’s application:
1. Even where the constitution imposes merely a procedural restraint, constructive
notice of the public documents will not allow the outsider to assume compliance
if the manner of execution is inconsistent with the constitution. In Equity
Nominees Ltd v Tucker, the company’s constitution required the seal to be signed
by at least two directors and the secretary. Two directors only signed the third
party guarantee signed under seal. Windeyer J held that the rule did not apply
where the articles “apparently or in fact” were not complied with.64
2. In Australia, unlike the English decisions,65 the delegation problem has been
overcome by essentially treating a substantive power of delegation as a proce-
dural requirement. For example, Re Scottish Loan Finance Co Ltd66 and Re
Hapytoz Pty Ltd67 are cases involving the positive exercise of an appointment
provided in the constitution, but were treated as merely procedural, so the rule
applied. The existence of the power was enough, despite the absence of any rep-
resentation as to its exercise.68
4. The continuing role of constructive notice
Although constructive notice of public corporate documents is now abolished in s
130 (except for registered charges), the concept of notice remains relevant to the doctrine
of the bona fide purchaser for value without notice. Issues of the outsider’s title may still
be challenged if the transaction occurred with actual or constructive knowledge, or notice
of a prior equity. In the corporate transaction, the prior equity may refer to the compa-
ny’s right to avoid the contract due to directors acting without authority. In a transaction
involving land, an outsider is still expected to conduct the normal searches as to title in
land registers, hence the reference to notice.
The effect of the doctrine of the bona fide purchaser for value without notice, in land
transactions, is affected by the Torrens system of indefeasibility of registration, but this
conveyancing practice aspect of legislative intervention by the states’ various land titles
legislation is not pursued here.
64 (1967) 116 CLR 518, 526.

65 For example, in South London Greyhound Racecourses Ltd v Wake [1931] 1 Ch 496, the sealing clause was incor-
rectly treated as a substantive matter of delegation, so the rule did not apply to assume that the delegation had in fact
occurred In Northside (1990) 11 ACLC 611, 631, Brennan J said that in Wake, the 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, the result
of the case is correct if confined to the “put on inquiry exception”. In Wake’s case, the share certificate was not
issued for the purposes of the company’s business as in Turquand but for the benefit of an unrelated debtor compa-
ny.
66 (1944) 44 SR (NSW) 461.
67 [1937] VLR 40.
68 See also Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd (1973) 131 CLR 60, where directors had to have
a share qualification for a valid appointment. The matter of their share qualification was a procedural matter that the
rule applied to, not a matter that related to delegation of power.
Conclusion on the Current Relevance of the Rule in Turquand’s

Case
The rule and its exceptions: ongoing development?
The cases analysed on the application of the common law indoor management rule show
some inconsistency in result. This is primarily due to the rule applying subject to other
common law doctrines such as classic ultra vires and constructive notice. The efficacy of
the rule was therefore affected by complexity in operation, attributed to:
1. Determining whether the constitution sets out a procedural constraint or a sub-
stantive power of delegation or appointment. If there is a procedural constraint,
then the outsider may assume that the procedure is complied with, regardless of
whether they had actual knowledge of the articles. The Rule in Turquand’s case
requires that the assumption made is consistent with the terms of the constitu-
tion, not necessarily with actual knowledge of it.
2. If it seems that the outsider is actually seeking to assume the exercise of a power
of delegation, then the existence of the power in the constitution is not enough to
assume procedural regularity, regardless whether the outsider read it. If they did
not read it anyway, constructive notice does not operate in their favour. Even if
they did read it, actual knowledge of the power still requires some representation
that it was exercised.
3. The debate as to the true nature of the seal,69 and determining the extent to
which the rule covers all steps in the execution, from the board resolution to
actual physical execution.
4. Whether the “forgery” preventing the rule from operating is true fraud, or also
applies to defects in the exercise of the power.
The statutory reform process that commenced in 1983 accordingly addresses these
points of confusion directly by codifying the rule and making explicit the assumptions
that are available, and indirectly by removing the need for a constitution (discussed in
chapter 2) and abolishing constructive notice (discussed in chapter 5).
Continuing relevance of the common law rule
Although the Northside case is essentially the final statement on the common law prin-
ciples applicable to the indoor management rule, these principles are relevant for three
reasons.
1. The common law will still apply to a situation that arises outside the statutory
formulation.
2. The common law background forms the foundation for the subsequent statutory
intervention.
3. The common law provides a standard or basis to inform the debate as to the
ambit of the statutory rule and to measure the effectiveness of the statutory inter-
vention.
69 See K E Lindgren, ‘The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in Turquand’s Case’
(1973) 9 Melbourne University Law Review 192; K E Lindgren, ‘The Negative Corporate Seal Rule and Exceptions
Thereto’ (1974) 9 Melbourne University Law Review 411. Professor Lindgren discusses the nature of the common
seal and describes how it represents the true expression of the company’s assent that operates independently of the
exercise of the power.
1. Circumstance outside of the statute

A dealing may occur that arises outside of the Corporations Act. Examples include:
• dealings with an entity not subject to Corporations Act regulation; or
• the transaction occurred before statutory intervention (unlikely); or
• based on some technical interpretation, the statute does not apply to the circum-
stances of the transaction.
As the statutory rule is set out as a code, there are obviously elements or conditions
to be cumulatively satisfied, discussed in chapter 5 as the “qualifying circumstances”.
Gummow J in Australian Capital Television Pty Ltd v Minister for Transport &
Communications70 comprehensively discusses the types of situations that may be exclud-
ed from the statute. His Honour identified the qualifying circumstances of the former
statutory version of the rule as:
1. any person had dealings with the company, and
2. in proceedings in relation to those dealings,
3. the company sought to assert that the matters the person was entitled to assume
were not correct.
For example in that case, the applicant sought to dispute the sealing of certificates of
lodgement submitted to the Minister by other parties. The statute could not apply, as the
applicant was not engaged in “dealings” with the companies concerned; nor were the
companies making assertions to the contrary about the execution of the certificates.
Gummow J provided a further example of where the statute may not apply, in an action
for inducing breach of contract, where the plaintiff may first need to establish the valid-
ity of the contract in question.
In Bell Resources Holdings Pty Ltd v Commissioner for ACT Revenue Collections,71
von Doussa J held that the statute did not apply because the first and second qualifying
circumstances had not been met. The case involved an appeal from the Administrative
Appeals Tribunal, by the applicant (a holding company) against the Commissioner in
relation to a share transfer signed by a subsidiary in favour of a third party.
There is limited scope for ongoing development of the common law indoor manage-
ment rule, as well as its relevance to establish the foundation for statutory modifica-
tions.72
2. Common law foundation for statutory intervention

The first round of statutory intervention commenced in 1984, and the case law indicates
some debate as to the status of the statutory rules against their common law foundation.
The argument that the statute operates as a complete code to replace the common law has
not been sustained. Instead, Australian judges acknowledge that the statute codifies and
clarifies the common law, to overcome some of its problems such as forgery,73 but oper-
ates not as a comprehensive code.74 Kirby P in Bank of New Zealand v Fiberi Pty Ltd said
70 (1989) 7 ACLC 525.

71 (1990) 8 ACLC 533.
72 Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525, 535
(Gummow J). See also D Morrison, ‘The Continued Role of the Common Law Indoor management Rule Due
Inquiry Exception’ (1996) 12 Queensland University of Technology Law Journal 28.
73 Barclays Finance Holdings Ltd v Sturgess (1985) 3 ACLC 662, 667 (Wood J). See chapter 7.
that the statutory rule does not operate in a “legal social and economic vacuum.”75 The
statute does not override existing common law principles on the rule, as expressed in
Northside, nor did it provide unconditional protection to outsiders, nor does it preclude
reference to other competing considerations (such as good faith).
3. Common law background relevant for statutory interpretation

The Explanatory Memorandum to the statutory reform that introduced the indoor man-
agement rule into the companies legislation kept Turquand’s case on the agenda by
specifically referring to the intention to clarify the rule’s operation.76 Any academic exer-
cise in tracing the rule’s development and application, and resolving remaining ambigu-
ities, inevitably requires comparison with the common law principles. Defining the scope
of the statutory versions of the actual or constructive knowledge exceptions is one of the
important contributions of the common law principles in shaping the debate as to statu-
tory interpretation. As discussed later in chapter 8 there was initial judicial agreement
that the statute departed from the common law constructive knowledge exception of “put
on inquiry”. However, the New South Wales Court of Appeal in Bank of New Zealand v
Fiberi Pty Ltd77 narrowed the perceived gap between the common law and the statute.
The debate continues as to the meaning of the newly drafted statutory exception, its con-
nection with constructive knowledge, and the role of common law principles.
Once the surrounding factors of ultra vires, forgeries and constructive notice have
been specifically reformed, the issues for statutory reform of the rule itself include:
1. Resolving the ambit of the exceptions;
2. Specifically, clarifying the open-ended obligation of reasonable conduct imposed
by constructive knowledge and its formulation into the “due inquiry” exception;
3. Clarifying whether the rule provides an assumption of delegation of authority;
4. Stating the role of the corporate seal and the extent of the assumption regarding
its use; and
5. Confirming the role of agency principles and the types of authority, particularly
to confirm the implied authority that company officers possess by virtue of their
position.
Chapters 5 to 8 now examine in detail these issues within the context of statutory
reform.
74 Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525, 535
(Gummow J).
75 (1994) 12 ACLC 48, 51.
76 Explanatory Memorandum, Corporations Bill 1988, [567].
77 (1994) 12 ACLC 48.
Chapter 5
The Statutory Reformulation

of the Indoor Management Rule
Statutory Intervention
The common law principles surrounding the operation and development of the indoor
management rule discussed in earlier chapters have now been affected by reform to the
Corporations Act in ss 125–130. The statutory version of the rule itself is based around
seven protective assumptions set out in s 129 and are subject to the limitations in s 128.
It was necessary to consider in the earlier chapters the Rule in Turquand’s case, its excep-
tions and the rules of agency law in their application to companies because the statutory
provisions are based upon the common law principles. This chapter will consider the
extent to which the statutory provisions represent a departure from the traditional rules.
In particular, it is unclear to what extent the inquiry exception to the Rule in Turquand’s
case has been incorporated into the legislation. Recent case law has indicated that the
common law rules provide necessary background in the interpretation of the provisions.
Accordingly, there continues to be uncertainty in formulating the scope of the indoor
management rule due to several factors:
1. the continuing relevance of the common law rule in modern circumstances in
Australia since Northside Developments Pty Ltd v Registrar-General;1
2. whether the common law is simply mirrored, as opposed to reformulated, by
statutory revisions of the rule;
3. the effect of the recent “simplification” of the rule by the Company Law Review
Act 1998;
4. the extent of the exceptions precluding the rule’s operation; and
5. in promoting business contracts, the rule must balance the business convenience
of the outsider with commercial morality factors to prevent fraud, mentioned in
chapter 3, under the discussion of the significance of the Northside case.
Aligned with reform to the Rule in Turquand’s case, the Company Law Review Act
1998 also continued the legislative goal of abolishing ultra vires and the doctrine of con-
structive notice. In tandem with the statutory rule’s reform, this chapter examines these
related reforms.
1 (1990) 8 ACLC 611.

Recent Litigation
The application of the indoor management rule for the protection of outsiders dealing
with corporate borrowers and mortgagors is particularly dynamic and has attracted con-
siderable academic commentary2 and practitioner focus.3 The cluster of 1990s cases
applying the statutory rule primarily concern financing transactions.4 Much of the recent
judicial and academic comment on the indoor management rule is relevant, because it
has arisen in the context of finance and security transactions.
Table 5.1 below nominates the important Australian cases and Table 5.2 provides a
comparative overview. As these tables show, the cases have mixed results for the lenders
involved. As Table 5.2 demonstrates, the selection of the comparative features is
designed to identify “up front” the critical factors that affected the outcomes. These fac-
tors are based on both the standards of conduct imposed on the outsiders and the context
of the transaction, such as the identity and characteristics of the corporate borrower/secu-
rity provider. The factors featured in Table 5.2 are referred to in more detail in chapter 8
(the statutory exceptions) as contributing to the factual matrix triggering the exceptions
to the statutory rule.
Collectively, these cases illustrate a combination of common features that the courts
have been required to balance between protecting the outsider and enhancing commer-
cial integrity, in situations involving contested authority. Significant factors throughout
these cases include:
1. Securities transactions: the disputes involve the validity of loan and securities
transactions.
2. Third party mortgages: the corporate security provider disputed the security grant-
ed in respect of loans made available to other (related and unrelated) borrowers.
2 Notably but not exhaustively: I Ramsay, G Stapledon and K Fong, ‘Affixing of the Company Seal and the Effect of
the Statutory Assumption in the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38;
D Loxton, ‘One Step Forward, One Step Back: The Effect of Corporate Law Reform on Procedures in Dealing with
Companies Borrowing or Giving Guarantees’ (1999) 10 Journal of Banking and Finance Law and Practice 24;
C Hammond, ‘Section 164(4)(b) of the Corporations Law: ‘To be Put Upon Inquiry or Not to be Put Upon Inquiry:
Is that the Question?’ A Problem of Statutory Interpretation’(1998) 16 Company and Securities Law Journal 93;
B Horrigan, ‘Busting Guarantees!’ [1998] National Law Review 7;
J Lambrick, ‘Corporate Benefit in Financial Transactions: A Policy Perspective’ (1997) 8 Journal of Banking and
Finance Law and Practice 212;
J O’Donovan, ‘Corporate Benefit in Relation to Guarantees and Third Party Mortgages’ (1996) 24 Australian
Business Law Review 126;
B Horrigan, ‘Third Party Securities – Theory, Law and Practice’ in J Greig and B Horrigan (eds), Enforcing
Securities (1994);
D Morrison, ‘The Indoor Management Rule – A Review’ (1994) 4 Australian Journal of Corporate Law 264.
3 For example, The Honourable Justice Paul de Jersey, ‘A Question of Notice’, Paper presented at QLS Securities
Intensive V Seminar, Royal Pines, Gold Coast, October 1991, 115–136;
The Honourable Justice Paul de Jersey, ‘Lending to Company Groups – The Problems of Corporate Power and
Directors’ Authority’, Paper presented at the 9th Annual Banking Law and Practice Conference, Gold Coast, April
1992;
The Honourable Justice Ken Handley, ‘When are Outsiders on Notice that Corporate Agents Lack Authority?’, Paper
presented at QLS Securities Intensive VII Seminar, Coolum, October 1993, 20–34;
J Story, ‘Authority of Corporate Officers: The Northside Case and Section 164’, Paper presented at QLS Securities
Intensive VII Seminar, Coolum, October 1993, 35–64;
J Gallimore, ‘The Authority of Companies to Enter into Transactions – a New Twist’ (1994) 14 (8) Proctor 10;
The Honourable Chief Justice Paul de Jersey, ‘Securities Case Law – The Year in Review’, Paper presented at QLS
Banking and Finance Law Intensive Seminar, Brisbane, October 2000.
4 Only the Australian decisions, including Northside and later cases, are emphasised. Australian cases dealing with
other applications of the statutory provisions of the indoor management rule are only referred to incidentally.
The Statutory Regulation of the Indoor Management Rule 45
3. Invalid execution: the security documents were executed under common seal
with later claims of invalid execution. The dispute involves the authority of those
“officers” who purported to attest the deal. In several situations, the attesting sig-
natories were not even officers. In Story v Advance Bank Australia Ltd,5 the sig-
natory was an officer, but their signature was forged.
4. Corporate benefit: claims made by the corporate security provider that it
received no direct benefit from the loan transaction.6
5. Corporate control: one person whose personality dominated the management of
the corporate security provider (either with or without the acquiescence or direct
sanction of other board members).
6. Corporate personality: the inability or unwillingness by outsiders to distinguish
between the dominant individual and the corporate personality. Similarly, where
“groups” were involved, the inability or unwillingness to distinguish between individual
companies and the “group” entity.
7. Public information: the extent to which outsiders resorted to and relied on public
information held by the ASIC.
8. Lack of shareholder involvement: there is no evidence that formal shareholder
approval to the transaction was sought.
9. Other basic information errors: failure by the outsider to follow through when basic
information was requested or supplied, or failure to reconcile conflicting information, or
failure to rely on or act on professional advice.
Technically, the lenders in the cases outlined in Table 5.2 who were unsuccessful in
enforcing their contracts were unable to rely on the indoor management rule due to the
scope of the exceptions. Although the analysis of the exceptions is addressed in more
detail in chapter 8, some preliminary reconciliation of the outcomes is appropriate. The
inability to access indoor management rule protection is directly attributable to two fac-
tors within the lenders’ control:
• failure to meet a threshold of familiarity with the corporate borrower/security
provider and other parties to the transaction (including access to basic publicly
available information); and
• failure to identify the “officers” of the company purporting to have the authority
to exercise corporate power (the authority of officers was discussed in chapter 2).
5 (1993) 11 ACLC 629.

6 “Benefit” here is used in the sense of commercial benefit or advantage, and is one of the components of the ‘due
inquiry’ exception identified in chapter 4.
Table 5.1 Indoor Management Rule cases involving banks and financiers as
outsiders
Case name in full Referred to as: Court Appeal history

Northside Developments Northside High Court NSW Sup Ct, Young J
Pty Ltd v Registrar-General Mason CJ, Brennan, (1987) 5 ACLC 642;
(1990) 8 ACLC 611. Dawson, Toohey & NSW CA, Kirby P,
Gaudron JJ McHugh & Samuels JJA
(1989) 7 ACLC 52
Brick and Pipe Industries Brick & Pipe Vic Supreme Ct FC Vic Sup Ct, Ormiston J
Ltd v Occidental Life McGarvie, Marks & (1991) 9 ACLC 324
Nominees Pty Ltd (1992) Beach JJ
10 ACLC 253.
Story v Advance Bank Story NSW CA NSW Sup Ct, Studdert J,
Australia Ltd (1993) Gleeson CJ, Mahoney Advance Bank Australia
11 ACLC 629. & Cripps JJA Ltd v Fleetwood Star Pty
Ltd (1992) 10 ACLC 703
Equiticorp Finance Ltd v Equiticorp NSW CA NSW Sup Ct, Giles J,
Bank of New Zealand Kirby P, Clarke & Bank of New Zealand v
(1993) 11 ACLC 952. Cripps JJA Equiticorp Finance Ltd
(1993) 11 ACLC 84
Bank of New Zealand v Fiberi NSW CA NSW Sup Ct, Allen J
Fiberi Pty Ltd (1994) Kirby P, Priestley & (1992) 8 ACSR 790
12 ACLC 48. Clarke JJA leave to appeal to the
High Court was refused
on 11 February 1994
(1994) 12 ACLC 232.
Sixty-Fourth Throne Pty Sixty-Fourth Throne Vic CA Vic Sup Ct, Hedigan J
Ltd v Macquarie Bank Ltd Winneke P, Tadgell JA (1996) 14 ACLC 670.
[1998] 3 VR 133. & Ashley AJA Special leave to appeal to
the High Court was
refused on 19 May 1998.
Pyramid Building Society Scorpion Vic Sup Ct
v Scorpion Hotels Pty Ltd Nathan J
(1996) 14 ACLC 679.
Koorootang Nominees Pty Koorootang Sup Ct Vic
Ltd v ANZ Banking Group Hansen J
Ltd [1998] 3 VR 16.
NAB v Sparrow Green Pty Sparrow Green; SA CA SA Sup Ct Debelle J
Ltd (1999) 17 ACLC 1665. Perkins (first instance)Olsson, Mullighan & Perkins v NAB
Nyland JJ (1999) 30 ACSR 256.
Myers v Aquarell Pty Ltd Myers Sup Ct Vic
[2000] VSC 429. Gillard J
Table 5.2 Major similarities and differences of significance in Indoor Management

Rule cases
Northside Brick Story Equiticorp Fiberi
& Pipe
COMMON LAW x
STATUTE: PRE CLR ACT x x x x
STATUTE: POST CLR ACT
LENDER SUCCESSFUL IN NO YES YES YES NO
ENFORCING SECURITY?
REASON? put on Statutory Statutory Statutory Statutory
inquiry rule rule rule exception
applied applied applied applied
OUGHT
TO KNOW
TRANSACTION ENTERED INTO NO NO NO YES NO
WITH BOARD AUTHORITY?
TRANSACTION ENTERED INTO NO YES NO YES NO
WITH SOME OTHER ACTUAL (Goldberg (Hawkins
AUTHORITY? was de was de
facto MD) facto MD)
SEAL AFFIXED BY ALL PARTIES NO YES YES, but YES NO
WHO WERE OFFICERS? forgery
involved
FORGED SIGNATURE? NO NO YES NO NO
CORPORATE BENEFIT? NO NO YES YES: NO
group
welfare
SOLE ASSET MORTGAGED? YES NO NO NO YES
CORPORATE GROUP? NO YES YES YES NO
DOMINANT MANAGER? NO YES YES YES NO
(Goldberg) (Story) (Hawkins)
DOMINANT BY ACQUIESCENCE NO YES NO YES NO
TRADING COY? NO YES YES YES NO
TRUST ASSETS? NO NO NO NO NO
SHAREHOLDER RATIFICATION? NO NO NO NO NO
LENDER CONSTRUCTIVE NO NO NO NO: but NO
TRUSTEE? Kirby P
in dissent
DUTY OF CARE TO BORROWER/ NOT NOT NOT NOT NOT
SECURITY PROVIDER? ARGUED ARGUED ARGUED ARGUED ARGUED
LENDER DID ASIC SEARCH? NO YES YES YES NO
LENDER /SOLICITOR N/A YES: N/A N/A N/A
FOLLOWED UP REQUESTS confirmation
FOR INFORMATION of Furst’s
appointment
as secretary
sought
Sixty- Scorpion Koorootang Sparrow Myers

Fourth Green
Throne
COMMON LAW
STATUTE PRE CLR ACT x x x x x
STATUTE POST CLR ACT x
LENDER SUCCESSFUL? NO NO NO NO YES
REASON? Statutory Statutory Statutory Statutory Statutory
exception exception exception exception rule
applied applied applied applied applied
OUGHT OUGHT OUGHT OUGHT
TO KNOW TO KNOW TO KNOW TO KNOW
TRANSACTION ENTERED INTO NO NO NO NO YES
WITH BOARD AUTHORITY? (McCardel
was sole
director)
TRANSACTION ENTERED INTO NO NO NO NO YES
WITH SOME OTHER ACTUAL
AUTHORITY?
SEAL AFFIXED BY ALL PARTIES NO NO YES, but NO, only YES
WHO WERE OFFICERS? forgery one officer
involved signed
FORGED SIGNATURE NO NO YES NO NO
CORPORATE BENEFIT? NO NO NO YES YES
SOLE ASSET MORTGAGED? YES YES SUBSTANT YES NOT
-IAL ASSETS KNOWN
CORPORATE GROUP? NO NO NO NO NO
DOMINANT MANAGER? YES YES YES YES YES
(Mr & Mrs (Lewis) (Jeffries) (Green) (McCardel)
Kandy)
DOMINANT BY ACQUIESCENCE NO NO NO, NO YES, sole
although his director
advice was
sought
TRADING COY? Trustee YES Trustee YES Trustee
TRUST ASSETS? YES NO YES NO YES
SHAREHOLDER RATIFICATION? NO NO NO NO NO
LENDER CONSTRUCTIVE NO: but NO YES NO NO
TRUSTEE? Ashley AJA
in dissent
DUTY OF CARE TO CORPORATE NOT NOT YES NOT NOT
BORROWER/SECURITY PROVIDER ARGUED ARGUED ARGUED ARGUED
LENDER /SOLICITOR FOLLOWED NO: bank did NO NO: bank NO: did not NOT
UP REQUESTS FOR INFORMATION not request did not act obtain a KNOWN
the results on legal director’s (lender did
of solicitor’s advice resignation not have
searches as it solicitors)
required.
LENDER DID ASIC SEARCH? YES YES YES YES NOT
KNOWN
The cases in Table 5.2 show that the lender was successful in relying on the indoor
management rule in only four out of the ten cases listed. In the unsuccessful cases, pro-
tection was denied because of the ambit of the constructive knowledge of the lender
(although Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd also involved actual
knowledge of certain factors). The facts of the cases are discussed in more detail in chap-
ters 6, 7 and 8 when the statutory provisions are analysed.
The results from the cases formulate the guidelines to indoor management rule
reliance set out in chapter 10. In the meantime, the ambit of the rule and its exceptions
are analysed to arrive at the scope of protection afforded to finance contracts.
The Statutory Rule: Sections 128–129

The statutory indoor management rule was first inserted as a reform to the former
Companies Codes, operational from 1 January 1984. Table 5.3 below summarises the
statutory versions of the indoor management rule. The Corporations Act, when first
enacted in 1991 (as the Corporations Law) replicated the former Code provisions, then
was subject to extensive revision in the Company Law Review Act 1998. For conve-
nience, this chapter will reference former s 164 and current ss 128–129 only.
Table 5.3 The history of the statutory indoor management rule
Description of statutory provision Uniform Companies Corporations Company Law

Companies Codes Law Review Act
Act 1961 1 January 1 January 1 July 1998 &
1 July 1962 1984 (as 1991 Corporations
amended Act 14 July
1985) 2001
Companies granted the legal No statute s 67(1) s 161(1) s 124(1)
capacity of natural persons
Company’s legal capacity not No statute s 67(3) s 161(3) s 124(2)
affected if its interests are not
served by atransaction7
Abolished constructive notice of No statute, only s 68C s 165 s 130
the constitution (but still applies common law
for charges) rule8
Statutory assumptions that No statute, s 68A(1)–(3) s 164(1)–(3) s 128–s 129
outsidersdealing with companies only common
may make9 law rule
Statutory exceptions to the No statute, only s 68A(4) s 164(4) s 128(4)
assumptions10 common law rule
Effect of fraud or forgery in No statute, only s 68D s 166 s 128(3)
dealings common law rule11
The purpose for statutory intervention, as stated by the legislature, is to:

“ensure that a person who deals in good faith with persons who can be reasonably supposed to have
the authority of the company should be protected against later claims by the company that the per-
sons purporting to act for it lacked authority. This involves clarifying and codifying the so-called
‘indoor management rule’ which has developed from the decision in Royal British Bank v Turquand
(1856) 119 ER 886.”12
The Attorney-General’s Explanatory Memorandum considered that the state of case

law was not entirely clear or satisfactory despite the considerable amount of litigation
revolving around the Rule in Turquand’s case. With the benefit of hindsight since statu-
tory intervention, it is an interesting question to consider whether the statutory provisions
have been successful in clarifying the “indoor management rule.” It is surprising to note
that despite the practical importance of this area, it had been the subject of relatively lit-
tle explanatory case law until the last decade.
7 This provision was first inserted in 1985 by the Companies and Securities (Miscellaneous Amendment) Act 1985.
8 The common law rule of constructive notice (i.e. deemed notice by outsiders of the corporate constitution) and its
application to the common law indoor management rule was discussed in chapter 4.
9 The former versions of the statutory rule comprised six assumptions. There are seven assumptions in the current
rule. This is discussed in the next chapter.
10 The statutory wording of the exceptions was changed from the common law expressed in Northside, then changed
again in the 1998 amendments. This is discussed in chapter 8.
11 The common law rule of forgery (i.e. that a forgery is a nullity) and its effect on the common law indoor manage-
ment rule is discussed in chapter 7.
12 Explanatory Memorandum, Companies and Securities Legislation (Miscellaneous Amendments) Act 1983, [188].
It is clear from the Attorney-General’s Explanatory Memorandum quoted above, that

the dominant policy consideration behind the statutory rule is to protect outsiders acting
in good faith. As will be seen in this and the following chapters, most of the cases inter-
preting this legislation have concerned the issue of whether the outsider ought to be
excluded from the benefit of the protective assumptions.
Although good faith is expressly articulated as legislative policy, and is always an
aspect of the common law, it has not been explicitly inserted into any of the statutory ver-
sions of the rule. As discussed under the common law rule in chapter 3, “good faith”
includes notions of honesty and reasonableness. Rather than imposing good faith as part
of the statutory rule, instead, it becomes relevant when the conduct of the outsider is
examined under the exceptions, discussed in chapter 8.
The assumptions seek to codify and clarify the Rule in Turquand’s case. Gummow J
in Australian Capital Television Pty Ltd v Minister for Transport and Communications,13
considered that former s 164 was not a “comprehensive code” but designed to repair the
failings of the common law. Kirby P in Bank of New Zealand v Fiberi Pty Ltd said that
former s 164 does not appear in a legal, social and economic vacuum. It does not over-
ride the principles and policies of the common law unless this is plainly the result intend-
ed by the legislation.14 Kirby P did not think that it was a universal and unconditional
objective of the legislation to protect persons dealing with a company at the expense of
all other competing considerations. Its purpose is to protect such persons who deal in
good faith and innocently. Kirby P thought that the competing policy considerations
behind the Rule in Turquand’s case as stated by Mason CJ in Northside Developments
Pty Ltd v Registrar-General,15 are also applicable in the interpretation of the statutory
rule.
As Table 5.3 above, summarising the statutory provisions suggests, there are four
main elements in relation to the outsider accessing the rule:
1. the outsider must meet the “qualifying circumstances” set out in s 128(1)–(3),
which includes having “dealings” with the company, and in the past has included
other elements such as whether the outsider was involved in proceedings in
which the company asserted that the assumption was incorrect.
2. The relevant assumption accessed must fall within the scope of those listed in
s 129.
3. The outsider has not triggered the statutory exceptions in s 128(4).
4. The events must have taken place since the statute was enacted. (The signifi-
cance of the common law rule was discussed in chapter 4).
The Company Law Review Act 1998 signals the most significant change in the statu-
tory rule. The main uncertainty created by the Company Law Review Act 1998 is the dif-
ferences in the former and current exceptions. The exceptions are examined in chapter
8, whilst the content of the assumptions are discussed in chapter 6. The remainder of this
chapter briefly canvasses the role of s 128 is establishing the “qualifying circumstances”
for outsiders to access the assumptions in s 129, as well as briefly noting important relat-
ed reforms.
13 (1989) 7 ACLC 525.
14 (1994) 12 ACLC 48, 51.
15 (1990) 8 ACLC 611, 627.
The qualifying circumstances in s 128(1)

The statutory version of the rule is more specific in two respects than the common law:
s 128 sets out qualifying circumstances, such as requiring the outsider to have “dealings”
with the company and exceptions; and s 129 specifies the actual assumptions allowed.
Section 128(1) provides:
“A person is entitled to make the assumptions in section 129 in relation to dealings with a compa-
ny. The company is not entitled to assert in proceedings in relation to the dealings that any of the
assumptions are incorrect.”
The new simplified version of the indoor management rule contained in s 128(1) sug-
gests only one qualifying circumstances for the outsider to prove: that there are “deal-
ings” with the company.16 Further, the wording of s 128(4) still seems to require some
direct connection between the person, the company and the dealing by using the phrase:
“if at the time of the dealings they knew or suspected that the assumption was incorrect.”
The company is not entitled to assert that the assumption is incorrect in proceedings, but
there is not the same imperative (as appeared in former s 164(1)) that the outsider may
only rely on the assumptions if they bring “proceedings”.
The word “dealings” was also used in former s 164(1) and is discussed in the case
law. However, in former s 164(1), the outsider was linked directly to the dealings by the
phrase “a person having dealings with a company”. There was some danger that this
would not appear appropriate to cover the types of agency questions contemplated by the
assumptions. A strict interpretation of the expression would remove the benefit of the
assumptions from an outsider who is unable to show the existence of an actual pre-exist-
ing legal relationship with the company.
The term “dealings” was given a broad meaning in Story v Advance Bank Australia
Ltd.17 In this case, a bank dealt with a managing director who was permitted de facto con-
trol of the conduct of a company’s business by the other director. It was held that the con-
cept of having dealings with a company extends beyond dealing with someone who has
actual authority and includes situations where a document is forged. It extends to pur-
ported dealings.
The authors of Ford’s Principles of Corporations Law concur that s 128(1) and (2)
allow the assumptions to apply where the outsider deals with a person who purports to
represent the company, or who purports to have acquired title from a company.18 This
interpretation enables an outsider to be protected in cases where the outsider is unable to
show that the company’s agent possessed authority so as to bind the company. The com-
pany would then be unable to argue that the outsider did not have dealings “with a com-
pany” but only with persons purporting to be its officers or agents.
While not deciding the issue, Kirby P in Bank of New Zealand v Fiberi Pty Ltd19 sug-
gested that it was arguable that a person is not “dealing with a company” if the circum-
stances of that person’s relationship with the company or the dealings themselves, should
have put the person on inquiry. The failure to make inquiry as to whether the dealings
16 Although Loxton, supra n 2, 30, suggests that the ambit is even wider and a person does not have to be dealing with
the company to exploit the assumption.
17 (1993) 11 ACLC 629.
18 H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (10th ed, 2001) [13.281]–[13.290].
19 (1994) 12 ACLC 48.
were with the company or with the particular individuals would result in the outsider los-
ing the entitlement to make the assumptions. This interpretation creates difficulties
because it results in the introduction of a further inquiry exception to the assumptions.
There is no significance to be attached to the use of the plural: it was held previous-
ly that “dealings” does not require multiplicity of transactions.20
The requirement in s 128(2) that the outsider may also have acquired title through
another in relation to dealings, to be entitled to make the assumptions, remains
unchanged from former s 164(1).
As the qualifying circumstances have been reduced, this suggests that the assump-
tions may be available to a wider range of situations that under the former provisions.
However, the assumptions are personal to each particular outsider. For example, provid-
ed a person has had dealings with a company, then they can assume that directors have
been appointed, but the assumption must relate to their dealings. In ASIC v Hallmark
Gold NL,21 a person sought to assume that a company validly appointed directors, in
order to resist an application made against them by the regulator. ASIC, after receiving a
complaint by the company’s shareholders, sought an order that three directors were not
validly appointed. Two directors were purportedly appointed at the annual general meet-
ing, whilst the board subsequently appointed the third director. The third director argued
that at the time of his appointment, he had dealings with the company and could assume
that the directors currently on the board were validly appointed. Lee J held it was “unnec-
essary to consider” whether ss 128–129 applied because they do not apply in rem by
making valid acts of a company that are invalid.22 This was not a case where the compa-
ny was making an assertion against the outsider.
The Abolition of Constructive Notice

At common law, an outsider dealing with a company was deemed to have notice of the
public documents of the company. The effect this had on the rule’s operation has been
criticised in chapter 4.
Addressing the arguments as to the lack of merit in the common law doctrine, the leg-
islature has stepped in to abolish constructive notice for most purposes. The position of
the outsider has been greatly improved by s 130 which has the effect of abolishing the
doctrine of constructive notice. The doctrine has been retained only with respect to doc-
uments relating to company charges: s 130(2). Section 130(1) provides:
“A person is not taken to have information about a company merely because the information is
available to the public from ASIC.”
(Former s 165(1) was substantially similar: a person shall not be taken to have
knowledge of the memorandum or articles of a company or any other document or par-
ticulars by reason only that they have been lodged with the Commission.) This means
that a company can no longer rely, as against an outsider, on any limitations of authori-
ty imposed on the organs or agents of the company by the constitution.
20 Brick & Pipe (1991) 9 ACLC 324, 345–6 (Ormiston J); Advance Bank Australia Ltd v Fleetwood Star Pty Ltd
(1992) 10 ACLC 703, 710 (Studdert J).
21 (1999) 30 ACSR 688 (Lee J).
22 (1999) 30 ACSR 688, 395.
Section 130 operates together with the assumptions an outsider is entitled to make
under s 129. For example, under s 129(2), an outsider may assume that an officer has
authority to exercise the powers and perform the duties customarily exercised or per-
formed by an officer of a similar company. The outsider need not be concerned with
restrictions on the authority of the officer or agent imposed by the constitution.
The Abolition of Ultra Vires

The unresolved issues of statutory reform
Literature and case law universally agree23 that the first round of legislative reform effect-
ed by the 1984 amendments abolished ultra vires in the classic sense. A breach of the
company’s constitution no longer has any direct effect on the enforcement of contracts:
s 125. Legislative attempts to abolish ultra vires, however, have not entirely dispelled
reservations regarding the degree of overall protection to outsiders from disputes regard-
ing a company’s capacity, powers and the exercise of its powers. The scope of reform
still raises the following issues:
1. The recurring debate whether the doctrine of ultra vires ought to be abolished.
2. Amendments to the legislation give rise to varying degrees of perceived transi-
tional difficulties for all pre-reform companies that have existing constitutions.24
The main difficulty is in identifying the form of the constitution, to determine
whether the company has any self-imposed restrictions on powers.
3. Identifying the direct and indirect consequences of a breach by the company of
its constitution. Even though the void effect of ultra vires is overcome, there is
concern as to the extent that the outsider’s rights could be indirectly affected by
internal enforcement action of the constitution, for example, if the shareholders
were successful in applying for an injunction, or to have the company wound up
for breach of the constitution.25
4. The limitation, if any, on a company’s contractual capacity and the significance
of the statement in s 124(2) (and its predecessors) that the company’s legal
capacity is not affected if an action is not in its interests.
These issues are examined below.
Should ultra vires have been abolished?
Although at the various stages of the reform there has been criticism of the drafting of
the provisions, the overwhelming consensus supports the view that abolishing ultra vires
is a desirable legislative goal. Outsiders were subject to harsh and inconsistent results
when the common law doctrine operated. For example, in Re Introductions Ltd,26 a nor-
23 For example, T Cain, ‘Ultra Vires in 1984’ 1 Queensland Institute of Technology Law Journal 31, 39; M Sneddon,
‘Protection From Ultra Vires and Related Defences’ (1992) 66 Law Institute Journal 70; Duke Ltd v Pilmer (1998)
16 ACLC 567, 731 (Mullighan J, at first instance); Advance Bank of Australia Ltd v FAI Insurances Ltd (1987) 2
NSWLR 464, 475 (Kirby P); Darvall v North Sydney Brick & Tile Company Ltd (No 4) (1988) 6 ACLC 1095, 1104
(Bryson J).
24 As in Re Edward Love & Co Pty Ltd [1969] VR 230.
25 “There is a remote possibility that non-observance of the restriction or prohibition could be part of a case for having
the company wound up and that might be inconvenient to the outside contractor .” H A J Ford, Outline of
Companies and Securities Law (1988) 54.
26 [1970] 1 Ch 199.
mal commercial loan transaction was held to be void by ultra vires. Although the com-
pany had the power to borrow, the loan was to fund a business activity that was outside
the company’s constitution, and the bank knew this. By contrast, Re David Payne & Co
Ltd27 held that as long as the company had a power to borrow in its memorandum, the
lender does not have to ensure that the directors apply the loan for an intra vires purpose.
To balance these criticisms, three points may be made in defence of ultra vires:
1. The doctrine of ultra vires was developed in the early cases during the nineteenth
century primarily to protect shareholders and members from unauthorised use of
corporate funds.28 This protection to shareholders was subverted during the twen-
tieth century by such strategies as widely drafted objects and powers clauses.
Consequently, protection to shareholders was eroded, the process of incorpora-
tion was seriously encumbered and created pitfalls for third parties.29
2. As mentioned in chapter 3, the doctrine of constructive notice, in conjunction
with ultra vires, seriously undermined the position of third parties. Traditionally,
the doctrine of constructive notice was developed to counterbalance the protec-
tion to shareholders by ultra vires, that is, it was developed to ensure that share-
holders invested on the basis that they were assumed to have knowledge of the
company’s constituent documents. It was a doctrine developed to constrain the
actions of insiders, that, when applied to outsiders, operated harshly.30
3. Although companies (or more usually, their liquidators31) could invoke ultra vires
and its void affect, so too could outsiders invoke a company’s ultra vires actions
to defend a claim brought by the company against them.32
Adopting the view of the outsider, such as a lender, the reforms minimise the risk of
invalid corporate dealings and minimise the transaction costs. The company’s constitu-
tion, if there is one, operates from the shareholders’ point of view as an expression of the
collective expectation regarding the company’s activities and managers’ powers.
Watson33 and Grantham34 have argued that the balance may be too far in favour of out-
siders at the expense of shareholders’ interests. Although we do not wish to vigorously
debate the chosen legislative path, any criticism of the legislative policy is at least con-
sistent with the High Court in Northside (noted in chapter 3), that corporate law princi-
ples must balance between facilitating business transactions with companies against pre-
venting corporate fraud. This “balancing” test is useful to moderate competing views as
to the scope of the outsider’s protection.
It is also worth observing the expectation gap left by the legislature in the latest round
of reform. Although the Corporations Act still contemplates, and in some cases, requires,
the corporate constitution, there is equivocal signalling of the purpose of such regulation.
27 [1904] 2 Ch 608.
28 Re KL Tractors Ltd (1961) 106 CLR 318, 338 (Fullagar J).
29 United Kingdom, Report of the Committee on Company Law Amendment, (Cmnd 6659, 1945), 12.
30 ‘The real focus of complaint by an outside party against whom the doctrine of ultra vires is invoked, is therefore, the
doctrine of constructive notice.’: W Paterson and H Ednie, Australian Company Law vol 1 (2nd ed, 1971) [20/10] .
31 For example, Re Edward Love & Co Pty Ltd [1969] VR 230 and Jon Beauforte (London) Ltd [1953] 2 WLR 465.
32 For example, City of Camberwell v Cooper [1930] VLR 289.
33 B Watson, ‘Corporate Collapses – Time to Reintroduce the Ultra Vires Rule?’ (1990) 8 Company and Securities Law
Journal 240.
34 R Grantham, ‘Contracting with Companies: Rule of Law or Business Rules’ (1996) 17 New Zealand Universities
Law Review 39.
If there is no direct consequence for non-compliance of the constitution, this disappoints

the expectations of shareholders and creates unnecessary confusion as to the legal effect
of the constitution. The absence of explicit consequences, or at least explicit cross-refer-
encing to indirect effects,35 is counter-productive to the simplification goal. This is still
an issue for companies created for a particular purpose, for example, joint venture com-
panies or not for profit companies.
Transitional difficulties in identifying the corporate constitution
The Company Law Review Act 1998 resulted in more simplified legislation but this is the
fourth major legislative stage in forty years.36 This means that there are companies cur-
rently operating that were incorporated according to different regulatory regimes.
Although it is possible to state above in simplistic terms the constitutional options for
companies before or after 1 July 1998, to reverse the issue is more complicated. That is,
there are a number of steps involved in answering the question: “For any given compa-
ny, what is its constitution?”37
From the point of view of an outsider,38 there are three steps:39
1. Was the company incorporated after 1 January 1998?
The only constituent document required to register the company is the applica-
tion for registration. A check of the ASIC records ensures that no constitution
was registered with the company and that no subsequent special resolutions have
been lodged to rescind or modify the replaceable rules. If the check is negative,
then the company has no constitution, and the replaceable rules apply as the
company’s constitution: s 134. A useful strategy for companies in this situation,
if requested to produce a “hard copy” its constitution, is to access the summary
of the replaceable rules from the ASIC webpage.40
Also, if a post-July 1998 company is a public company, three other complica-
tions are noted:
(i) a public company is bound by certain mandatory rules that are not replace-
able (s 141);
(ii) if it is a No Liability company, then it must be registered with a constitution
limiting its objects to mining (s 112(2)); and
35 S Woodward, ‘Ultra Vires Oversimplified: Changes to Company Powers Under the Second Corporations Act
Simplification Bill’ (1997) 15 Company and Securities Law Journal 162, 172.
36 In summary:
Pre 1961 Uniform Companies Acts, (UCA) that relied on mandatory objects and powers in memoranda, backed up
by the common law ultra vires void effect;
UCA to the 31 December 1983 version of the Companies Codes, with the first expression that transactions were not
void merely because of a restriction in or absence of powers or objects in the memorandum;
Companies Codes to 30 June 1998 Corporations Law, expressly abolishing ultra vires and making memoranda
optional;
Current Corporations Act with the ultra vires provisions simplified as a result of the Company Law Review Act 1998
changes.
37 The ‘what’ question is posed as the threshold question. The ‘why do you need to know’ question is dealt with next.
38 Shareholders have a right to request a copy of the constitution: s 139.
39 Elsewhere, the process of identifying a company’s constitution since 1 July 1998 has been presented as a complex
flowchart: see for example I Ramsay, The New Corporations Law (1998) 39–40; S Woodward, H Bird and S
Sievers, Corporations Law in Principle (5th ed, 2001) 74–75.
40 The ASIC webpage contains a useful summary of the replaceable rules, which is attached as Appendix II. See
http://www.asic.gov.au/.
(iii) if it omits the word “Limited” from its name, it must have objects limiting
its activities to “charitable” (s 150).
If there are any special resolutions, the most likely effect is to modify the
replaceable rules, in which case the replaceable rules as modified will govern
the company.
2. Was the company incorporated between 1 January 1984 and 30 June 1998?
These companies were required to have a memorandum, although stated objects
and powers were optional. The ASIC records will reveal whether the company
passed a special resolution to repeal its former constitution (s 136). If so, then
the company has no constitution, and the replaceable rules apply, subject to the
same three complications for public companies. If the company still has its
memorandum and articles, then these documents will remain as the company’s
constitution (s 1415). Similarly, if there are any special resolutions, they may
either repeal the existing constitution or modify the replaceable rules, in which
case the replaceable rules as modified will govern the company.
3. Was the company incorporated before 1 January 1984?
These companies were required to have a memorandum, with stated objects and
powers. The ASIC records will reveal whether the company has passed a special
resolution to repeal its former constitution (s 136). If so, then the company has
no constitution, and the replaceable rules apply, subject to the same three com-
plications for public companies. If the company still has its memorandum and
articles, then this will remain the company’s constitution (s 1415). Similarly, if
there are any special resolutions, they may either repeal the existing constitution,
or modify the replaceable rules, in which case the replaceable rules as modified
will govern the company.
The difficulty is that the constitution may not necessarily comprise the one document
that was submitted for incorporation, but now must be “recreated” from the special res-
olutions filed on the public record. In summary, if the company records indicate that it
once had a memorandum, the record must be checked to ensure that it has not been
repealed. If the company never had a constitution, or repealed it, the record must be
checked to ensure that the replaceable rules apply unmodified, or that a constitution has
not subsequently been reinstated.
Identifying the format of the constitution enables any stakeholder, whether outsider,
insider or the regulator, to ascertain whether the company has any self-imposed objects
or restriction on powers. The significance of the existence and contents of the constitu-
tion, in terms of its effects and indeed whether the outsider needs to know any details of
the company’s constitution, is considered in the next part that examines the direct and
indirect effects of breaching the constitution.
The Explanatory Memorandum rather unhelpfully suggests that:
“Acts which are contrary to restrictions on the company’s exercise of powers will now be treated
in the same way as any other breach of a company’s constitution.”41
There is no explanation of these effects.
41 Explanatory Memorandum, Company Law Review Act 1998, [8.5].

The consequences of breaching the constitution

1. The effects of the statutory provisions on classic ultra vires
The Company Law Review Act 1998 effects four main changes to bring about the aboli-
tion of ultra vires. First, constructive knowledge of the constitution is abolished (s
130(1)). Section 130 is structured in the legislation as part of the rules relating to the
availability of statutory assumptions to outsiders. This reform has already been discussed
in chapter 3. The result is that cases such as Re Jon Beauforte (London) Ltd,42 where the
company’s constitution confined its objects to carrying on the business of costumiers and
tailors, would not affect its capacity to deal with outsiders, regardless of the company
carrying on some other business.
Second, a company cannot plead its constitution to avoid a contract. However, the
residual effect of ANZ Executors and Trustee Co Ltd v Qintex Australia Ltd43 is still pos-
sible, as to whether a court would order specific performance of a contract where the
company refused to complete it if it breached the express restrictions and objects in the
constitution. Qintex may still override s 125 as regards executory transactions that con-
travene the constitution.
Third, as s 125 covers both stated objects and express restrictions, the technical dis-
tinctions under the common law between objects and powers are no longer relevant.
Fourth, s 124(2) confirms that corporate purpose is not relevant to the company’s
capacity. This was the effect of the common law as decided by Pennycuick J in
Charterbridge Corporation Ltd v Lloyds Bank44 particularly as His Honour emphasised
that non-corporate purpose transactions may still be voidable due to defects in agents
authority, but not void due to ultra vires.
2. The residual effect of the former provisions on s 125
Section 125 confirms that a company may still have stated objects, or impose restrictions
on its powers, in its constitution. A failure to observe an express restriction or prohibi-
tion or an object in a constitution does not invalidate the transaction. Section 125 mere-
ly retrieves the essence of the corporate constitution captured in former s 162(1) and (5)
by acknowledging that companies may have limitations imposed by their constitution,
but that it does not affect transactions if power is exercised not in accordance with such
limitations.
The balance of the provisions in former s 162 are not necessary to achieve the object
of abolishing ultra vires. In a substantial departure from former s 162, the ultra vires pro-
visions no longer explicitly:
• state that a contravention of the constitution is a contravention of the Law (for-
mer s 162(2)); nor
• refer to any non-effects of an ultra vires action, such as contravention of the con-
stitution is not an offence (former s 162(4)); nor
• provide direct consequences flowing from a breach of constitution (former s
162(7)(8)).
The simplified “anti-ultra vires” rules suggest that there is no direct consequence
flowing from a breach of the corporate constitution.
42 [1953] 2 WLR 465.
43 [1991] 2 Qd R 360.
44 [1970] Ch 62.
To test the effectiveness of the repeal of s 162(7) and (8), the direct consequences for-
merly listed in those sections were itemised as set out below.45
Under former s 162(7), the fact that a company contravened its constitution, or that
an officer was involved in the contravention, could only be asserted in the following sit-
uations:
1. In a prosecution of a person for an offence against the legislation (s 162(7)(c)):
although no longer explicit, it is intuitive that such a general effect survives.
Depending upon the nature of the offence, a director’s disregard of the constitu-
tion may be relevant to the elements of that offence, as shown in Figure 5.1
below. Woodward’s example of the breach of the statutory duty of good faith,46
remains valid under the current provision in s 181 that requires directors to act in
good faith and exercise powers for a proper purpose. The constitution contains
an expression of corporate purpose, so that a breach of the constitution may evi-
dence lack of good faith, or improper purpose. A contravention of this provision
is an offence if accompanied by recklessness or intentional dishonesty: s184(1).
Figure 5.1 Breach of constitution and offences for breach of statutory duties
Breach of
constitution
May be evidence of
Not an offence
breach of good faith
duty s181
No direct effect Reckless or

intentionally
dishones an
offence
s184
2. In an application for a management banning order under s 230 (s 162(7)(d)): for-

mer s 230 allowed the court to make an order prohibiting a person from manag-
ing a corporation where there were “repeated breaches of the legislation.”
Section 230 has been replaced, as a result of changes effected by the Corporate
Law Economic Reform Program Act 1999, with Part 2D.6 – Disqualification
from managing corporations. Part 2D.6 still contains a power by the court to dis-
qualify for repeated breaches of the legislation: s 206E. Woodward concluded
that the effect of the repeal of s 162 is to render irrelevant breaches of the consti-
45 See Woodward , supra n 35.

46 Ibid 166, see also Explanatory Memorandum, Company Law Review Act 1998, [8.4].
tution for the purpose of a disqualification order.47 However, s 206C confirms

that the court may also make an order consequent upon a civil penalty order.
Breach of directors’ duties also involves a civil penalty order, so a disqualifica-
tion order remains an indirect effect, as shown in Figure 5.2 below.
Figure 5.2 Breach of constitution and disqualification orders
Breach of
constitution
No a breach of May also be

legislation for evidence of breach
disqualification of good faith duty
s181
No direct Breach is a
Repeated breaches
application civil penalty
may lead to
may lead to
disqualification
disqualification
s206E s206C
3. An application for an oppression remedy (s 162(7)(e)): the court’s discretion

under s 232 and s 233 to consider the conduct of the “affairs of the company”
would appear to be wide enough to contemplate contraventions of the constitu-
tion.48 Woodward49 argues that a member must be able to rely on such a factor as
evidence of oppression or prejudicial conduct. The court can make any order, for
oppressive conduct, including winding up, appointment of a receiver, a share
purchase order, etc.
There is no direct power for the court to affect contracts entered into with out-
siders, although the court may make “any order”. The oppression remedy refers
to the possibility of an injunction as a remedy that indirectly may affect pending
contracts, although the risk to outsiders being affected is minimal. The appoint-
ment of a receiver may affect a lender if it triggers default under a floating
charge, but this does not affect enforceability of the underlying contract.
4. An application for an injunction under s 1324 to restrain the company from
entering into an agreement (s 162(7)(f)): “the abolition of s 168(7)(f) has the
effect of putting a statutory injunction entirely out of the reach of a member (or
47 Ibid 166.
48 Contemplated, but not decided, by Young J in Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 9 ACLC 1,018,
1,023.
49 Supra n 35, 167. See also Explanatory Memorandum, Company Law Review Act 1998, [8.4].
other person) who is aware that directors are proposing to act in breach of
objects or restrictions in the company’s constitution…”.50 The courts’ express
jurisdiction in the Corporations Act to grant an injunction is not available, as s
1324 provides that the remedy is available only for contraventions of the legisla-
tion. The passive wording of s 125, combined with the absence of any explicit
outcome, suggests that a breach of the corporate constitution does not, of itself,
contravene the legislation. However, this does not preclude the possibility that a
breach of the constitution will have relevance in other matters, leading to an
injunction for other contraventions, such as discussed above, breach of duty51 or
as an oppression remedy.
5. Proceedings by the company or by a member against present or former directors
(s 162(7)(g)): the Explanatory Memorandum asserts that this provision related to
“the common law doctrine that a director of a company who causes the company
to act outside its powers is automatically liable to the company for any loss
resulting from the breach.”52 No authority for this assertion is provided, and it
gives rise to two separate issues: first, was the effect of s 162(7)(g) confined to
the common law doctrine as identified, and secondly, in any event, the deletion
of s 162(7)(g) does not automatically repeal the operation of the common law
damages doctrine.
As to the first point, there may be some confusion generated by the Explanatory
Memorandum as to the relation between s 162(7)(g) and s 162(8). Former s 162(8) was
more explicit as to the damages effect. It provided:
“Where, if subsection (7) had not been enacted, the Court would have power under section 1324 to
grant … an injunction restraining a company, or an officer of a company, from engaging in partic-
ular conduct constituting a contravention [of the constitution]… the Court may, order the … com-
pany, or the officer, as the case may be to pay damages …”.
The terms of s 162(7)(g) are more general, permitting ultra vires actions to be assert-
ed in any proceedings against directors by either the company or a member. There is
nothing to suggest that the proceedings are limited to damages. Referring to the direc-
tors’ duties example, if the ultra vires action of directors is being used as evidence of a
breach of the duty of good faith, or breach of the duty of care,53 then a whole range of
civil remedies, including damages, is available to the company. This remedy may be pur-
sued by the company, or by a member on behalf of the company under Part 2F.1A (the
statutory derivative action). Further, members may sue in their own right if they are seek-
ing to enforce the constitution as a contract (discussed below). Repeal of s 162(7)(g) does
not preclude ultra vires actions being raised indirectly if this relates to enforcement of
some other provision or duty on directors.
As to the second point, the Explanatory Memorandum is probably incorrect in
attributing the common law doctrine of damages for breach of constitution solely to
s 162(7)(g), as s 162(8) had a similar effect. As a breach of the constitution is no longer
a contravention of the Act, and as a contravention of the Act is a prerequisite to seeking
50 Woodward, supra n 35, 168.
51 Ibid.
53 H A J Ford, Outline of Companies and Securities Law (1988) 54.
an injunction under s 1324, a damages provision tied to injunctive relief is redundant. In

any event, Professor Ramsay suggests that former s 162(7)(g) does not overcome the
common law rule.54 Based on the usual requirements of statutory interpretation, if the leg-
islature intends to specifically override common law, some express provision is required.
The simplified anti-ultra vires provisions, merely by repealing the former provisions, and
in the absence of express statutory override, suggest that the common law liability of
directors is intact. Woodward supports the view, on policy grounds, that directors ought
to retain some accountability for breaching the constitution.55
6. An application for winding up (s 167(7)(h)): deletion of the direct effect may not
have any substantial change, as the ultra vires act could be raised simply because
it is relevant to the court’s determination of the winding up application.56
To summarise the effects of the repeal of s 162(7), the Explanatory Memorandum
confirms that actions contrary to stated restrictions on powers or stated objects will still
be able to be asserted in other sections, and three examples are provided:
1. Action for breach of statutory duty of honesty (now good faith in s 180);
2. Action for oppression; or
3. Action for winding up under s 461(1)(k).57
Members have several grounds available under s 461 to seek winding up. It may be
that the directors’ actions contravening the constitution may be relevant evidence in
proving, for example, that directors have acted for a non-corporate purpose for s
461(1)(e), or the just and equitable ground in s 461(1)(k). The history of ultra vires
reform and its effect on winding up creates some uncertainty, as demonstrated by
Menhennitt J in Re Tivoli Freeholds Ltd.58
In Re Tivoli Freeholds Ltd, the company’s stated objects were to carry on an enter-
tainment business. Industrial Equity Ltd gained control of the company and sold off its
assets, using the proceeds to fund the group’s share trading activities. The minority share-
holders applied for compulsory winding up on the just and equitable ground. Menhennitt
J granted the application on the basis that the company’s departure from the general
intention and common understanding of the activities of the company when they became
members meant that it was just and equitable to wind it up. His Honour emphasised that
although this is a different test to ultra vires, the prime source for ascertaining the gen-
eral intention and common understanding of the members was the constitution.59 The
winding up application was decided on the provisions in the Uniform Companies Act
1961. As the original s 20 provided an exclusive code for the ultra vires effects, only
allowing members to seek an injunction, Menhennitt J held that “lack of capacity or
power is not a ground for winding up by a member.”60
54 I Ramsay, The New Corporations Law (1998) 35.

55 Supra n 35, 169.
56 Ibid. See also Explanatory Memorandum, Company Law Review Act 1998, [8.4].
58 [1972] VR 445.
59 See also Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 9 ACLC 1,018, 1022 (Young J) that confirms that
members can seek winding up for loss of substratum, although that case involved identifying the corporators’ pur-
pose in the absence of stated objects. See also R Grantham, ‘Ultra Vires: Gone But Not Forgotten’ (1993) 3
Australian Bar Review 243.
60 Re Tivoli Freeholds Ltd [1972] VR 445, 465.
Given the restructured ultra vires provisions that now provide no direct consequence
for the breach of the constitution, the reference in the Explanatory Memorandum to the
relevance of winding up may be valid on two alternative bases, either by confining
Menhennitt J’s finding to the context of the statutory provision then in place, (so that in
the absence of specified effects, lack of capacity or power may be a ground of winding
up), or by applying the substance of the judgment that loss of substratum is different to
ultra vires, but confirming the role of the constitution in identifying the general intention
and common understanding of the members.
Added to this list, also, must be the effects from former s 162(7)(g), that directors act-
ing for non-constitutional purpose may still be raised in proceedings against directors, for
example, an action for damages for breaching the constitution, or for breaching their gen-
eral law duties.
These effects are predominantly of an internal nature, and are unlikely to affect the
validity of an external contract entered into in breach of the constitution. The remedy of
winding up obviously has consequences for an outsider regarding the long-term effec-
tiveness of any transaction. Similarly, the appointment of a receiver as a remedy for
oppression would usually trigger default and crystalisation under a floating charge. For
any other discretionary oppression remedy under s 233, presumably, the court would
limit the exercise of its discretionary power to situations of threatened or proposed
breaches of a company’s constitution. Otherwise, an attack on executed contracts would
jeopardize the rights of third parties and reinstate a form of ultra vires.61 An outsider may
be directly affected by allegations of directors’ breach of fiduciary duty flowing from a
non-constitutional transaction, if they have participated in the breach of duty. The out-
sider’s participatory liability is determined according to the law of constructive trusts.
(Discussed in Chapter 6).
The only immediate relevance of a contravention of the constitution is that it results
in a breach of the corporate contract. Section 140 confirms that the constitution applies
as the terms of a contract between:
• the company and each member; and
• the company and each officer; and
• a member and each other member.
Further, as a restriction on the company’s powers to amend its constitution, any
amendment that increases a member’s liability to the company is not valid unless they
agree in writing to be bound: s 140(2)(b).
Members may seek a remedy against the company under the general law in the form
of a declaration or injunction (but not damages)62 to enforce the constitution. Bryson J in
Darvall v North Sydney Brick & Tile Co Ltd (No. 4)63 confirmed that the former “anti-
ultra vires” provisions (ss 67–68 Companies Codes) “operate to diminish the enforce-
ability among the members and the company of the contractual obligations among them
arising out of” the constitution.
61 Supported by Australian Corporations and Securities Commentary [¶33–140].
62 Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15.
63 (1988) 6 ACLC 1,095, 1104. A member was successful in having a dividend declaration declared invalid, on the
basis that the articles did not authorise a dividend in the form of assets (shares in a wholly owned subsidiary). Also,
Austin J in Ding v Sylvania Waterways Ltd (1999) 17 ACLC 531 declared that an alteration to the constitution to
impose a new levy was not binding under s 140(2). None of these disputes affected the rights of outsiders.
It is not accurate to describe a breach of the constitution, which only affects the inter-
nal contract between the company and members (s 140), as a “direct” effect. In the
absence of any explicit direct effects, and due to the repeal of former s 162, it is con-
cluded that there are no direct consequences if a company contravenes its constitution.
The rewording of s 125 does not prevent enquiry as to possible indirect effects of the
breach of the corporate constitution. Figure 5.3 below summarises possible direct and
indirect effects. Whether the effects of the breach of the corporate constitution are direct
and indirect, they primarily have significance for internal parties only. The extent of the
risk to outsiders is assessed as minimal.
Figure 5.3 Comparison between direct effects and indirect effects of breach of the
company’s constitution
Corporate
consitution
May contain
objects
May limit
powers
Actions
contravening
consitution
Direct Indirect
No explicit Breach of Residual effects

effects corporate of former
contract s162(7)(8)
s140 proceedings common law

winding up oppression
no direct effect against action to sue
s461 s232
on outsiders directors directors for
breach of
constitution
Breach of duty
ss180–184
civil Prosecution
remedies of offences civil penalty
(not s 180)
disqualification
orders s206C
The balance of the effects of a breach of the constitution would now have to be con-
sidered as indirect effects.
The regulatory effects of a breach of the constitution: company type

A constitution is now optional for most companies, but the only exceptions are No
Liability companies, and any charitable company that wishes to delete the word “Limited”
from its name. Such companies must have constitutions that restrict their purposes. A
problem for outsiders is whether they will be bound by the restrictions in objects that these
companies must have, and that are automatically signalled by the company’s name.
To address this issue for No Liability companies, s 112(5) specifically provides that
an act or transaction is not invalid merely because the company engages in activities that
are outside its mining purposes objects. This confirms the effect of s 125(2), so that con-
tacts are not invalid. This effect though would be limited to classic ultra vires,64 but there
are two problems dealings with No Liability companies create:
1. Are outsiders automatically on notice that such companies have restricted consti-
tutions when dealing with No Liability companies? This is mitigated if notice is
confined to actual knowledge:
“…since there may be considerable awareness in the business community that a no liability
company is restricted to engaging only in activities directed to mining purposes.”65
2. Dealing with No Liability companies that breach their stated objects adds anoth-
er layer of compliance, so s 125(2) is not enough to protect outsiders from all
effects of a breach of the Act, particularly an injunction. It would seem that a
member or any other person whose interests are affected could seek an injunc-
tion under s 1324 for a breach of s 112(3), as this subsection specifically pro-
hibits a No Liability company from breaching its constitution.
To the extent that s 112(4)66 only precludes letting contacts over the mining land
without a special resolution, breach of this restriction would not amount to a
breach of the constitution, but would be a procedural matter for the outsider to
assume under the statutory assumptions.
Corporate capacity: s 124
1. Section 124(1) and its limitations
Although s 124 (former s 161(1)) is necessary in abolishing the doctrine of ultra vires, it
must be recognised that corporate capacity still has some limits. Companies have the
powers of an individual, but there are limits on individuals’ contractual freedom. Any
principles under general contract law may still invalidate a financing transaction, so
lenders must still be alert to these “usual” problems.67
64 Confirmed in Duke Group Ltd v Pilmer (1998) 16 ACLC 567, 731–733 (Mullighan J, at first instance), in dealing
with the defendants’ arguments about the plaintiff’s dealings, where the plaintiff was a No Liability company. The
defendants raised a preliminary issue that the negligence action against the defendants could not be sustained, as it
arose out of a transaction (a takeover) that was not for the company’s express purposes.
65 Ford, Austin and Ramsay, supra n 18, [12.190]. A similar issue arises for charitable companies that delete ‘Limited’
from their name (s 150) as the company’s name would signal this particular restriction.
66 Section 112(4) [Letting or contract] The directors of a no liability company must not:
(a) let the whole or proportion of a mine or claim on tribute; or
(b) make any contract for working any land on tribute;
unless:
(c) the letting or contract is approved by a special resolution; or
(d) no such letting or contract has been made within the period of 2 years immediately preceding the proposed let-
ting or contract.
67 For example, absence of consideration: Re Edward Love & Co Pty Ltd [1969] VR 230.
Section 124(1) is a pivotal section to corporate contracts. It states:

“A company has the legal capacity and powers of an individual both in and outside this jurisdic-
tion. A company also has all the powers of a body corporate …”
A company cannot be equated with an individual for all purposes, so some ad hoc
distinctions have been made with respect to corporate capacity, for example:
• A company cannot act maliciously against its members. In Rogers v The Royal
College of Ophthalmologists,68 Young J posed the question that “if a company
has all the powers of a natural person, and a natural person has the power to gos-
sip about a friend, why does the company not have the power to do what this
company, unless restrained, intends to do?” Ultimately, His Honour did not quite
answer this question, as he granted the injunction based on the finding that it
would be a fraud on the power for the board to exercise its powers maliciously.
• Section 124 does not abrogate any restriction that a company cannot “represent”
itself in legal proceedings other than by a practitioner: Bay Marine Pty Ltd v
Clayton Country Properties Pty Ltd (No 2).69
It has been held under the common law that the doctrine of maintenance of share cap-
ital operates as a restriction on corporate capacity. For example, a company had no power
to:
• Purchase its own shares: Trevor v Whitworth;70
• Issue shares for less than their nominal value: Ooregum Gold Mining Company
of India v Roper;71
• Issue shares in breach of the fundraising provisions: Australian Breeders Co-
operative Society Ltd v Jones.72
These effects have now largely been overcome by the recent reforms. However, these
effects may be of little continuing relevance in any case, as s 124(1) is different to for-
mer s 161(1) in one significant respect. Former s 161(1) had effect “subject to the
Corporations Law” (former s 161(2)(a)); whereas this qualification to s 124(1) was delet-
ed by the Company Law Review Act 1998. Although this “simplification” is not referred
to in the Explanatory Memorandum, the effect of this change is arguably more than just
simplification. Where certain contracts are illegal for companies, whether under the
Corporations Act itself, or due to some other statute or due to general law principles, the
outsider could not enforce them. In the case of the first category, contracts illegal under
the corporations legislation, former s 162(2)(a) operated as a limitation on a company’s
capacity. A contract invalid by some other provision in the Corporations Law was not
“saved” by the grant of power in former s 161. For example, in Collingridge v Sontor Pty
Ltd,73 a contract had the effect of an unauthorised reduction of capital. Young J held the
contract was still void, despite former s 161:
68 (1991) 9 ACLC 1,497, 1,499.

69 (1987) 5 ACLC 38, 41 (Samuels JA). In that case, the Supreme Court Rules required companies to be represented
by a solicitor. The Court of Appeal (majority, Kirby P dissenting) held that the amendments to the Companies Codes
affecting capacity did not alter this rule.
70 (1887) 12 App Cas 409.
71 [1892] AC 125.
72 (1998) 16 ACLC 100.
73 Collingridge v Sontor Pty Ltd (1997) 16 ACLC 1,681.
“In any event, s 161 does not appear to authorize the company to do something which under the
Corporations Law it cannot do. Thus, even after ss 160–162, if a company purports to make an
agreement which involves an unauthorized reduction of capital the agreement is ultra vires and
void.”
Contracts that contravene the Act are arguably no longer void since the Company
Law Review Act 1998 changes for two reasons:
1. s 124 is no longer expressly “subject to” the Act; and
2. the combined effect of the Company Law Review Act 1998 and the Corporate
Law Economic Reform Program Act 1999 simplifies many of the procedural lim-
itations on companies in relation to share dealings, so that the procedures are no
longer required,74 and the provisions expressly preclude any void effect.75
2. Section 124(2): capacity not affected by the company’s interests not being served
The drafting of s 124(2) has been simplified compared to its former equivalent, s 161(3).
A significant change is that instead of the company’s capacity being unaffected by “the
fact that the doing of an act by a company would not be, or is not, in its best interests”,
s 124(2) now only refers to the “company’s interests are not … served”. The previous use
of the qualifier “best” suggests a connection with the fiduciary formulation of the “best
interests of the company as a whole”. The deletion of “best” relieves any future concerns
that s 124 is confined to precluding the void effect for transactions entered into in breach
of fiduciary duties. The more generic, unqualified “interests” denotes that all transactions
tainted by a non-corporate purpose, whether that be identified as a breach of the consti-
tutional constraints, or identified by the fiduciary constraint, are not void. Accordingly,
the redrafted format of s 124(2) is more explicit in recognising “abuse of power” in all
its forms, and that such transactions are not to be treated as void. Hence, the former s
161(3) did not affect the outcome in ANZ Executors & Trustee Company Ltd v Qintex
Australia Ltd,76 nor would the redrafted s 124(2), as the case involved the issue of spe-
cific performance (i.e. court’s discretion), not the issue of whether the transaction was
void ab initio.
The Effect of Statutory Reform

Although this chapter has discussed the history of legislative reform to ultra vires and the
statutory indoor management rule, of primary interest is the comparison between
Company Law Review Act 1998 and former legislation. The Company Law Review Act
1998 significantly restructured and redrafted the provisions dealing with corporate con-
stitutions, registration and ultra vires. Notable features of reform that affect outsiders’
perception of capacity issues are:
Constitution optional
If outsiders are dealing with a company, it is unnecessary for the outsider to access the
company’s constitution. For those who may still insist on this information, it may be a
frustrating task to identify the company’s constitution. Companies registered after 1 July
74 For example, capital reductions, unlike in Collingridge, no longer require court authorisation to be valid, only share-
holder approval: s 256B, s 256C.
75 For example, a capital reduction in breach of s 256B and s 256C does not affect the validity of any transactions: s
256D.
76 [1991] 2 Qd R 360.
1998 do not need a constitution, unless they are No Liability or charitable companies.
Table A articles have been repealed and the replaceable rules operate as the default rules
for all companies. Existing companies are able to repeal former memoranda and articles.
Constitutions may state objects and powers, but there are no explicit effects
The effect of s 125 is similar to former s 162 by expressly providing that the exercise of
a power is not invalid merely because it contravenes the constitution. However, the
streamlined s 125 may cause confusion as it no longer makes transparent the indirect, or
internal effects, of a breach of the constitution. Contravention of the constitution may
still be raised in related actions such as prosecutions of directors, actions for damages
against directors, oppression proceedings and winding up applications. Section 125 may
be misleading as it no longer recognises these effects, but they still exist.
Grant of corporate power: s 124(1)
Section 124(1) is differently worded form former s 161 in two respects. First, the grant
of power to the company is “the legal capacity and powers of an individual” whereas pre-
viously it was “legal capacity of a natural person”. No significance is attributed to this
change. However, former s 161(2) made the grant of power “subject to the Law”. This
qualification has been deleted, with the result that breach of any provision of the
Corporations Act cannot affect the company’s legal capacity. This effect is important,
and overcomes any past arguments as to the effect of illegal transactions.
Company’s “best” interests
The new provision s 124(2) is arguably stronger in overcoming the effect of corporate
purpose on corporate capacity, as it has been simply reworded from “best interests” to:
“A company’s legal capacity to do something is not affected by the fact that the company’s inter-
ests are not, or would not be, served by doing it.”
The use of best interests in the former provision is too restricting, due to the strong
association between “best interests” of the company and directors’ fiduciary duty. The
new provision makes it clearer that capacity is not affected by any non-corporate pur-
pose, not just directors’ breach of fiduciary duty.
Express intention to abolish ultra vires
The legislation no longer contains this express intention. This is not significant because
the Explanatory Memorandum refers to that intention anyway; and the use and misuse of
the term “ultra vires” in the past renders such intention of fairly unsatisfactory assistance.
It is not clear that either the intention or effect of the Corporations Act is to protect
lenders from the effects of “ultra vires” as used in the sense of officers’ abuse of power.
This is the issue that consumes much of the current literature; “although ss 160–162 have
abolished the old narrow ultra vires doctrine the wide doctrine appears to be alive and
kicking.”77 Specifically, the Company Law Review Act 1998 does not resolve the follow-
ing vulnerabilities of debt or security contracts, relating to the authority of officers to
enter into them:
77 K Robson, Annotated Corporations Law, (2nd ed, 1997) 163.

• the lender still has to identify the officers of the company and ascertain their
position.
• The existence of a non-corporate purpose still operates as an inherent limitation
on officers’ authority. However, with optional constitutions, it is more difficult to
define “non-corporate” purpose. The judgment of McPherson J in ANZ
Executors and Trustee Co Ltd v Qintex Australia Ltd assists to some extent in
defining “non-corporate” purpose. His Honour said:
“We cannot order a shareholder to require the company to execute the instrument of guaran-
tee if to do so would involve infringing the ‘essential principle’ that corporate powers and
funds may be used only for corporate purposes. For a commercial or trading company con-
fronting insolvency to make a gift of its assets in derogation of the interests of creditors is
not to use powers or purposes for their corporate but to do so for a non-corporate purpose.
For a subsidiary now to execute an instrument rendering it liable for an indebtedness in the
order of $110 million cannot possibly be for its benefit.”78
• Similarly, a transaction entered into by directors in breach of their fiduciary

duties still gives rise to disputes about officers’ authority and company’s reme-
dies that may be exercised.
Finally, to address these concerns, we have formulated some guidelines below, to
assist lenders in avoiding issues of corporate capacity, or the abuse of corporate power
by officers.
The Scope of Protection: Practical Guidelines and Ultra Vires

In terms of practical guidelines, the only threat to outsiders enforcing transactions against
companies lies in the uncertainty surrounding the effect of abuse of power by the com-
pany’s officers. We address the following scenarios:
1. If the abuse of power relates to a contravention of express objects or powers in a
constitution, this has no direct effect on outsiders. However, contravention of the
constitution may arise as evidence to support a limitation on directors’ authority,
or that directors have breached their fiduciary duty.
2. If the abuse of power relates to illegality, whether under the Corporations Act or
some other statute, this does not affect the grant of the company’s power under s
124(1). Illegality however may still be relevant to contractual capacity under
contract law, in the same manner as it would affect individuals.
3. If the abuse of power relates to an excess of authority, limits on an agent’s
authority do not affect outsiders as long as the person purporting to exercise the
power is an officer, in which case the outsider can assume that the officer has
customary or actual authority, and can assume that the officer has formal authori-
ty to execute documents.
4. If the outsider is not a bona fide purchaser for value without knowledge (i.e.
actual knowledge) of the abuse of power, then the transaction is not void, but
may be voidable at the company’s option. The Corporations Act does not alter
this general principle of equity.
78 [1991] 2 QdR 360, 371.

5. If the abuse of power relates to a fiduciary breach by directors, the extent of the
threat depends to some extent on the scope of the statutory assumption as to
proper performance of duties, discussed in chapter 6. Otherwise, a contract will
be voidable unless the outsider is a purchaser for value without knowledge of the
fiduciary breach. Knowledge is a critical concept here, as degrees of actual and
constructive knowledge by the outsider may also trigger constructive trust liabili-
ty.
More comprehensive guidelines to the conduct of transactions, taking into account
the indoor management rule and all statutory reforms are offered in the concluding chap-
ter, chapter 10. To conclude this chapter, several points are made:
1. The outsider needs to identify the corporate party, by sighting a certificate of reg-
istration. This confirms that the Corporations Act applies to the entity, and that it
is actually registered. Pre-registration contracts are enforced under Part 2B.3.
2. If the company is regulated under the Corporations Act, there is also an issue in
determining which version of the law applies. As outlined above, there have
been three stages of statutory reform. The first of July 1998 is a critical date
because that is when major change occurred. However, the substance of the
change is not significant so as to affect these concluding remarks.
3. The outsider needs to know the number of and identity of current corporate offi-
cers.
4. The outsider does not need to sight current nor former constitution. If the out-
sider currently has those documents, it amounts to knowledge of the restrictions
on powers, or object, if any. However, knowledge of the constitution is not
enough to make any contract voidable.
5. The outsider may be inconvenienced if the company is involved in litigation
over disputes with compliance with the constitution. Such disputes may affect
the viability of the company and cause inconvenience to outsiders, but will not
affect transactions. Whether such litigation occurs is beyond the control of an
outsider.
6. Similarly, the outsider will be inconvenienced if the company is involved in dis-
putes with the regulator for breaching its constitution, for example, a No
Liability company may be required to change status for breaching its restriction
to mining purposes, but will not affect transactions.
Chapter 6
The Statutory Assumptions: Section 129

The Content of the Assumptions
This chapter examines in detail the scope of the assumptions available to outsiders. The
drafting of the current assumptions in s 129 reflects a new, more streamlined style com-
pared to former s 164(3). Section 129(8) gives specific instructions as to their applica-
tion: “the assumptions that may be made under this section apply for the purposes of this
section.” This statement of application has three effects:
1. Each of these assumptions is separate and discrete: Brick and Pipe Industries Ltd
v Occidental Life Nominees Pty Ltd.1 This means that just because an outsider
cannot rely on a particular assumption, he or she is not prevented from relying
on the other assumptions.
2. The assumptions apply only where the qualifying circumstances in s 128 have
been met (discussed in chapter 5) and not for other purposes of the Corporations
Act.
3. The outsider does not have to prove that they actually made the assumption to
rely on it.
These are examined below.
First, as the Explanatory Memorandum states, the assumptions are intended to be
cumulative.2 This avoids the awkward drafting apparent from earlier iterations of the rule
that required internal cross-referencing. A similar effect had been achieved under the pre-
vious assumptions, which had been held to be discrete assumptions, so that if access to
one failed, then others were still available.3 For example, in Brick and Pipe Industries Ltd
v Occidental Life Nominees Pty Ltd,4 the outsider could not assume compliance with the
constitution, as it had actual knowledge of non-compliance, but that did not prevent it
from relying on the assumption as to due sealing.
However, the reverse is not the case, as Horrigan states, it is unlikely that outsiders
may actually subsume the assumptions.5 That is, if a specific assumption cannot be relied
upon, then the outsider cannot fall back on the more general. For example, where a sealed
document has not been attested by two officers as required by the sealing assumption, the
general assumption as to compliance with the constitution will not save it.6 Brennan J,
1 (1992) 10 ACLC 253.
2 Explanatory Memorandum, Company Law Review Bill 1998, [8.9].
3 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 58 (Kirby P).
4 (1992) 10 ACLC 253.
5 B Horrigan, ‘Busting Guarantees!’ [1998] 7 National Law Review [63].
6 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 15 ACLC 1,057 (Handley and Powell JJA, obiter). That case
involved the same officer, Mr Edmonds, attesting the seal as director and secretary, although he did occupy both
offices. Compare an earlier decision, not referred to, Belven Enterprises Pty Ltd v Lydham Pty Ltd (1996) 14 ACLC
1478, where Commissioner Wheeler QC held that the sealing assumption was not relevant, as the outsider had not
invoked it. In this case, the purchaser under a contract had not actually seen the executed contract and its sealing, but
rather was relying on the general assumption that the company it was dealing with had complied with its constitu-
tion.
in refusing special leave to appeal in Bank of New Zealand v Fiberi Pty Ltd,7 said that the
applicability of the first assumption to a dispute over the attestation of the seal is a doubt-
ful proposition, having regard to the particular assumption as to sealing.
Second, the assumptions only apply to that section, meaning that they operate only
as procedural assumptions. This confirms the procedural regularity purpose of the rule.
As expressed by Mahoney JA in Story v Advance Bank Australia Ltd, the assumptions do
not validate the transaction, but rather prevent the company from relying on the invalid-
ity.8 So, for the procedural assumptions to apply elsewhere, specific provision is made,
for example, s 442F.9 In addition, this means that the assumptions are only available to
counter assertions against the company. In Australian Capital Television Pty Ltd v
Minister for Transport and Communications,10 it was held that the former s 164(1) allows
the assumptions to be made only in relation to assertions by the company that they are
not correct. Where an assertion of non-compliance with a company’s constitution is made
by a third party, the statutory provisions do not apply and the common law Rule in
Turquand’s case and its limitations will still be operative.
Third, it is not necessary for an outsider to actually make these assumptions in order
to rely upon them. In Lyford v Media Portfolio Ltd,11 a company argued that evidence
showed that the making of the assumptions would have been contrary to the usual prac-
tice of the outsider in making loans, therefore the assumptions could not be made.
Nicholson J dismissed this argument on the basis that the statutory rule prevents a com-
pany from asserting that any of the assumptions are incorrect. This is so, whether or not
the assumptions were actually made by the outsider:
“It is the assertion which brings into application the provisions and not proof that assumptions
were in fact made.” 12
The new statutory version of the indoor management rule has been reworded and
restructured, prompting a comparison between new ss 128–129 with the former sections.
The previous six assumptions that the outsider was entitled to make are now restructured
into seven in s 129,13 with some modification consequent upon other Company Law
Review Act 1998 innovations. The utility of each assumption is analysed below.
Compliance with the Constitution: s 129(1)

The terms of the assumption are that: “The company’s constitution (if any) and the
replaceable rules that apply to the company, have been complied with” (based on former
s 164(3)(a)).
This assumption for corporate compliance in s 129(1) appears to mirror and so “cod-
ifies” the existing common law. In particular, the assumption is expressed as “compli-
ance” with the constitution. “Compliance” connotes procedural matters only, and does
not import any suggestion that the powers in the constitution have actually been exer-
7 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232, 236.
8 Story v Advance Bank Australia Ltd (1993) 11 ACLC 629, 640.
9 Section 442F provides that the assumptions are available where the administrator has control of the company.
10 (1989) 7 ACLC 525.
11 (1989) 7 ACLC 271.
12 (1989) 7 ACLC 271, 281.
13 See Appendix I where the provisions are set out in full.
The Statutory Assumptions: Section 129 73
cised. This assumption retains the common law distinction between procedural regulari-
ty and substantive exercise of powers. Accordingly, the principles discussed in chapter 3
from Northside Developments Pty Ltd v Registrar-General are still correct where it was
asserted that potential authority cannot be treated as actual authority, merely because the
company’s constitution confers the power to grant authority.14
However, in another sense, it appears to have a wider operation because the Rule in
Turquand’s case was subject to the doctrine of constructive notice, which has now been
abolished by s 130. Outsiders are no longer taken to be aware of provisions in the con-
stitution. This enables outsiders to make the assumption that the company has complied
with its constitution even though the constitution has not been complied with and this
would have been apparent to the outsider had it been read. For example, if the constitu-
tion contains a restriction on the power of the board to borrow in excess of a certain sum,
an outsider who is unaware of this provision is not taken to know of this restriction. In
fact, the outsider can assume that the board has the power to borrow an amount greater
than the specified amount.
This broader operation of the statutory assumption arising from the abolition of the
doctrine of constructive notice has significant implications. It places an outsider who is
unwilling to read the company’s constitution in a stronger position than one who makes
an effort to read the constitution. This may sometimes unfairly advantage an outsider
who deliberately dons blinkers in circumstances where there are grounds for suspicion
that an officer or agent of a company is acting in an unauthorised manner. This situation
is addressed by the limitations to the assumptions contained in s 128(4).
The operation of this assumption depends upon the wording of the particular consti-
tution involved. Further, the existence of the specific assumptions in the following sub-
sections suggests a very limited role for this first assumption, but a case such as Belven
Enterprises Pty Ltd v Lydham Pty Ltd 15 shows that it can provide a valuable fallback.
Officers Named on the Public Record: s 129(2)

The terms of the assumption are that: “Anyone who is named, from information provid-
ed by the company available from ASIC, as director or company secretary, has been duly
appointed and has the authority to exercise the company’s powers and perform the duties
customarily performed by an officer of a similar company” (based on former s
164(3)(b)).
According to the Explanatory Memorandum to the 1984 amendments,16 this over-
comes the non-appointment or defective appointment of directors or officers. As demon-
strated in chapter 4 above, there was conflicting authority at common law regarding the
outcome of cases involving defective appointments and whether the rule applied. For
example, the failure by the shareholders to properly exercise their power to appoint the
directors in Mahoney v East Holyford Mining Co17 was treated by the court as procedur-
14 (1990) 11 ACLC 611, 640 (Dawson J).
15 (1996) 14 ACLC 1478. Commissioner Wheeler QC held that the more specific sealing assumption was not relevant,
as the outsider had not invoked it. In this case, the purchaser under a contract had not actually seen the executed
contract and its sealing, but rather was relying on the first assumption that the company it was dealing with had
complied with its constitution.
16 Explanatory Memorandum, Companies and Securities (Miscellaneous Provisions) Bill 1983, [204].
17 (1875) LR 7 HL 869.
al matters covered by the rule, whereas in other cases, such as Rama Corporation Ltd v
Proved Tin and General Investments Ltd,18 a failure to properly appoint a managing
director was treated as a substantive matter of delegation that could not be assumed.
Now, the circumstances of appointment are irrelevant provided the identity of the officer
is revealed on the public record.
An early illustration of this assumption, relying on former s 164(3)(b), was Re Madi
Pty Ltd.19 A subsidiary company entered into a deed of guarantee in which it guaranteed
repayment of loans made to its holding company. The company seal was affixed to the
deed attested by a director and a person who signed as secretary. The company later
claimed that it was not bound by the deed of guarantee because the person who signed
as secretary had not been appointed despite having been named as one of two company
secretaries at the relevant time. The company argued that it was not bound because the
seal had not been affixed in accordance with its constitution. The Victorian Supreme
Court held that the company was bound because the person had been named as secretary
in the annual return lodged under the Companies Code equivalent of s 345. This amount-
ed to a holding out by the company that the named person was its secretary and thereby
authorised to affix the company’s seal.
One of the flaws of the former provision was that it was more specific as to the source
of ASIC information. Former s 164(3)(b) required the outsider to make the assumption
based only on the information contained in the latest register of officers (former s 242)
or annual return (former s 335).20 Where there was inconsistency in the information avail-
able to the outsider, such as in Dawson v Westpac Banking Corporation,21 the outsider
ought to only rely on the prescribed sources.
ANZ Ltd v Australian Glass and Mirrors Pty Ltd22 involved the issue of inaccurate
public records. The bank was faced with conflicting information regarding the officers
of the company. Kaye J confirmed that the bank, acting reasonably, is not required to
make any additional searches of the public record. A company search by the bank’s solic-
itors revealed the officers of the company to be a solicitor, Semmel, and his secretary
Sullivan. In reality, the company was incorporated as a shelf company and sold to
clients, Mr and Mrs Vasiljevic. Mr and Mrs Vasiljevic were already customers of the
bank. When they purchased the company, they applied for loans in the company’s name.
Security documents were executed under seal and signed by Mr and Mrs Vasiljevic. The
bank queried the information on the statutory registers. Under the statutory rule, the bank
was entitled to treat Semmel and Sullivan as directors. Ultimately, the bank accepted the
document signed by the Vasiljevics by relying on further information and representa-
tions.
18 [1952] 2 QB 147.
19 (1987) 5 ACLC 847.
20 P Lipton, The Authority of Agents and Officers to Act for a Company: Legal Principles (1996) 34, argued strongly in
favour of expanding former s 164(3)(b).
21 (1989) 7 ACLC 1,175, 1179, at first instance, (Bryson J): “if there were anomalies or doubts created by documents
which were not filed primarily for the purpose of notifying to the public the identities of office-holders, but referred
to such matters incidentally, such as annual returns, the latter documents should not have been relied on”. The case
pre-dated s 68A. This issue was not raised on appeal.
22 (1991) 9 ACLC 702, 707.
National Australia Bank v Sparrow Green Pty Ltd23 is a case that involves a reverse
situation of conflicting information. The bank in that case checked the ASIC register and
noted that the directors of the borrower company were Mr Green and Mr Sparrow.
However, the bank accepted the documents signed under the seal of the company attest-
ed by Green only, as sole director. Sparrow’s resignation did not actually occur until
some six months after the transaction. However, the bank accepted the representations
by Green and the company’s accountant that Sparrow intended to resign; and did not fol-
low up on its request to view documentary evidence of Sparrow’s resignation at the time
of the transaction. The Court held that the bank had actual knowledge that there were
two directors of the company, therefore it could not assume (pursuant to s164 (3) (b)) due
sealing by Green only.
The recent case of Myers v Aquarell Pty Ltd24 is a good illustration of the paramoun-
cy of the public record. In that case, the company’s constitution required it to have two
directors. The lender sought to rely on a document sealed by the company, attested by
one director who signed as sole director. Regardless of the constitution, Gillard J held
that where there was only one director on the public record, the company could legiti-
mately operate as a sole director company. Unlike Sparrow Green, the lender had no
actual knowledge of the company’s constitution.
The expanded provision referring to information on the public record makes search-
ing superficially easy for the outsider. It allows reliance to be placed on the electronic
search obtained from the ASIC as to the identity of officers. It does not however resolve
the problem of conflicting information. Loxton alerts to the risk of a transcription error
by the ASIC and a consequent judicial holding that the officer is not properly appoint-
ed.25 Where there may be a mistake in the public records, revealed for example if the out-
sider obtains or retrieves hard copies of the annual return or return of directors, the out-
sider has two choices:
1. rely on an expedient interpretation of s 129(2) that preserves the paramountcy of
the public record to prevent the company from asserting the contrary; or
2. as in ANZ v Glass & Mirrors and Sparrow Green, request confirmatory informa-
tion from the company to form the basis of a representation and apparent author-
ity.
An interpretation of s 129(2) that preserves the efficacy of the ASIC records is of
course the preferable one from the outsider’s point of view.
By referring to customary powers and duties, s 129(2) enacts the common law rules
of customary authority, set out in chapter 2.
The current s 129(2) is based on former s 164(3)(b), but is not identical. A change in
wording is evident by the phrase “similar company” in s 129(2). Former s 164(3)(b)
referred to the customary authority of an officer exercised by a “company carrying on a
business of the kind carried on by the company”. This change in wording highlights the
second flaw in the drafting of former s 164(3)(b), as the phrase “company carrying on a
business of the kind carried on by the company” unnecessarily limited the scope of the
23 (1999) 17 ACLC 1665.
24 [2000] VSC 429.
25 D Loxton, ‘One Step Forward, One Step Back: The Effect of Corporate Law Reform on Procedures in Dealing with
Companies Borrowing or Giving Guarantees’ (1999) 10 Journal of Banking and Finance Law & Practice 24, 34.
customary authority of an officer. This change in wording in s 129(2) overcomes the nar-
rower application that involved a consideration of the kind of business carried on by the
company. (Curiously, this narrow application was not evident under the former s
164(3)(c) assumption.) It was unclear how the nature of the business carried on by a com-
pany affected the customary authority of the company’s officers. Thus it was difficult to
determine how customary authority under former 164(3)(c) differed, if at all, from that
under former s 164(3)(b).
The kind of business carried on by a company may have been a reference to the size
of the company and may have allowed for a distinction to be made between tightly-held,
small proprietary companies effectively run by one director and listed public companies
which usually have large boards which operate in a collegiate manner. The customary
authority of a director of a small company may be regarded as broader than the custom-
ary authority of an individual director of a large public company.
According to our discussion in chapter 2, customary authority is defined according
to a number of factors, including the size of the enterprise, the purpose of the company
and why it was incorporated. Where a company has a limited purpose of merely holding
a particular asset, the customary authority of a managing director may be considerably
narrower than would be the case where the company is engaged in regular business. A
consideration of the kind of business carried on by a company may also refer to the usual
business activities of the company. If a managing director enters into a contract on behalf
of the company that falls outside and is unrelated to the usual business activities of the
company, then the assumption may not apply.26
As both former s 164(3)(b) and former s 164(3)(c) relied on the concept of custom-
ary authority, it is entirely unclear as to why only s 164(3)(b) contained the “business of
the kind carried on by the company” phrase and whether it was intended to cause the sec-
ond and third assumptions to have dissimilar operations. The Explanatory Memorandum
to the Company Law Review Act 1998 states that the change to “similar company” is
merely intended to be a plainer version of the former provision,27 so the uncertainty
remains in relation to any disputes occurring prior to the Company Law Review Act 1998.
Holding Out: s 129(3)

The terms of the assumption are that: “Anyone who is held out by the company as offi-
cer or agent, has been duly appointed and has the authority to exercise the company’s
powers and perform the duties customarily performed by an officer of a similar compa-
ny” (based on former s 164(3)(c)).
Section 129(3) enacts the common law rule of apparent authority, which according
to Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd,28
requires there to be:
• a representation made by a person with the actual authority of the company,
• that the agent has authority,
26 H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, (10th ed, 2001) [13.390]. The
authors refer to ANZ Executors & Trustee Co Ltd v Qintex Aust Ltd (1990) 8 ACLC 980. McPherson J said that
“corporate property may be applied only for corporate purposes” (at 988).
28 [1964] 2 QB 480, 566.
• that the contractor has relied upon that representation, and

• that the company, pursuant to its constitution, was not deprived of the capacity to
enter into that contract.
Outsiders, when dealing with an officer or agent of the company, are generally not
aware of the extent of the actual authority of the agent. This is because actual authority
stems from the principal-agent relationship and outsiders are rarely privy to this. It is
much more common for the outsider to gain the impression that a particular person has
authority to bind the company from the representations or conduct of the company itself
or of persons acting as the company or on behalf of the company. Such representations
or holding out create an agency relationship that binds the company by apparent author-
ity.
This assumption comprises two main elements that must be established by the out-
sider:
1. a holding out or representation by the company that a person is an officer or
agent; and
2. the particular power exercised by this person is within the scope of powers cus-
tomarily exercised or performed by an officer or agent of the kind concerned.
What is a “holding out by the company”?
The indoor management rule cases have drawn a clear distinction between what amounts
to a representation for the purposes of the assumption and what does not. For example,
in ANZ Ltd v Australian Glass and Mirrors Pty Ltd,29 the bank relied on a prescribed
Form 61 (Particulars and Changes in Particulars of Directors)30 produced by the
Vasiljevics, to satisfy it that the Vasiljevics were in fact the appropriate officers of the
company.31 The Court held that the Form 61, together with other circumstances such as
the Vasiljevics being existing customers of the bank, constituted a holding out by the
company that Mr and Mrs Vasiljevic were officers of the company.
Outsiders relying on a representation that the authorised officers have attested the
seal/signature have to prove that the maker of the representation had the actual authori-
ty to do so. The difficult cases involve the acquiescence type cases, such as Freeman and
Lockyer v Buckhurst Park Properties (Mangal) Ltd32 and Brick and Pipe Industries Ltd v
Occidental Life Nominees Pty Ltd.33 In the acquiescence type cases (discussed in chapter
2), the outsider typically deals with one officer of the corporate borrower/security
provider, whom the outsider believes to have authority. The legitimacy of the outsider’s
impression depends upon the board’s conduct or acquiescence in creating this impres-
sion. The outsider’s unilateral, although expedient belief regarding the officer’s authori-
ty is not enough. Reasonable explanations accepted at the time of the transaction miti-
gate search costs, but with hindsight become implausible. The results from the cases are
mixed.
29 (1991) 9 ACLC 702, 707.

30 The equivalent of current Form 304 Notification of change to officeholders, lodged pursuant to s 205B.
31 In fact, nearly 2 years elapsed until the Form 61 was lodged with the Corporate Affairs Commission.
32 [1964] 2 QB 480.
33 (1992) 10 ACLC 253.
A common thread in both Brick & Pipe and Equiticorp Finance Ltd v Bank of New
Zealand34 to the lenders’ success in preventing a corporate borrower asserting lack of
authority was the courts’ willingness to hold that the dominant manager, acting with
acquiescence of the board, had the actual authority to bind the company.35 The courts
have accepted that this conferral of authority may be informal and based on a course of
dealings between the outsider and the lender.36
Other cases on the statutory rule show that that the outsider failed to prove that the
officer they were dealing with had actual or apparent authority either through acquies-
cence, or by a representation emanating from the company. For example:
• In Bank of New Zealand v Fiberi Pty Ltd,37 the bank portrayed Mr Doyle, the
head of the Doyle group in that case as a “dominant” persona. Mr Doyle repre-
sented his son to be the secretary of Fiberi Pty Ltd for the purpose of attesting
the seal on a third party mortgage. In fact his spouse, Ms Arnhold, was the sec-
retary, and she had no knowledge of the representation or the transaction. The
bank relied on the representation, but was subsequently unable to prove that Mr
Doyle had the actual authority of Fiberi to make it. Allen J at first instance38 dis-
tinguished Brick & Pipe on the basis that there was no knowledge or acquies-
cence by the board of Fiberi to Mr Doyle’s activities.
• In Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd,39 Michael and Lisa Kandy
attested the seal of the company on a third party mortgage, whereas Lisa’s par-
ents, the Tafts, were the officers. The Tafts had no knowledge of the mortgage.
Macquarie Bank, in dealing with the Kandys, relied on previous dealings with
other companies in the Kandy group, the Kandy group solicitors, (who were not
retained to act for Sixty-Fourth Throne) and had no direct contact with the Tafts.
The bank, through its solicitors, obtained a company search showing that the
Tafts were directors, but never pursued this information and did not check the
sealed documents in relation to it.40 Hedigan J at first instance, held that the case
was similar to Fiberi, in that the only representations as to Michael Kandy’s
authority came from third parties who had no authority to make the representa-
tions on behalf of the company.41
• Nathan J in Pyramid Building Society v Scorpion Hotels Pty Ltd42 found the facts
of that case “dissimilar” to Brick & Pipe, as Mr Lewis, the dominant manager,
had assumed authority but was not invested with it. Lewis had embarked on a
course of conduct designed to exclude the other board members from the affairs
of the company. He never presented himself in company with the other directors,
34 (1993) 11 ACLC 952.

35 See Table 5.2 in chapter 5 for a summary of the comparison of the relevant cases. For another example outside the
banking/finance application, see Greater Pacific Investments Pty Ltd v ANI Ltd (1996) 39 NSWLR 143 which was
also a successful case for an outsider where the court held that the dominant manager by acquiescence (Brian Yuill)
had actual authority to bind the company.
36 Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1,557, 1,569 (Allen J).
37 (1994) 12 ACLC 48.
38 (1992) 10 ACLC 1, 557, 1,570–1,571. The argument was not pursued on appeal.
39 [1998] 3 VR 133.
40 [1998] 3 VR 133. This finding of fact about the search was outlined in Tadgell J’s judgment on appeal at 148.
41 (1996) 14 ACLC 670, 674. The argument was not pursued on appeal.
42 (1996) 14 ACLC 679.
in the market place or anywhere else, as having dominion over them.43 There was
a subsidiary argument that the directors had authorised Lewis to negotiate bridg-
ing finance with another bank, so that that authority carried over to the current
transaction. Nathan J rejected this “carry over” argument, and in any event,
found that Lewis had exceeded his authority in that transaction.
• The facts of National Australia Bank v Sparrow Green Pty Ltd44 provided the
bank with some conflicting information that it chose to resolve by relying on the
director who assumed control of the company. The bank knew that there was
only one director, Green, who was managing and controlling the company, but
the bank also knew from the company’s constitution and from the ASIC search
that the company was required to have a second director and that Sparrow occu-
pied that position. The bank relied on assertions by both Green and the compa-
ny’s accountant that Sparrow was resigning, but the bank was not entitled to rely
on that assertion for two reasons. First, Green was only a director, and did not
have the actual authority to make a representation about another officer’s capaci-
ty, nor was there any other evidence that anyone else had the company’s actual
authority to make the representation. Secondly, the bank knew that, in any
event, the borrower company was required to have two directors and that there
were two directors shown on the public record.
The lenders in these cases were primarily operating on their own mistaken belief and
fooled by the dishonesty or delusions of the individuals purporting to exercise corporate
power. The mistaken reliance on the dominant officer was fuelled, in cases such as
Fiberi and Scorpion, by the lenders’ failure to check from ASIC records the officers’
identities. Even as in Sparrow Green, where the bank checked the ASIC registers, it was
uncommercial to accept the risk that it could rely on a single director’s representation
that the public record was inaccurate. In practice, this confirms the desirability of secur-
ing a directors’ resolution, which is not commercially unreasonable to ask for in all
finance transactions.
The apparently contrary results in this series of cases exposes the statutory rule to
criticism. It exposes an outsider to uncertainty where someone who an outsider reason-
ably believes has authority makes a representation but it turns out that the representation
was not made by someone with actual authority “to manage the business of the compa-
ny either generally or in respect of those matters to which the contract relates.”45 It is
often almost impossible for an outsider to discover who has actual authority to make rep-
resentations for the company.
An obvious measure to enhance the outsider’s protection under s 129(3) is to extend
the assumption to cases where a representation is made by someone with actual or
apparent authority to manage the business of the company either generally or in respect
of the particular contract concerned. This extension meets the original purpose of the
statutory amendment, which was stated to “ensure that a person who deals in good faith
with persons who can be reasonably supposed to have the authority of the company
43 (1996) 14 ACLC 679, 694.

44 (1999) 17 ACLC 1665.
45 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 505–6 (Diplock LJ).
should be protected against later [claims] by the company that the person purporting to
act for it lacked authority.”46
Further, the model for s 129 is the National Companies Bill 1975 para 34(2)(c) and
s 142(2) of the Ghana Companies Code.47 These provisions extend to a person “repre-
sented by the company (acting through its members in general meeting, through its direc-
tors or through its principal executive officer) to be an officer or agent of the company.”
This explains more fully whose representations may be attributed to the company for the
purpose of a “holding out by the company.” It would appear to encompass a representa-
tion made by a de facto managing director.
An extension to s 129(3) must be balanced against the purpose of the rule in its
entirety. That is, the rule is a procedural convenience. To allow outsiders to assume that
an officer has authority to make representations plunges into a matter of substantive law.
Regardless of the scope of the assumption, an outsider is still subject to the disentitling
circumstances of the exceptions. To take any of the examples where the outsider lost the
“holding out” assumption, would the outcome have been different under an extended
assumption in s 129(3)?
For example, Fiberi was primarily decided on the disentitling circumstances.
Accordingly, regardless of the scope of the s 129(3) assumption, the bank was not enti-
tled to assume that the purported ‘secretary’ who signed the seal was an officer of the
company, because they had knowledge that this was not accurate.
In Scorpion and Sixty-Fourth Throne, there was no representation by a director that
another person had authority. These were both cases where purported officers made rep-
resentations about there own authority, unsubstantiated by any conduct or acquiescence
from the board.
In Sparrow Green, even had the bank been able to rely on the representations of one
director, it had actual knowledge to the contrary. In relation to all of the recent cases
examining s 129(3) then, an expanded assumption would not have altered the outcome.
This may suggest that the balance between the assumption and the disentitling circum-
stances, as they currently stand, is about right.
Finally, the statutory rule is more readily available than common law apparent
authority, in the sense that actual reliance is not necessary. In order for agency by appar-
ent authority to arise at common law, it must be shown that the outsider was induced by
the representation to enter into the contract and in fact relied upon it.48
It appears that the common law rules of agency as stated in the Freeman and Lockyer
case may have been modified by the s 129(3) assumption. In Lyford v Media Portfolio
Ltd,49 it was held that an outsider need not have actually made the assumptions contained
in former s 164(3) in order to rely upon them. A company is prevented under s 128(1)
from asserting that the assumptions are incorrect. It is not relevant that the outsider actu-
ally made the assumptions, as “...the section talks only of assumptions which may be
made and need not necessarily reflect the actual assumptions made by the parties seek-
47 D Obadina, ‘Irregular, Intra-vires Corporate Transactions and the Protection of Third Parties in the UK and the
Commonwealth – The Case for Reform: Part 1’ (1997) 18 The Company Lawyer 45, 51.
48 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 505.
49 (1989) 7 ACLC 271.
ing to rely on s 68A [now s 129].”50 This appears to dispense with the common law
requirement that the outsider must rely on the representation in order to hold the compa-
ny bound by the acts of an agent who was held out by the company to be an officer or
agent.
An alternative interpretation that may impede the efficiency of the statutory rule is
that while s 128(1) prevents an assertion that the s 129(3) assumption is incorrect, the
assumption itself may not operate if a “holding out by the company” requires reliance by
the outsider on the representation in accordance with the common law principles. There
is no authority for this restrictive approach.
Customary authority of agents
The second element of s 129(3) is that the person who has been held out by the compa-
ny to be an officer or agent has authority to exercise the powers and perform the duties
customarily performed by an officer of a similar company. This aspect involves a con-
sideration of the customary authority of a company’s officers, which would appear to
incorporate the general agency rules in their application to companies.
We generally discussed ‘customary authority’ in chapter 2, and summarised the
points under the previous assumption in s 129(2) above. The assumptions in s 129(2) and
(3) are similar because they both refer to duties “customarily performed by an officer of
a similar company”. Where the outsider deals with someone held out by the company to
be its managing director, that person has wide customary authority that is only limited in
cases of unusual transactions. These limits were considered under the common law prin-
ciples.
Where the person with whom the outsider deals is an ordinary director, the outsider
is at risk because the courts are reluctant to regard an ordinary director as having cus-
tomary authority to bind the company, in the absence of further circumstances that would
indicate otherwise. This application of agency law to companies is probably contrary to
widespread commercial practice. It is generally the case that once an outsider establish-
es that the person with whom dealings are conducted has been appointed as a director,
that person will usually be regarded as having authority to bind the company in a wide
range of contracts. In the absence of suspicious circumstances, such a belief is consistent
with the operation of the indoor management rule. If the director does not have the req-
uisite authority to bind the company, this is a matter to do with the internal regulation of
the company and the outsider has no realistic means available to check whether the com-
pany’s constitution have been complied with or a delegation of authority has been prop-
erly made.
The strict application of agency principles in a company context is inappropriate
because there is a different balance of interests. An officer of a company generally stands
closer to the company than does an agent in relation to a principal. It is therefore more
important to protect the interests of a principal in cases where an agent acts in an unau-
thorised manner. In the case of a company standing as a principal, the policy of the leg-
islation is to hold the company liable for the acts of its officers. An outsider should not
50 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, 265 where the Full Court
of the Supreme Court of Victoria approved this statement of Ormiston J at first instance.
be deprived of the protective assumptions where the making of such assumptions is rea-
sonable. The limitations contained in s 128(4) are intended to operate in cases where the
outsider does not act in good faith.
Accordingly, the statutory rule still does not relieve the outsider of the obligation to
verify both the identity and the position of the person with whom they are dealing. If they
are dealing with only one representative of the company, in the absence of a written con-
tract, the company may not be bound by the contract if the person is merely a single
director with limited customary authority. If the outsider is relying on a written document
that purports to have been executed by the company, then there are additional procedur-
al assumptions available in ss 129(5) and (6).
Proper Performance of Duties: s 129(4)

The terms of the assumption are that: “A person may assume that the officers and agents
of the company properly perform their duties to the company”(based on former s
164(3)(f)).
There has been minor change to this provision, as former s 164(4)(f) also applied to
“employees” performing their duties. Whilst the significance of this alteration is dis-
cussed below, it relates to the overall controversy surrounding this assumption: whether
s 129(4) extends the assumption to proper performance of directors’ fiduciary duties to
the company. Accordingly, there are three potential interpretations of this assumption:
1. that “duties” refers to administrative or statutory tasks undertaken by officers as
assigned in the constitution or legislation;
2. that “duties” refers to substantive fiduciary duties and the duty of care; or
3. that “duties” connotes a combination of the above, which provides the assump-
tion with its widest possible ambit.
Potential constructive trustee liability imposed on outsiders emerges as a substantial
consequence of the interpretation of this assumption. The meaning of s 129(4), and its
application in constructive trustee liability, is examined below.
Contemporaneous commentary, when the assumption was first introduced in 1983, is
equivocal whether the assumption extended the Rule in Turquand’s case. For example,
Ford, Paterson, Ednie and Ryan, in their Guide to the National Companies and Securities
Scheme merely comment that: “Section 68A (3) (a) and (f) [i.e. s 129 (1) and (4) cur-
rently] are legislative adopters of the rule [in Turquand]”.51 However, Professor Ford, in
his own texts,52 is more specific about former s 68A(3)(f), linking the assumption to sit-
uations where directors exercise their power for an improper purpose.
51 H A J Ford et al, Guide to the National Companies and Securities Scheme (2nd ed, 1984).
52 Professor Ford’s 1984 supplement to the third edition only indirectly equates the newly inserted proper performance
of duties assumption to abuse of power: H A J Ford, Supplement to the Third Edition of Principles of Company Law
(3rd ed, 1984) [525].
By the fifth edition, Professor Ford was more circumspect on the connection between the assumption and abuse of
powers: “Whether a third person dealing with the company can be prejudiced if the company fails to affirm the
transaction [in abuse of power], depends upon whether the third party can make the assumption … that the persons
acting for the company are properly performing their duties to the company.” H A J Ford, Principles of Company
Law (5th ed, 1990) [88]. There are two levels of uncertainty in this statement and Professor Ford has not distin-
guished them: whether the ambit of the assumption precludes reliance for abuse of power, or whether the assumption
covers abuse of power, but the third party’s reliance depends on the statutory exceptions. The 1990 statement indi-
cates less certainty than his views expressed at the time the reforms were introduced.
The meaning of “duties”

The Explanatory Memorandum,53 in justifying this provision, stated: “This statutory pre-
sumption of regularity restates the common law rule (e.g. see Richard Brady Franks Ltd
v Price (1937) 58 CLR 112 at 142).”
In Richard Brady Franks Ltd v Price, Dixon J54 referred to two rules relating to the
exercise of corporate power in the case. The first rule was the common law principle of
regularity (the indoor management rule), in the context where the validity of the contract
was challenged due to the procedural defect in the directors’ resolution authorising it.
This case involved an issue of debentures to persons including directors of the company.
The validity of the debentures was challenged on the grounds that the issue was not
authorised by a quorum of directors who were entitled to vote. The holders of the deben-
tures were protected from the assertion by the company that the persons purporting to act
for it lacked authority.
However, the second rule of regularity was an analogous rule of regularity from
agency law, applied to the company director context. Dixon J said:
“Under the general law of agency it is a breach of duty for an agent to exercise his authority for the
purpose of conferring a benefit upon himself or upon some other person to the detriment of his prin-
cipal. But, at the same time, if his act is otherwise within the scope of his authority it binds the prin-
cipal in favour of third parties who deal with him bona fide and without notice of his fraud (Hambro
v Burnand (1904) 2 KB 10; Lloyds Bank v Chartered Bank of India, Australia and China (1929) 1
KB 40, 56 (Scrutton LJ). The rule, no doubt, is the same with respect to the acts of directors. It
follows that a transaction carried out by directors for their own or some other persons’ benefit and
not to further any purpose of the company is voidable but not void.”
In analysing the derivation of this assumption and the judgment of Dixon J, Carroll55
concludes that former s 164(3)(f) means that the company’s officers and agents may be
assumed to have duly performed the tasks and duties assigned to them by the company
under the constitution or by other means, that is, the first interpretation. O’Donovan also
concludes, “there is no clear authority that a bank can rely upon [former] s 164(3)(f) to
argue that it is entitled to assume that the directors have properly performed their fidu-
ciary duties.”56 Horrigan57 interprets the section as containing shades of grey: s 129(4)
does not operate as a catch all provision, as the fiduciary duty to act in the interests of
the company as a whole is a “broad concept embracing many discrete things”. In 1998
he acknowledged that the interpretation of s 129(4) is still “undetermined” and “hotly
contested”.58
The conservative view of former s 164(3)(f) favoured a “tasks” interpretation, and
there are several factors that support that narrow interpretation:

54 (1937) 58 CLR 112, 142. The plaintiff was unable to discharge the burden of proof that the defendant directors
acted in bad faith, so the transaction was not voidable.
55 R Carroll, ‘Proper Performance of Duties by Company Officers: The Statutory Assumption in s 164(3)(f)’ (1995) 69
Australian Law Journal 200.
56 J O’Donovan, ‘Corporate Benefit in Relation to Guarantees and Third Party Mortgages’ (1996) 24 Australian
Business Law Review 126, 130.
57 B Horrigan, ‘Third Party Securities – Theory, Law and Practice’ in J Greig and B Horrigan (eds), Enforcing
Securities (1994) 275–277.
58 B Horrigan, ‘Busting Guarantees!’ [1998] 7 National Law Review [20].
1. The indoor management rule is a common law rule of procedural regularity only.
It would be an unintended consequence of the statutory enactment if it created a
substantial new limb to the rule that effectively subsumes the whole area of fidu-
ciary duties and equitable remedies.59
2. Based on the interpretation of the words used, the assumption refers to “perfor-
mance” of duties. This term is more appropriately applied in a procedural con-
text. Substantive fiduciary duties are not “performed”.
3. Ipp J in Vrisakis v ASC60 (in examining the statutory duty of diligence, which
also refers to “performance of duties”) referred to “duties” as meaning the tasks
undertaken by directors and these may vary from one company to another. This
is different from a duty that is owed to the company, which remains constant.
Essentially, His Honour is distinguishing a matter of fact (what are the tasks
assigned to that office?) from the matter of law (what are the obligations that
attach to that office and the standards of conduct expected?). A rule of procedur-
al regularity is confined to assuming matters of fact.
The advantage of the narrow “tasks” interpretation is that it refers both to matters set
out in the constitution and to statutory obligations. As for the constitutional “tasks”, this
approach appears consistent with the other assumptions of the statutory rule, as it repre-
sents a part of the Rule in Turquand’s case, enabling a presumption of regularity in the
internal workings of the company. It appears to complement the first assumption that
refers to compliance with the constitution and therefore applies to conferral of authority
by the constitution. This interpretation at least enabled an outsider to seek the protection
of the assumption in former s 164(3)(f) where the company’s officers or agents act
beyond authority conferred on them by the company and purport to affix the company
seal.
In addition, the “tasks” interpretation covers matters of procedural regulation that
apply independently of the constitution. The assumption is suggesting that the outsider
does not have to read the constitution, nor the statute, to check for compliance. For an
example under the current legislation, the replaceable rules confer upon directors the
power to call a general meeting under ss 249C and 249CA. However, s 249D imposes on
directors the duty (in the sense of task) of co-operating with a request from members to
hold a general meeting. Even though it is not a matter under the constitution, the outsider
can access s 129(4) to assume that the directors performed their duties when the general
meeting was held.
To continue to impose this “tasks” definition on the current assumption in s 129(4)
is at least of some utility to outsiders, although it confines the ambit of s 129(4) to that
of an adjunct to the main Turquand rule in s 129(1).
Balancing the “tasks” view, however, we can construct an argument in favour of
reading into s 129(4) the widest possible ambit, that is, that it includes both “tasks” and
“duties”, including general law duties of good faith and care. Since Carroll’s article, there
has been additional case law and commentary on former s 164(3)(f) and s 129(4).
Further, the wording of the former provision, as analysed by Carroll is slightly different
59 L Law and J Pascoe, ‘Financiers and Constructive Trusts: Protection Versus Liability’ (2000) 11 Australian Journal
of Corporate Law 219, 229.
60 (1993) 11 ACLC 763, 767.
to s 129(4). Former s 164(3)(f) also applied the assumption to “employees”. While

employees may have tasks assigned to them as part of their “duties”, they do not owe
fiduciary duties to the company in the same sense as officers to a company or agents to
a principal. The deletion of “employees” from s 129(4) may be an argument in favour of
reassessing its interpretation.
Since s 129(4) was passed, Loxton disagrees with the sustainability of Carroll’s
view. Loxton states that excluding fiduciary duties “seems very difficult to accept… s
129(4) now makes it clear that a person may assume that the officers and agents of the
company perform their duties, and that the ‘duties’ referred to … must include fiduciary
duties.”61 Whilst the proposition is sound, Loxton does not operationalise the reason for
it.62 Whincop devotes considerable argument favouring the widest possible interpretation
of s 129(4), to enhance his general argument that the corporate law needs to be more
responsive and less formalistic.63
Section 129(4) (and its predecessors) has not been successfully argued in any of the
indoor management rule cases, although its significance has been noted by McPherson J
in ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd,64 Brennan J in Northside
Developments Pty Ltd v Registrar-General65 and Hansen J in Koorootang Nominees Pty
Ltd v ANZ Banking Group Ltd.66
The Explanatory Memorandum accompanying the Company Law Review Act 1998
is silent on the existing or intended interpretation of s 129(4).
The factors that support the widest interpretation (i.e “tasks” + “duties”) are:
1. The wide view supports the general approach of maximising the ambit of statu-
tory protection to outsiders.
2. As the statute codifies and clarifies the common law rule, the extension of the
assumption to fiduciary duties fulfils the promise of “clarification”. Proper per-
formance of fiduciary duties was not part of the original common law rule, but
forms part of analogous doctrine from agency law. Agency law principles have
been used in the other assumptions to extend the rule.
3. For what purpose does the outsider actually need to assume that the directors
have complied with their substantive fiduciary duties? This would be a threshold
assumption only, and still subject to the company’s other remedies. A breach of
fiduciary duty enables the company to avoid the contract if the purchaser is not
61 D Loxton, ‘One Step Forward, One Step Back: The Effect of Corporate Law Reform on Procedures in Dealing with
Companies Borrowing or Giving Guarantees’ (1999) 10 Journal of Banking and Finance Law & Practice 24, 29–30.
See also M Sneddon, ‘Protection of Financiers From Ultra Vires and Related Defences’ (1992) 66 Law Institute
Journal 70, 71; D Obadina, ‘Irregular, Intra Vires Corporate Transactions and the Protection of Third Parties in the
UK and the Commonwealth: The Case for Reform’ (1997) 18 Company Lawyer 45, 51: “In spite of assertions to the
contrary, it would also appear wide enough to protect the outsider where the functionary has breached fiduciary
duties, or otherwise abused his (sic) powers.”
62 The surrounding argument is unconvincing given that first, the new section is almost identical to the former, so there
is no comparative change in position, and second, there is no support for the assertion that the issue has been in any
other way made clear.
63 M Whincop, ‘Nexuses of Contracts, the Authority of Corporate Agents and Doctrinal Indeterminacy: From
Formalism To Law and Economics’ (1997) 20 University of New South Wales Law Journal 274, 301–302.
64 [1991] 2 Qd R 360, 374.
65 (1991) 11 ACLC 611, 635, Brennan J wished to reserve his opinion on the effect on the creditor’s enforcement
where a guarantee, though due execution may be assumed, is taken with notice that it is in breach of directors’ fidu-
ciary duty.
66 [1998] 3 VR 16, 124.
taking as bona fide purchaser for value without notice. There is support for the
view that the voidability of contracts is not affected by the statutory enactment
of the indoor management rule.67 Additionally, the outsider may incur personal
liability if they participate in the breach of duty. The principles that give rise to
participatory liability are discussed next, and are not merely subsumed by the
indoor management rule. Additionally, the rule applies subject to actual and con-
structive knowledge (i.e “suspicion”) exceptions in s 128(4).
The reference to “duties” in s 129(4) also probably includes the full range of statu-
tory duties under ss 180–184 and Chapter 2E, the general law fiduciary duties and, in an
insolvency context, the duties to creditors. The duty of directors to consider the interests
of creditors (as a whole, not individually) has been developed considerably within the
ambit of the fiduciary duties.68 At the same time, the statutory duty to prevent insolvent
trading has been expanded.69 Further recent developments have also resulted in a wider
duty to exercise care, diligence and skill.70
Accordingly, the real issue of substance for the outsider should not be the scope of
the assumption itself, but the ambit of the disentitling circumstances. The widest inter-
pretation is therefore the more logical view.
An application of the assumption of “proper performance of duties”: participatory
liability
The significance of the ambit of this assumption to outsiders lies in the protection, if any,
conferred by the Corporations Act where the issue of the outsider’s participatory liabili-
ty is involved.71 Whether directors, in entering into a transaction, have breached their
duty, is fundamentally an internal matter. The equitable principles of constructive trusts
are relevant to consider in this context because in certain cases they allow a company to
recover property from a third party or prevent the third party from enforcing rights under
a contract. This may enable a company to obtain a remedy despite the operation of the
statutory assumptions that protect the outsider.
There are three potential effects on the outsider where directors act in breach of their
duties:
1. A transaction entered into in breach of fiduciary duty may be voidable at the
company’s option, depending upon whether the party to the contract acted in
good faith without knowledge of the fiduciary breach.72
67 R Carroll, ‘Duly Sealed Documents and Knowledge of Directors’ Breach of Fiduciary Duty’ (1993) 23 Western
Australian Law Review 173, 180; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10
ACLC 253, 264; Northside Developments Pty Ltd v Registrar-General (1991) 11 ACLC 611, 635, Brennan J wished
to reserve his opinion on the effect on the creditor’s enforcement where a guarantee, though due execution may be
assumed, is taken with notice that it is in breach of directors’ fiduciary duty.
68 See Walker v Wimborne (1976) 137 CLR 1; Ring v Sutton (1979) 5 ACLR 546; Nicholson v Permakraft (NZ) Ltd
[1985] NZLR 172; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; Grove v Flavel (1986) 4 ACLC 654;
McNamara v Flavel (1988) 6 ACLC 802; Jeffree v NCSC (1989) 7 CLC 556, Spies v The Queen (2000) 18 ACLC
727.
69 Section 588G Corporations Act. This is a redrafted version of its predecessor s 592.
70 Daniels v Anderson (1995) 13 ACLC 614; Hilton International Ltd v Hilton (1988) 4 NZLC 96–265; See further S
Sievers, ‘Farewell to the Sleeping Director – The Modern Judicial and Legislative Approach to Directors’ Duties of
Care, Skill and Diligence – Further Developments’ (1993) 21 Australian Business Law Review 111; S Sievers,
‘Directors’ Duty of Care: What is the New Standard’ (1997) 15 Company and Securities Law Journal 392; J Bird,
‘The Duty of Care and the CLERP Reforms’ (1999) 17 Company and Securities Law Journal 141.
71 This issue has been raised in Law and Pascoe, supra n 59.
72 Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 142 (Dixon J); Reid Murray Holdings Ltd v David Murray
Holdings Pty Ltd (1972) 5 SASR 386.
2. Whilst the contract may remain enforceable, the outsider may become indirectly
affected, or at least inconvenienced, by internal disputes. (For example, share-
holder action for oppression remedy or winding up, or where the company sues
its directors for damages or account of profits for breaches of directors’ duties.)
3. The outsider may be involved in the breach of duty to the extent that they incur
personal liability as constructive trustee, so that the outsider takes the property or
funds the subject of the transaction as trustee for the original beneficiaries of the
duty.
Under this assumption, it remains for us to examine the threat to the outsider of con-
structive trustee liability. The Corporations Act does not directly prevent the imposition
of a constructive trust on the outsider. There are provisions in the Corporations Act that
alter or modify the common law in regulating the conduct of directors. It is often pro-
vided that such legislation is to be read as being in addition to other provisions of the
Corporations Act or any other rule of common law or equity. Compliance with the leg-
islation is not taken to relieve directors of their statutory or fiduciary duties.73 In the statu-
tory indoor management rule, there is no such statement. However, it would be prefer-
able to give full effect to the enforcement of the duties of directors and other officers and
expressly make the s 129(4) assumption subject to common law and equitable principles.
The rules of constructive trusts show how equitable principles dealing with the duties
of directors may affect the relationship of an outsider with the company and its directors.
These rules probably overlap with and are in addition to the statutory indoor management
rule and affect the balance of policy considerations referred to above in Northside
Developments Pty Ltd v Registrar-General.74
For example, in both Northside and Bank of New Zealand v Fiberi Pty Ltd,75 a direc-
tor affixed the company seal in an unauthorised manner for the purpose of mortgaging
the sole major asset of the company in order to secure loans that were for the benefit of
the director and of no benefit to the company. This probably constituted a breach of fidu-
ciary duty by the director even though the courts did not refer to their fiduciary duties or
to the equitable remedies that may be sought to enable the company to set aside a con-
tract with an outsider.
The principles relevant for when an outsider is liable as a constructive trustee and
liable to pay compensation for loss arising from a breach of duty, evolved from the case
of Barnes v Addy.76 This case laid down two principles in order for a stranger to be liable
as a constructive trustee. Either the trust property must be received with the requisite
degree of knowledge of the breaches of duty by the directors; or there must also have
been participation in the breaches or the taking of an advantage for the stranger’s own
benefit with the requisite knowledge.
This raises the question of what constitutes “knowledge” on the part of the third
party. In Baden Delvaux and Lecuit v Societe Generale,77 (discussed in chapter 4) Peter
73 For example, s 179 expressly recognises that other duties under legislation and other laws (including the general
law) are imposed on directors in addition to the statutory directors’ duties imposed under Part 2D.1. See for other
examples: s 230 in relation to financial benefits to related parties (Chapter 2E) and s 260E in relation to the authori-
sation of financial assistance (Part 2J.4).
74 (1991) 8 ACLC 611. See Chapter 3.
75 (1993) 11 ACLC 952.
76 (1874) 9 Ch App 244.
77 [1983] BCLC 325.
Gibson J classified knowledge into five categories:

(i) Actual knowledge
This is knowledge that a person actually knows in a conscious and subjective sense. In
some cases it may include knowledge which a person does not admit to but from the evi-
dence a court may conclude that the person must have known for example, that the direc-
tors of a company breached their duties.78
(ii)Wilful blindness
Where a person “wilfully shuts his or her eyes”, it may be inferred that the person pos-
sessed actual knowledge.79
(iii) Wilful or reckless failure to make inquiry
This type of actual knowledge is similar to and overlaps with wilful blindness. For exam-
ple in Agip (Africa) Ltd v Jackson80 certain parties were held to have known or wilfully
abstained from making inquiries so as to avoid discovering that their clients were laun-
dering money. They were held to be constructive trustees because they were treated as
having sufficient knowledge that there had been an exercise of power for an improper
purpose.
(iv) Failure to make inference from knowledge of circumstances
This is where a person knows certain relevant facts but fails to appreciate their factual or
legal significance in circumstances where an honest and reasonable person would make
such an inference.81 Actual knowledge may be inferred where there is ignorance of the
law or “moral obtuseness”.82
(v) Knowledge which ought to have put a person on inquiry
Where a person is put on inquiry and fails to make inquiries, the person is taken to have
constructive knowledge of information that person would have known had reasonable
inquiry been made. This differs from the other aspects of knowledge because it arises
from the fact that proper inquiries were not made.
These categories of knowledge are relevant in determining whether a third party has
knowingly assisted a trustee in committing a breach of trust. Where this has occurred, the
third party may be liable to pay compensation or be required to restore the property and
is unable to claim that he or she is a purchaser for value without notice.83 The principles
of constructive trusts are also applicable to breaches of duty by directors involving trans-
actions where company property is transferred to an outsider. This enables a company to
attack the validity of a transaction under equitable principles. There is considerable over-
lap between the types of knowledge that may result in an outsider becoming a construc-
tive trustee and the knowledge or suspicion required as the exceptions to the rule (see s
128(4) discussed in chapter 8).
78 Agip (Africa) Ltd v Jackson [1991] Ch 547; Rolled Steel Ltd v British Steel Corp [1986] 1 Ch 246; International
Sales & Agencies Ltd v Marcus [1982] 3 All ER 551.
79 English and Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700.
80 [1992] 4 All ER 385.
81 See for example Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393; Ninety Five Pty Ltd v
Banque Nationale de Paris [1988] WAR 132.
82 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.
83 For further discussion of these principles see C Harpum, ‘The Stranger as Constructive Trustee’ (1986) 102 Law
Quarterly Review 114 and 267; J D Heydon, ‘Recent Developments in Constructive Trusts’ (1977) 51 Australian
Law Journal 635; R P Austin, ‘Constructive Trusts’ in P Finn (ed) Essays in Equity (1985) and Carroll (1993), supra
n 67.
These five categories of knowledge ought to be considered as a scale of “impropri-

ety”, with category (i), actual knowledge, being the most subjective, up to category (v)
that approaches an objective standard similar to negligence. In Royal Brunei Airlines Sdn
Bhd v Tan84 the Privy Council held that the Baden five-point knowledge scale is relevant
in cases of knowing receipt.
The application of the knowledge scale has recently been examined by several
Australian commentators,85 as well as extensively addressed by Hansen J in Koorootang
Nominees Pty Ltd v ANZ Banking Group Ltd86 and Kirby P in Equiticorp Finance Ltd v
Bank of New Zealand.87 In particular, Lodge discusses in detail the application of Baden
in other cases, including Australian, English and New Zealand authorities. Her analysis
of Barnes v Addy concludes that the classification of knowledge ought not to be consid-
ered as a rigid scale, but as overlapping categories. This analysis however does not con-
clude on the vexed issue of the application of category (v), “knowledge of circumstances
which would have put an honest and reasonable person on inquiry”. Category (v) knowl-
edge is most controversial, because it imports an objective standard similar to negli-
gence, which has a profound effect on liability. If category (v) is sufficient, then it places
an active duty on outsiders to enquire into the possibility of the directors’ fiduciary
breach when the company enters into a transaction. This approaches the undesirable
effect of inadvertent liability. Scaling back from category (v) approaches more a standard
of intention, which appeals more to the purpose of constructive trustee liability.
Not all of the Australian cases on recipient liability directly address the Baden scale,
but it is used as a reference point in discussing the main Australian cases, below:
• Ninety Five Pty Ltd v Banque Nationale de Paris88
• Equiticorp Finance Ltd v Bank of New Zealand89
• Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd90
• Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd.91
These cases contribute to the question of knowledge and as they are not included in
Lodge’s analysis, they are examined in detail below.
1. Ninety Five Pty Ltd v Banque Nationale de Paris
The decision in Ninety Five Pty Ltd v Banque Nationale de Paris is one of the first cases
in Australia to impose recipient liability following the High Court decision on participa-
tory liability in Consul Development. It is a more unusual case than the other three list-
ed above, because the bank was a true “stranger” to the transaction, in the sense that there
was no direct contractual relationship between the bank and the plaintiff company.
84 [1995] 2 AC 378.
85 Including; P Finn, ‘The Liability of Third Parties for Knowing Receipt or Knowing Assistance’ in D Waters (ed),
Equity Fiduciaries and Trusts, (1993) 200; S Barkehall Thomas, ‘Knowing Receipt: Options and Issues for the High
Court’, in Perspectives on Banking Finance and Credit Law, ed W Weerasooria (1999); Also M Bryan, ‘Cleaning
Up After Breaches of Fiduciary Duty – the Liability of Banks and Other Financial Institutions as Constructive
Trustees’ (1995) 7 Bond Law Review 67; J Pascoe, ‘Equitable Remedies in Cases of Misapplied Company Funds:
Recent Developments’ (1996) 14 Company and Securities Law Journal 393; and M Lodge, ‘Barnes v Addy: The
Requirements of Knowledge’ (1995) 23 Australian Business Law Review 25.
86 [1998] 3 VR 16.
87 (1993) 11 ACLC 952.
88 [1988] WAR 132.
89 (1993) 11 ACLC 952.
90 [1998] 3 VR 133.
91 [1998] 3 VR 16.
In that case, the bank lent money to another company, Bicton Investments Pty Ltd,
for the purpose of acquiring the issued share capital in the plaintiff company. Prior to the
acquisition, the plaintiff company was part of the Metro group. It was the practice in the
group for subsidiaries to deposit surplus funds with the holding company, at a commer-
cial interest rate. Accordingly, on settlement of the share transaction, the plaintiff com-
pany received a cheque drawn from the bank on Bicton’s account for $3 million. In addi-
tion, the plaintiff company received cheques for $1.3 million, from its former holding
company, to discharge the debt owed by the former holding company. However, the pro-
ceeds from the discharged debt were immediately on lent to the purchaser Bicton, so that
on settlement, the cheques for $1.3 million were endorsed by the plaintiff company to
Bicton. The bank’s officer at settlement took the endorsed cheques for $1.3 million and
deposited them to Bicton’s account. There was no dispute that the effect of the transac-
tions effected at settlement amounted to a breach of fiduciary duty by the plaintiff com-
pany’s directors, specifically because they granted financial assistance for the purchase
of the plaintiff company’s shares in breach of the Companies Act 1961 (WA) (Now see
Part 2J.3 Corporations Act).
The dispute related to the bank’s role as participating in the breach of duty. In an
uncontroversial decision, Smith J held that because the bank had actual knowledge of the
breach of duty, it was liable under both limbs of Barnes v Addy as constructive trustee.92
Insofar as recipient liability is concerned, the judgment of Smith J makes several
exploratory points:
• Smith J confirmed that breach of fiduciary duty is the same as breach of trust for
Barnes v Addy liability.93
• Smith J defined “constructive knowledge” in terms of “constructive notice” as
“where the recipient does not know but ought to know”,94 but His Honour did
not refer this back to the Baden scale. By referring to constructive “notice” His
Honour is satisfied that recipient liability will arise on category (v), as he
endorsed other authority that referred to the expectation that the recipient act as a
reasonable person and demand inquiry.95
In the final result, Smith J did not need to conclusively decide or apply this defini-
tion of constructive notice, as His Honour decided that the bank had actual knowledge
that it received the plaintiff company’s settlement funds in breach of the company’s
directors’ fiduciary duty, and was liable as constructive trustee to account to the plaintiff
for the funds received.
2. Equiticorp Finance Ltd v BNZ
The facts of Equiticorp Finance represent the main scenario engaging this part of this
chapter: the danger that outsiders may experience dealing with companies where breach
of the directors’ fiduciary duties are alleged.96 However, the case is more of academic
interest than practical importance, as only Kirby P in dissent imposed recipient liability
92 [1988] WAR 132, 178.

93 [1988] WAR 132, 173.
94 [1988] WAR 132, 174.
95 [1988] WAR 132, 175, citing R Austin, ‘Constructive Trusts’ in P Finn (ed) Essays in Equity (1985) 226 and the
New South Wales Court of Appeal decision in United States Surgical Corporation v Hospital Products International
Pty Ltd [1983] NSWLR 157, 285.
96 The description of the case is based on Law and Pascoe, supra n 59, 236–237.
as constructive trustee on BNZ. The case was discussed briefly in chapter 2 on aspects
of the officers’ authority to enter into the external contract, whilst here it is discussed in
more detail examining the effect on the outsider of the officers’ breach of duty.
BNZ was the principal banker to the Equiticorp Group of companies. The Equiticorp
Group was structured with two separate arms: the industrial group and the finance group,
both encompassed under the holding company, Equiticorp Holding Ltd. Allan Hawkins
was chairman of the Group and a director of some of its 140 companies. It appears that
of the companies directly involved in the case, there were common directors. In June
1987, a loan facility of $200 million was made available by BNZ to one of the wholly
owned subsidiaries, Uruz. Uruz acted as the conduit through which the money flowed
to fund the activities of the industrial group. By January 1988, BNZ was concerned as
to its exposure, and the facility was reduced to $65 million. By April 1988 it was appar-
ent that the financial position of the industrial group was tenuous. To try to protect the
financial group, two of the finance group companies, Equiticorp Finance Ltd and
Equiticorp Financial Services Ltd, created liquidity reserve accounts with BNZ into
which approximately $50 million was deposited in June 1988. In July 1988, Allan
Hawkins made the decision, uncontested by other directors, to apply the liquidity
reserves in repayment of the Uruz debt. (The two companies were “compensated” for
the loss of funds via the transfer to them of certain receivables owned by other compa-
nies in the industrial group.) The reason for the decision was to maintain the support of
BNZ, which was described as “imperative for the survival of the Group”.
In the subsequent liquidation of the finance group companies, Equiticorp Finance Ltd
and Equiticorp Financial Services Ltd, the liquidators sued BNZ to recover the liquidity
reserves.
On the face of it, the liquidators had a very strong claim. In summary, their argument
was that the directors of the finance companies owed fiduciary duties of loyalty and good
faith to the shareholders and creditors of those companies. Using the companies’ funds
to repay the debts of another company is a breach of that fiduciary duty, applying Walker
v Wimborne.97 BNZ was involved to the extent that it knew of the breaches of duty, oblig-
ing it to account to the companies for the sums received. Kirby P was prepared to uphold
the liquidators’ claim against BNZ, and in particular, to impose constructive trust liabil-
ity on BNZ over the funds that it received, knowing they were tainted by the directors’
breach of fiduciary duties.
However, Kirby P was the dissenting judge in this case. The majority, Clarke and
Cripps JJA held that there had been no breach of fiduciary duties by the directors of
Equiticorp Finance Ltd and Equiticorp Financial Services Ltd:
“Mr Hawkins considered, with some justification, that the welfare of the group was intimately tied
up with the welfare of the individual companies. … In a climate of substantial liquidity problems
and having regard to the holding company’s guarantee of the Uruz debt, we would conclude ... that
those responsible for managing the two companies thought that the steps taken to protect the group
as a whole, and in particular the holding company, coupled with the compensation scheme, were of
definite benefit to the companies. The alternative was possible disaster for the whole group includ-
ing the two companies.”98
97 (1976) 137 CLR 1.

98 (1993) 11 ACLC 952, 1,019.
Therefore, the result was that the directors did not breach their duties and BNZ was
not liable as constructive trustee for the funds. However, this is merely a result confined
to its facts: the judgment of Kirby P contains a cautionary tale for the outsider. Kirby P
held that a bank was a constructive trustee in circumstances where it was aware of
breaches of fiduciary duties by the directors and participated in them by taking advan-
tage of the breaches for its own benefit. He said that while a bank does not “have the
responsibility of gratuitously supervising or checking the managerial activities of its cus-
tomers, it is not relieved of obligations arising from the particular circumstances of its
relationship with a particular customer.99
3. Sixty-Fourth Throne Ltd v Macquarie Bank Ltd
The case was previously discussed under the assumption of apparent authority, s 129(3).
It is now discussed briefly in respect of potential equitable liability on the outsider for
the officers’ breach of duty.100 The Macquarie Bank had advanced funds to Michael
Kandy on the security, inter alia, of a guarantee and registered mortgage over the respon-
dent company’s property. The financing transaction was risky, with no evident benefit to
the company. The mortgage had been executed by the fraud of Kandy, the son-in-law of
the company’s two directors, Dr and Mrs Taft. A claim of participatory liability against
the Macquarie Bank was unsuccessful because the majority held that the principles of
constructive trusteeship, based either on recipient or accessory liability, could not be
imposed to undermine the doctrine of indefeasibility of interests established by the
Torrens system. The High Court refused an application for special leave to appeal.101
However, it is worth noting the strong dissenting judgment of Ashley AJA. His Honour
emphasised the need for the law to give adequate protection to trust property and the
interests of innocent beneficiaries, and was prepared to fix the bank with recipient lia-
bility. His judgment strongly endorsed the view that the concept of constructive knowl-
edge should be given a broad application. He held that knowledge in the fourth Baden
category would clearly suffice for recipient liability and that the Macquarie Bank “at the
least [ought to] have been put on enquiry.”
4. Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd
The Koorootang case provides an example of a situation where the constructive trust was
imposed on an external party contracting with a corporate security provider.102 The ANZ
bank had dealt with Mr Jock Jeffries and the Jeffries Group of companies for twenty
years. Jock Jeffries was also a director of Koorootang, a company that was not related
nor connected to the Jeffries Group. Koorootang was formed to act as trustee in admin-
istering the estates of the Ramsay family, (Mrs Jeffries’ family). Koorootang had two
other directors, but they and the rest of the family, left Jock Jeffries to run the company.
Unknown to the Ramsay family, the Jeffries Group was in financial difficulty. Jock
Jeffries offered, and ANZ accepted, security for the Jeffries Group loans over
Koorootang’s property, comprising shares and real property. The negotiations with ANZ
and the execution of the security documents took almost a year, between December 1992,
and November 1993. In executing the security documents (scrip lien, real property mort-
99 (1993) 11 ACLC 952, 986.

100 The description of the case is based on Law and Pascoe, supra n 59, 237.
101 High Court Transcript, 9 October 1998.
102 The description of the case is based on Law and Pascoe, supra n 59, 223–224.
gage and associated requisitions) in Koorootang’s name, Jock Jeffries forged the signa-
ture of one of the other directors. None of the other members of the Ramsay family were
aware that the transactions had occurred, nor did ANZ directly consult with any other
family members over the transactions. The real property mortgage was registered.
The shares, which were the subject of the scrip lien, were sold on 8 September 1993.
The fraud was uncovered in late 1994. Koorootang’s solicitors wrote to ANZ disputing
the validity of the transaction, and ANZ took steps to exercise its power of sale.
Koorootang commenced proceedings against ANZ, claiming, inter alia:
• a declaration that the scrip lien and mortgage were void and unenforceable,
• alternatively, a declaration that ANZ’s interest in the scrip lien and mortgage was
held on constructive trust for Koorootang,
• an injunction restraining ANZ from enforcing the mortgage,
• recovery of the proceeds of the sale of shares, based on conversion, moneys had
and received, and breach of duty of care.
In finding for the plaintiff, Hansen J held that ANZ was a constructive trustee for
Koorootang of the real property the subject of the security transaction.103 ANZ was the
recipient of trust property, knowing that it was tainted by the breach of trust. As to the
requisite degree of knowledge, Hansen J held that ANZ had:
• actual knowledge that the mortgaged property was trust property; and
• constructive knowledge that the trust property was misapplied by Koorootang as
trustee and by Jock Jeffries, in breach of his fiduciary duty to Koorootang.
Hansen J found the bank had constructive knowledge of Jock Jeffries’ breach of fidu-
ciary duty and breach of trust, and expressed it in terms of the bank’s wilful and reckless
failure to make inquiries about the matter that an honest and reasonable banker would
have made in the circumstances. Reference to “wilful” and “reckless” is analogous to
category (iii) (a type of actual knowledge, but Hansen called it constructive), and Hansen
J expressed disapproval at ANZ’s conduct, holding that the bank’s conduct fell short of
that expected of a reasonably prudent bank.104 Although the facts were complex, the main
aspects leading to Hansen J’s assessment of the bank’s conduct included:
• it was a third party security;
• the mortgage was for a large amount ($7 million);
• failure by the bank’s officers to follow procedure and obtain legal advice as to
the use of the trust’s assets to secure Jeffries’ Group indebtedness;
• failure by the bank’s officers to clarify inconsistent information on their file (for
example, the bank obtained a letter from Jock Jeffries confirming that the securi-
ty was not trust assets, but that this was clearly inconsistent with earlier detailed
information that the bank had about the financial affairs of the trust);
• failure by the bank to contact any other directors of Koorootang;
• evidence of concern within the bank as to Jock Jeffries’ potential conflict of
interest.
103 Hansen J declined to determine whether constructive trusteeship applied to ANZ’s interest under the scrip lien.
Instead, Hansen J resolved the problem according to the rules of priority of competing equitable claims.
Koorootang’s claim was successful, based on the priority accorded to the first in time created.
104 [1998] 3 VR 16, 122, 123.
Hansen J therefore did not need to express a concluded view on whether any cate-
gory of constructive knowledge ((iv) or (v)) would apply, although he explicitly stated a
preference for at least category (iv) knowledge. He stated that category (v) is not suffi-
cient, as cases in that category are characterised as ones where the outsider is merely
careless.
The Koorootang case examined the scenario where the outsider knew about the
breach of trust. The Koorootang case considered, but did not resolve, the relevance of the
indoor management rule assumptions to constructive trustee liability. As Hansen J
noted,105 in any case in which a fraud is carried out by an officer or agent of a corpora-
tion, former s 164 (now s 129) will have an important, perhaps conclusive, role to play.
The scope of the assumptions were not considered, because Hansen J decided that the
exceptions precluded ANZ from accessing any assumption, but Hansen J left open the
likelihood of the assumptions proving conclusive in a case where the Barnes v Addy
claim had only been based upon Jock Jeffries’ fiduciary duties as a director.
5. The Australian cases: support for constructive knowledge
To assess the state of recipient liability in Australia, the cases show that the prevailing
criterion is that the outsider must have constructive knowledge of category (iv): knowl-
edge of circumstances that would have indicated the facts to an honest and reasonable
person. Whether this would extend to being more objective (i.e. category (v)) was float-
ed by Kirby P but has not been adopted. As there is no direct application where the out-
sider to the contract with a company has incurred personal liability due to breach of the
fiduciary duty owed to the company by its officers, the risk is therefore hypothetical
rather than actual.
The only residual point of uncertainty is even if the scope of the assumption allows
fiduciary duty compliance, it still depends on the scope of the rule’s exceptions in s
128(4). It is unlikely that the exceptions to the rule, based on knowledge, would not over-
lap with participatory liability.106 Both demand high standards of prudence, conduct and
integrity in commercial dealings, standards emphasised by the High Court in Northside
and referred to in chapter 3.
The overlap between corporate law principles and wider equitable principles has now
been made. The significance of this is that if circumstances arise pursuant to s 128(4)
that will preclude an outsider from relying on the procedural assumptions,107 the corpo-
rate borrower may go further and seek equitable relief for breach by its directors of their
fiduciary duty.
Documents Executed Without Common Seal: s 129(5)

The terms of the assumption are that: “A person may assume that a document has been
duly executed by the company if the document appears to have been signed in accor-
dance with subsection 127(1). For the purposes of making the assumption, a person may
also assume that anyone who signs the document and states next to their signature that
105 [1998] 3 VR 16, 116.
106 Law and Pascoe, supra n 59.
107 There is now sufficient authority in Australia that defines what those circumstances are, from Northside
Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611and subsequent cases mentioned in Table 5.2 in
chapter 5.
they are the sole director and sole company secretary of the company occupies both
offices” (no former equivalent).
A company may enter into contracts directly,108 but the company’s assent to be bound
must be in the proper form.109 “Proper form” is specified in the Corporations Act how-
ever other statutes may specify procedural requirements. For example, Jovista Pty Ltd v
Pegasus Gold Australia Pty Ltd 110 concerned the execution by a company of a statutory
lien registered pursuant to the Workman’s Liens Act 1893 (NT). Section 10(3) required
the notice to be “signed … and attested”. It was argued that by sealing the documents,
the company had “signed” but not “attested”. Bailey J held:
“the signatures of Jovista’s director and secretary have the effect of authenticating the company’s
signature by attesting that the company’s seal was affixed in accordance with its Articles … the four
applications were ‘signed and attested’ in accordance with s 10(3) of the Act.”
There arises, as a separate issue to the officers’ authority to exercise corporate power,
the issue of the officers’ authority to provide the company’s assent in the proper form. As
two separate issues, there is a distinction between “substantive authority” and “formal
authority”,111 where:
1. “substantive authority” is the existence and scope of the officers’ authority to
enter into the contract; and
2. “formal authority” is the officers’ authority to signify, in the proper form, the
company’s assent.
The assumption in s 129(5) is new, since 1 July 1998, and is a necessary consequence
now that the common seal is optional under s 123. Even if a company has a common
seal, the effect of s 127(1) is to make it optional whether the company uses it. For exe-
cution without the seal, s 127(1) provides that a company may execute a document with-
out the seal if it is signed by:
(a) 2 directors; or
(b) a director and a secretary; or
(c) the sole director of a single director proprietary company.
Recent companies legislation has never prescribed the situations in which contracts
and transactions with outsiders are to be under seal.112 This has been left to commercial
practice, and therefore the outsider essentially dictates the procedure by which the com-
pany’s assent to be bound is evidenced.
Section 127 (particularly subsection (1)) has no direct former equivalent section, and
the Explanatory Memorandum only makes brief reference to the section facilitating the
execution of documents without a seal.113 As s 127 is new, does it change the law, in terms
whereby it either:
1. confirms the existing distinction between substantive authority and formal
authority; or
108 Richardson v Landecker (1950) 50 SR (NSW) 250.

110 (1999) 17 ACLC 524, 528 (Bailey J).
the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38, 39.
112 The seal was only required on share certificates: s 1087 prior to 1 July 1998.
2. merges, or otherwise renders indistinct, the difference between substantive and

formal authority?
The section refers to its effect by the note: “If a company executes a document in this
way, people will be able to rely on the assumptions in subsection 129(5) for dealings in
relation to the company.”114 Section 129(5) allows the assumption that a document is
“duly executed” if it complies with s 127(1).
The cross-reference between s 127(1) and s 129(5) is a useful drafting device but
must be read as merely confirming that the officers of the company have formal author-
ity to sign.115 To look at the issue of execution another way, is it possible that there may
still be disputes regarding authentication is the proper from, where substantive authority
is not contested? The facts of Tilley v Egan116 provide an example, suggesting that there
is no merger of formal authority and substantive authority. Tilley involved a priority dis-
pute between two charges. The chargor company was a sole director proprietary compa-
ny. There was no substantial challenge to the officer’s authority to grant the charge. The
dispute related to whether the officer had actually signed at all, there being contested evi-
dence whether his signature was intended to authenticate the document as the company’s.
To outsiders, the role of s 127 is to:
• confirm formal, implied authority on officers to execute company documents;
and
• define “proper form” of authentication, to assist the operation of the procedural
assumptions that may be made under s 129.
Accordingly, the assumption confirms that the company can enter into contracts
directly,117 but it does not resolve the question as to authority, unless the signatories may
also be assumed to be a director or secretary. This is discussed under s 129 (6) below.
Documents Executed With Common Seal: s 129(6)

The terms of the assumption are that: “A person may assume that a document has been
duly executed by the company if:
(a) the company’s common seal appears to have been fixed to the document in
accordance with subsection 127(2); and
(b) the fixing of the common seal appears to have been witnessed in accordance
with that subsection.
For the purposes of making the assumption, a person may also assume that anyone
who witnesses the fixing of the common seal and states next to their signature that they
are the sole director and sole company secretary of the company occupies both offices”
(similar to former s 164(3)(e)).
The major drafting difference between the former provision and the current provision
is the cross-referencing. In order for the former s 164(3)(e) to operate, the outsider was
also required to access either the assumption as to customary authority of officers or
114 This is the note to s 127(1). The note to s 127(2) is identical, except it refers to the assumptions in s 129(6).
115 Ramsay, Stapledon and Fong, supra n 111, 52.
116 [2000] QCA 356. The case was an appeal against summary judgment. The Court of Appeal decided that the case
should go to trial.
117 Richard Brady Franks Ltd v Price (1937) 58 CLR 112.
ostensible authority of officers attesting the seal.118 Internal cross-referencing in this form
is not required, as the assumptions operate cumulatively: s 129(8). Instead, the cross-ref-
erence is to s 127(2) (execution of company documents under seal). The significance of
this change was recently examined,119 to determine whether this change in drafting has
rendered a substantive change in the ambit of the rule. There is a distinction made
between substantive authority to bind the company and formal authority to affix the seal.
Cases on the former s 164(3)(e) limit the assumption to formal authority, that is, the
assumption relates only to procedural regularity in ensuring that the company’s assent is
in the proper form. Substantive authority relates to the authority of the officers to exer-
cise corporate power to enter into the transaction. The former provision did not cure
defects in authority,120 nor was the common law indoor management rule intended to cre-
ate authority where there was none. 121
Accordingly, there are two possible views of the redrafted s 129(6):
1. the “narrow” view, under which s129(6) is intended to remain as a rule of proce-
dural regularity.
2. The “wide” view that s 129(6), via s 127(2), is designed to overcome lack of
authority.
The wide view is not sustainable, as it is not consistent with previous Australian
authority, nor has the legislature unequivocally signalled an intention to depart from that
previous law.122 Such an interpretation of s 129(6) does not accord with the indoor man-
agement rule’s role as a rule of procedural regularity, and one that operates as an adjunct
to the principles of agency but not in derogation of them.
The company’s signature, whether represented by a seal or not, can only be physical-
ly inscribed via the actions of its officers or agents. The indoor management rule was
designed to cure most defects relating to formal authority to execute. A series of examples
of authentication problems are discussed below. These examples prove the comprehensive
ambit of the rule’s application. Set out below are the types of sealing disputes that have
arisen in litigation, and the extent to which the statutory assumptions resolve them.
The collapse of s 129(6) into s 129(1)
The assumption as to sealing, and the more general first assumption as to compliance
with the constitution, are generally treated as separate. This usually operates in favour of
the outsider, so that their disentitlement to the first assumption does not disentitle them
to the more specific assumption.123 However, the outsider does not usually get the bene-
fit of the reverse, that is, the assumption as to compliance with the constitution general-
ly does not operate in lieu of s 129(6) in a sealing dispute.124 Belven125 provides an inter-
118 Section 164(3)(e) permitted the assumption of due sealing when three conditions were met:
1. the document had an impression of the seal;
2. it was attested by two persons (subject to single director proprietary companies);
3. those two persons were assumed to be a director and either director or secretary pursuant to s 164(3)(b) (statu-
tory register of offices) or s 164(3)(c) (holding out by the company as to authority).
119 Ramsay, Stapledon and Fong, supra n 111.
120 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 9 ACLC 324, 343 (Ormiston J).
122 Ramsay, Stapledon and Fong, supra n 111, 49–50.
123 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 9 ACLC 324.
124 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 15 ACLC 1,057 (NSW Court of Appeal); Bank of New Zealand
v Fiberi Pty Ltd (1994) 12 ACLC 232, 236 (Brennan J).
125 Belven Enterprises Pty Ltd v Lydham Pty Ltd (1996) 14 ACLC 1478.
esting corollary. Commissioner Wheeler QC held that former s 164(3)(a) could apply
where the outsider had not actually seen the document that they were seeking to enforce.
The Belven argument still applies to the current provision, which requires the com-
mon seal to “appear” to have been fixed to the document.
“Appears” to be sealed
Where a company has a seal, s 123 requires the seal to state the full name and ACN of
the company (similar to former s 219). This is significant because the assumption as to
due sealing in s129(6) requires the document to appear to have been sealed. If the seal
was defective through non-compliance with s 123 and as it is a matter capable of detec-
tion by mere casual physical examination, then arguably the outsider is precluded from
the assumption because they have actual knowledge of the defect or at least a “suspicion”
(s 128 (4)).
A situation arose in Westpac Banking Corporation v Dawson126 where the borrower
company used the seal for its proposed new name some four months prior to the name
change taking effect with the issue of a new certificate of registration. The New South
Wales Court of Appeal held the intention of the parties to enter into that transaction with
the borrower identified by its proposed new name and evidence that the appropriate inter-
nal procedures had been complied with were sufficient to cure the defect. The circum-
stances arose prior to the statutory enactment of the rule. The case adds only indirect sup-
port that such a defect could not be cured by the assumption in s 129(6) alone.
Where there is a non-complying seal, it may be that a court will disregard the seal
and s 127(2), and allow the outsider to assume that the document has been executed in
accordance with s 127(1). For the assumption to apply under s 129(5), the outsider would
only need to rely that officers signed the document. Whilst there is no direct authority,
this is similar to the approach of the High Court in MYT Engineering Pty Ltd v Mulcon
Pty Ltd.127 The majority of the High Court held that as the document in question did not
need to be sealed, then authentication of the company’s consent was sufficiently evi-
denced by the signature of its directors.
Forged seal
Contrast the above situation with a forged seal. Provided it is genuine on the face of it,
then the assumptions as to sealing in s 129(6) and absence of fraud and forgery in s
128(3) protect the outsider. After reviewing the relation between the former provisions (s
164(3)(e) and s 166) Justice Handley128 concluded that:
“if the person dealing with the company is entitled to make the assumptions in [s164(3)(e)] that
person is also protected against the risk that a counterfeit seal has been used or that one or more of
the attesting signatures have been forged unless that person has actual knowledge of such forgery”.
The main concern for outsiders since the Company Law Review Act 1998 is whether
the current provision relating to forgery in s 128(3) is excluded beyond actual knowl-
126 (1990) 8 ACLC 681; affirmed on appeal by the High Court in Dawson v Westpac Banking Corporation (1991) 66
ALJR 94.
127 (1999) 17 ACLC 861, 864.
128 ‘When are Outsiders on Notice that Corporate Agents Lack Authority?’ Paper presented at QLS Securities
Intensive VII Seminar, Coolum, October 1993, 20, 32.
edge. Former s 166 only excluded actual knowledge. This issue is pursued in chapter 7,
where we argue that under the statutory rule, the outsider cannot make the assumption if
they knew or suspected that the seal/signature was a forgery.
Forged signatures
As referred to by Justice Handley above, it is unlikely that a forged signature on the com-
pany seal or signature affects the validity of execution from the outsider’s point of view.
Story v Advance Bank Australia Ltd129 is a case precisely on point. Mr Story (a director
and secretary of Fleetwood Star Pty Ltd) forged his wife’s signature (as the other direc-
tor) on a third party mortgage to secure his loans. The signatures appeared consistent
with the public information on the company and it was held that the bank had no actual
knowledge and no duty to make inquiry from the circumstances, as to whether Mrs
Story’s signature was genuine. The bank was able to rely on former s 164(3)(e).
Incorrect designation of officers as signatories
An outsider can still rely on the execution of a contract, even if the officers sign in anoth-
er designation. A person who may be assumed to be a director can sign as “secretary” as
long as the other requirements of fixing the seal are satisfied such as the other signatory
can be assumed to be a director, the document will be assumed to have been duly
sealed.130
Two different signatories attest the seal
The wording of former s 164(3)(e) required, as one of the elements to make the assump-
tion as to due sealing, that the sealing of the document must “appear” to be attested by
two persons. Further, former s 240(7) specifically provided that a requirement that an
act is to be performed by a director and a secretary is not satisfied by its being done by
the same person acting as both director and secretary. This provision has not survived the
Corporate Law Economic Reform Program Act 1999131 and suggests that this issue is
open for reassessment. Despite the absence of s 240(7), the issue may depend upon judi-
cial attitudes expressed in past cases to affixing the corporate seal. The problem of the
single signatory actually gives rise to two separate scenarios:
1. where one signature appears, intended to witness the seal in different capaci-
ties,132 and
2. where two signatures appear to witness the seal, but they are in fact the signature
of the same officer.
In the first situation, whether the sealing clause requires two different signatures, the
Court in re Efron’s Tie & Knitting Mills Pty Ltd133 held the same director could not sign
the seal in their capacity as director and again as attorney for another director, regardless
of the terms of the power of attorney. Such execution did not comply with a sealing
clause in the constitution that required the signature of two officers. By extrapolation,
129 (1993) 11 ACLC 629.
130 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, 265–266; Story v
Advance Bank Australia Ltd (1993) 11 ACLC 629, 637.
131 Operational 13 March, 2000.
132 Windeyer J in Equity Nominees Ltd v Tucker (1967) 116 CLR 518, 525 declined to accept the proposition that a
single signature of an officer operated both as a signing by that officer and a signing by the officer as nominee for
another officer.
133 [1932] VLR 8, 23 (Cussen ACJ); applied in Mancini v Mancini (1999) 17 ACLC 1570 (Bryson J).
this may not affect compliance with s 127(2), as the provision does not require “two sig-
natures” but merely that the seal is “witnessed by” two directors. For the Efron view to
prevail, s 127(2) would require an interpretation that the seal is to be physically witnessed
by “two different directors.”134
In the second situation, the High Court in MYT Engineering Pty Ltd v Mulcon Pty
Ltd135 held that the former s 164(3)(e) assumption was not available where the same offi-
cer signed in both capacities as director and secretary. In that case, Mr Edmonds held the
positions of director and secretary of MYT. The other director, Mr Pullen, was unavail-
able to affix the company seal on a deed of arrangement. Edmonds, with Pullen’s
informed consent, affixed and attested the seal. However, Gleeson CJ, Gaudron,
Gummow and Hayne JJ referred to the changes in the law due to the Company Law
Review Act 1998, indirectly alluding to a change in effect.136 The assumption requires the
seal to be witnessed by two directors or by a director and a company secretary (s 127 (2)).
It no longer explicitly refers to the witnesses being two separate people. This simplifi-
cation in the wording of the sealing of a document may have the substantial effect of
altering a case such as MYT Engineering. Since July 1998, if the same officer signs as
both director and secretary, as Edmonds did, the outsider is in a stronger position to argue
compliance with s 127(2) and access the sealing assumption in s 129(6).
In MYT Engineering, the document itself was held valid under former s 182(7), that
enabled a company to authenticate a document or proceeding by the signature of an offi-
cer in lieu of the common seal. The ultimate result was that the signature of the officer
authenticated the deed of company arrangement on behalf of the company.137
There is no current equivalent to s 182(7), which suggests either oversight, or that s
127 renders such a provision redundant. As former s 182 is replaced by a combination of
ss 123, 126 and 127, the better view is the redundancy one. The Corporations Act, when
referring to company contracts, no longer distinguishes between “execute” and “authen-
ticate”, as it did in former s 182. The majority judgment of the High Court in MYT
Engineering,138 and the judgment of Asprey JA in 195 Crown Street Pty Ltd v Hoare139
indicate that it is unnecessary to distinguish between a company signing a document,
executing a document or authenticating a document, as they all mean the same thing: the
manifestation of the company’s assent. If MYT Engineering were to arise after the
Company Law Review Act 1998 changes and in the absence of the express “authentica-
tion” provision in s 182(7), the majority’s view still stands. Accepting that the deed did
not need to be sealed,140 a single director’s signature, affixed to the seal in two capacities,
with the consent of the other director, still authenticates the company’s assent. Arguably,
134 Unlikely, since Myers v Aquarell Pty Ltd [2000] VSC 429.
135 (1999) 17 ACLC 861, 864 (Gleeson CJ, Gaudron, Gummow and Hayne JJ) and 875, (Kirby J).
136 Their Honours said, in footnote 4 to their judgment: “The provisions of the Law governing assumptions that may
be made by persons dealing with companies have since been amended by the Company Law Review Act 1998
(Cth) as applied by the Corporations (New South Wales) Act 1990 (NSW) s 7. Among other things, changes have
been made to reflect the possibility that a company may have only one officer. See ss 128, 129 of the Law. These
changes do not affect the present matter.”
137 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 17 ACLC 861, 870. Kirby J dissented on this point.
138 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 17 ACLC 861, 870.
139 [1969] 1 NSWR 193, 202 (Asprey J): The company’s “signature can be affixed by that [natural] person in a variety
of ways so long as what is done by him is performed with the intention of authenticating the document so as to be
binding on the company under whose authority he is executing the document.”
140 This was a point upon which Kirby J dissented.
now given that s 127(4) provides that s 127 “does not limit the ways in which a compa-
ny may execute a document”, it would apply to the same effect. As to whether outsiders
are affected by this form of authentication is a question left open by the majority in MYT
Engineering and depends upon the scope of s 129.
Certainly, in Myers v Aquarell Pty Ltd, decided after 1 July 1998, where the compa-
ny had appointed a sole director (despite the constitution requiring a minimum of two
directors), Gillard J held that that person signing in their capacity as both director and
secretary complied with the constitution.141
Note that this does not apply to a case where a director incorrectly describes him-
self/herself as a “sole director”, where the ASIC records indicate that there are two direc-
tors. This type of error is resolved under the next heading.
Curing contested authority
If the company has a constitution comprising articles of association (ss 135 and 1415),
then its articles will invariably provide that the seal must be affixed by authority of the
board of directors (e.g. former Table A article 84). In most situations, s 129(1) allows the
outsider to assume that the meeting was held. But even where reliance on s 129(1) may
be precluded, as in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd,142
this does not affect the availability of the more specific assumptions in s 129(5) and (6).
In Brick & Pipe, the lender had read the company’s constitution and so had actual knowl-
edge of it. It also had actual knowledge that the transaction had been entered into in
breach of the constitution.143 However, actual knowledge of non-compliance with the
constitution was held not to affect the lender’s capacity to rely on the assumption as to
the sealing as they are discrete assumptions.144
Similarly, a director acting outside the scope of the company’s interests affects their
authority to bind the company.145 However, the company is bound unless the outsider had
notice of the fiduciary breach. The assumptions as to due execution do not allow the out-
sider to escape the effects of voidable contracts, where they have notice of the breach.
We discussed voidable contracts under the assumption as to proper performance of
duties, s 129(4).
The rule does not allow the assumption that an officer has the actual authority of the
company to enter into the transaction. The outsider still needs to know with whom they
are dealing, and, in a formal sense, their connection with the company. At best, the rule
allows the outsider to assume either customary authority (s 129(2)), or apparent author-
ity (s 129(3)). If the outsider cannot rely on s 129(2), it has the more difficult eviden-
tiary hurdle of proving “apparent” authority. As discussed in chapter 2, this requires a
representation from a person who has the actual authority to make it.
A director cannot bind the company,146 but the managing director might, subject to the
wide conferral of actual authority. The appointment of a person to the post of managing
141 [2000] VSC 429, [71].
142 (1992) 10 ACLC 253.
143 Specifically, the financier actually knew that one of the directors, Goldberg, breached article 89, precluding “inter-
ested directors” from voting on a resolution, and article 107, as to use of the seal.
144 (1992) 10 ACLC 253, 264–265.
145 See Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246; ANZ Executors and Trustee
Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360 .
146 Re Haycraft Gold Reduction and Mining Co [1900] 2 Ch 230, Dawson J in Northside.
director is not necessarily available from the public record. In two of the major cases,
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd147 and Equiticorp
Finance Ltd v Bank of New Zealand,148 the court assisted the lenders’ bid to enforce a
transaction by holding that a person who appeared to be in a position of dominance and
control, with the support and acquiescence of the board, had the actual authority to bind
the company. As discussed in chapter 2, subsequent cases emphasise that “acquiescence”
means that the board knew of the usurper’s role, so that lenders in later cases were unsuc-
cessful in proving actual authority.
The Brick & Pipe case was the breakthrough success for lenders. The company was
part of the “Goldberg Group” of companies, all of which were managed under the close
control of Mr Goldberg. He was on public record as being director of the company along
with Mrs Goldberg, Mr Furst and several “independent” directors, yet in reality he took
effective control. The third party security documents had to be signed under seal and
attested to by a director and the secretary only.149 Goldberg signed as director. Furst
signed as secretary, when he did not hold this position. The lender queried Furst’s capac-
ity to sign as secretary. Goldberg assured the lender that the appropriate parties had
attested the seal.150 The company later disputed the validity of the execution. The lender
relied on Goldberg’s statement, treating it as a representation from the company that
Furst was secretary.
By virtue of the board acquiescing to his control, it may be argued, as in Freeman
and Lockyer v Buckhurst Park Properties (Mangal) Ltd,151 that Goldberg had apparent
authority to bind the company. But an agent with merely apparent authority cannot make
a representation binding the company as to another person’s authority.152
Goldberg was considered by all, outsiders and insiders, to be the alter ego of each of
the companies in the group. In the affairs of Brick and Pipe, Goldberg acted without first
seeking board approval. The board routinely authorised transactions already completed
and did not interfere. Due the extent of his control Goldberg was clothed with the actu-
al authority of the company. For the lender, this finding completed the links in the chain:
Goldberg had actual authority to hold out Furst as secretary, thus s 164(3)(c) operated so
that Furst could be assumed to be secretary, triggering the assumption of due execution.
Brick & Pipe is a good illustration of how the principles of authority work together
with the indoor management rule to overcome disputes as to authority. The effect of the
decision is not to confer authority on Furst where none existed, but to use the principles
of agency and substantive authority to link into the rule’s assumption as to formal author-
ity to execute documents.
Warrant Documents Genuine: s 129(7)

The terms of the assumption are that: “A person may assume that an officer or agent of
the company who has the authority to issue a document or a certified copy of a document
147 (1992) 10 ACLC 253.
148 (1993) 11 ACLC 952.
149 An unusual requirement of the company’s constitution.
150 The facts were a bit more convoluted: the statement was made by the Group’s financial controller, in the presence
of Goldberg to which Goldberg did not object. The Court therefore treated it as Goldberg’s statement.
151 [1964] 2 QB 480.
152 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72.
on its behalf also has authority to warrant that the document is genuine or is a true copy”
(based on former s 164(3)(d)).
Consistent with the execution assumptions, this paragraph extends to formal author-
ity only so is limited to its procedural effects.
The Scope of the Statutory Rule

The indoor management rule is a rule of procedural convenience only, and it primarily
protects outsiders from effects of non-compliance with the constitution, defects in formal
authority to authenticate documents and possibly, from improper performance of fidu-
ciary duties by officers.
The rule’s genesis has been traced back to cases over one hundred years ago, notably
Royal British Bank v Turquand,153 Ernest v Nicholls154 and Mahoney v East Holyford
Mining Co.155 Developments in the rule through the twentieth century have been noted,
to demonstrate the complications and inconsistencies in the rule’s evolution. The rule’s
operation was affected by three other common law doctrines, classic ultra vires, the effect
of forgery and the doctrine of constructive notice of public documents. Some of the
inconsistencies identified relate to factors such as:
• whether the cases have adopted a clear or blurred distinction between procedural
or substantive limitations that the outsider is seeking to assume;
• the role of the public documents and whether the outsider actually relied on their
contents;
• the extent to which delegation and agent’s authority is a matter that may be
assumed from the company’s constitution.
Case law developed exceptions to the rule, based on actual knowledge and due
inquiry. This culminated with the High Court’s decision in Northside Developments Pty
Ltd v Registrar-General.156 This case held that the due inquiry exception required bal-
ancing between business convenience and preventing fraud on the company. The judg-
ments also indicate the combination of circumstances that put the outsider on inquiry,
such as: the powers of the company (if relevant); the nature of the company’s business;
a reasonable apprehension that the transaction is entered into for purposes unrelated to
the company’s business. These factors were discussed in chapter 4 and collated in Table
5.2 in chapter 5.
All four common law doctrines (i.e. the indoor management rule, classic ultra vires,
forgery and constructive notice) were modified by statute in 1983. So far as the rule was
affected, Parliament’s intention was to clarify and codify the existing common law. The
introduction of the first statutory version was followed by a decade of uncertainty regard-
ing two main aspects of the rule. The first uncertainty related to the preconditions for
relying on the rule, in particular whether the outsider had “dealings” in “proceedings”
with the company. The second uncertainty was the scope of the exceptions. Chapter 7
examines the remnants of the forgery rule, and chapter 8 considers the scope of the statu-
tory rule’s exceptions.
153 (1856) 6 E&B 327; 119 ER 886.
154 (1857) 6 HL Cas 401.
155 (1875) LR 7 HL 869.
156 (1990) 8 ACLC 611.
Chapter 7
The Indoor Management Rule and Forgeries

The Common Law
Chapter 3 examined the scope of the common law indoor management rule and its excep-
tions. A significant limitation on the operation of the rule was where the company alleged
forgery in the execution of its contracts. It is unlikely that the scope of the common law
indoor management rule was designed to cure forgeries. In the separate judgments of the
High Court in Northside Developments Pty Ltd v Registrar-General,1 Mason CJ,
Brennan J, Dawson J and Toohey J all discussed in some detail the alleged “forgery”
exception to the Rule in Turquand’s case. Overall, the members of the Court treated
forgery as a separate doctrine, not essentially part of the rule itself.
According to the various judgments of the High Court in the Northside case, forgery
in a limited sense operated to defeat the Rule in Turquand’s case. Brennan J thought that
it did not matter whether a false seal or signatures were used or the seal and signatures
were genuine but affixed or signed without authority. In both types of cases, a company
will be bound only if it is estopped from denying that the seal or signatures were false or
put on the document without authority. Therefore Brennan J did not regard forgery as a
separate issue but part of the general principles of estoppel.2
Dawson J adopted a similar approach but noted that in the case of a false seal or sig-
natures, the company will usually not have represented that the forger had authority to
act. Thus a forgery will usually be a nullity under ordinary agency principles. Where the
seal and signatures are genuine, the question arises whether the seal and signatures were
affixed by persons held out by the company to have authority to do so. In such a case,
the Rule in Turquand’s case applied. Correspondingly, s 129(1) and (6) would now gov-
ern this situation in much the same way because the agency rules of apparent authority
have been incorporated into the assumption of valid sealing.
Mason CJ expressed doubt that forgery was a true exception to the rule but thought
that in any case it had a limited operation.3
Brennan J4 noted that confusion arises due to the two senses in which “forgery” is
used: in the strict sense of a false signature or seal, or in a wider sense, where the seal or
signatures are genuine, but where there is no authority to execute.
The common law dilemma demonstrated by the so-called forgery exception is illus-
trated by cases such as Ruben v Great Fingall Consolidated,5 South London Greyhound
Racecourses Limited v Wake6 and Kreditbank Cassel (GmbH) v Schenkers Ltd.7 Ruben
1 (1990) 8 ACLC 611.

2 (1990) 8 ACLC 611, 633.
3 (1990) 8 ACLC 611, 617.
4 (1990) 8 ACLC 611, 633.
5 [1906] AC 439.
6 [1931] 1 Ch 496.
7 [1927] 1 KB 826.
The Indoor Management Rule and Forgeries 105
involved the fraudulent sealing of a share certificate. The certificate was attested by the
secretary. The company was not bound by the document and the secretary had no author-
ity to warrant that the share certificate was genuine. The secretary did not have actual
authority, nor had been held out as having authority. It was held that the indoor manage-
ment rule did not apply to transactions that were not genuine. The forged signature ren-
dered this document “not genuine”.
Kreditbank and Wake, however, involved genuine signatures that were held to be
forgeries insofar as they purported to bind the company. Kreditbank involved bills of
exchange signed on the company’s behalf, as drawer, by a branch manager. The branch
manager had no authority to sign. It was held an outsider could not assume that the usual
authority of a branch manager in the company’s business was to draw bills. The case
could have been disposed of on the basis of lack of authority. However, the Court went
on to hold that the rule did not apply because the bills were forgeries.
In South London Greyhound Racecourses Limited v Wake8, the seal of the company
was affixed by the managing director and secretary with their genuine signatures, but
without the authority the board. The document was held to be a forgery.
The inconsistency of the latter type of case with the genuine forgery cases has been
criticised elsewhere.9 The common law effect of forgery, at least in the strict sense, has
now been abrogated by s 128(3).
However, the outsider is still at risk from the common law position, that for forgery
in the strict sense, the company is not bound, as its consent is a nullity.10 For forgery in
the wider sense, it is not really a matter addressed solely by the indoor management rule:
the resolution rests ultimately on agency principles and the extent of the actual or appar-
ent authority of the agent to execute.
The principles relating to the effect of fraud now depend upon whether the
Corporations Act applies to the transaction. For events occurring before 1 January 1984,
the applicable law is the common law; for events occurring on or after 1 January 1984,
former Companies Codes s 68D applies;11 after 1 January 1991, s 166 Corporations Law
applies; and after 1 July 1998, s 128(3) Corporations Act applies.
Statutory Intervention
Former s 166
With the statutory reform in 1984 came modification to the common law rule on forg-
eries. Extending the protection conferred to outsiders, former s 166 provided that the
outsider in the case of fraud or forgery could still make the statutory assumptions. Former
s 166 provided that the assumptions may be made in relation to dealings with a compa-
8 [1931] 1 Ch 496.
9 I Campbell, ‘Contracts with Companies’ (1960) 76 Law Quarterly Review 115, 130–36; H A J Ford, Principles of
Company Law, (2nd ed, 1978) 124. At first instance, Young J in Northside Developments Pty Ltd v Registrar-General
(1987) 5 ACLC, 642, 651 attempted to reconcile them; an explanation of the Ruben and Kreditbank cases may well be
that in those cases the forged instrument was not warranted as genuine by someone with actual authority.
10 According to Brennan J in Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 633, it is diffi-
cult to envisage a case where the company has represented that it would be bound by a forgery.
11 It was held that s 68D does not have any retrospective effect (i.e. before 1 January 1984): Barclays Finance
Holdings Ltd v Sturgess (1985) 3 ACLC 662.
ny even if an officer, agent or employee referred to in the specific assumption acted

fraudulently in relation to the dealings or forged a document that appeared to have been
sealed on behalf of the company. The outsider lost this entitlement to make the assump-
tions where that person had actual knowledge that the officer, agent or employee of the
company or the person held out as such acted fraudulently or forged a document.
The purpose of s 166 was stated in the Explanatory Memorandum12 as being to restate
the common law rule that a company will not escape liability for the acts of its officers,
agents or employees merely because they have acted fraudulently, if the company would
otherwise have been made liable by the fraudulent act. It also over-rules the interpreta-
tion placed on Ruben v Great Fingall Consolidated13 that a forgery is a nullity and there-
fore comprises an exception to the Rule in Turquand’s case. This interpretation of
Ruben’s case was rejected by the High Court in Northside Developments Pty Ltd v
Registrar-General.14
However, there were two points of uncertainty regarding the interpretation and appli-
cation of former s 166:
• does the fraud or forgery used in the section refer to either or both the strict
sense and the wide sense as discussed in Northside?
• Is actual knowledge the only disentitling circumstance to relying on former s
166, or does the second statutory exception apply as well?
Forgery in the strict sense only
Former s 166 does not explain whether a fraudulent act or a forged document includes
an unauthorised affixing of the company seal or whether it is restricted to the affixing of
a seal or signatures that are not genuine. It probably refers only to a fake seal or signa-
tures because unauthorised affixation of a genuine seal would be covered by the other
assumptions as to execution in former s 164(3)(a) and (e) in any case. Kirby P in Bank
of New Zealand v Fiberi Pty Ltd15 concluded that there was an overlap between former s
164(3)(a) and (e) and that paragraph (a) could be applicable to cases involving the use of
the company seal. His Honour suggested that paragraph (a) did not operate where “the
sealing” was carried out with a fake seal. This restriction on the operation of s 164(3)(a)
was evident because any reference to “the seal” in a company’s articles implicitly
referred to a genuine seal.16 Where a seal that was not genuine was used, the outsider was
still protected by former s 164(3)(e). This is made clear by virtue of former s 166.
Comments by Kirby P in Fiberi sustain the argument that former s 166 is confined
to forgery in the strict sense. His Honour stated, “it would not be surprising that the leg-
islature should make a distinction between the use of a genuine seal [the wide forgery]
and of a forged seal [the strict forgery].”17 If this is the correct interpretation, then s 166
represented a change in the common law by providing more protection to the outsider.
As forgery in the wider sense involves issues of officers’ authority, this is still a mat-
ter to be left to the general rules of agency, combined with the specific statutory assump-
13 [1906] AC 439.
14 (1990) 8 ACLC 611, 617 (Mason CJ).
15 (1994) 12 ACLC 48.
16 (1994) 12 ACLC 48, 58.
17 (1994) 12 ACLC 48, 58.
The Indoor Management Rule and Forgeries 107
tions, to resolve. This represents a sensible interpretation of the various statutory enact-
ments dealing with the indoor management rule and is consistent with the case law that
has substantially been about forgery in the wider sense.
There are two major cases dealing with former s 166 and forgery in the strict sense:
Story v Advance Bank Australia Ltd18 and Koorootang Nominees Pty Ltd v ANZ Banking
Group Ltd.19 In Koorootang, the bank did not rely on s 166. In Story, one director forged
the signature of the other director when affixing the company’s seal to a mortgage. The
New South Wales Court of Appeal confirmed that in this situation, s 166 protected the
bank, unless it had actual knowledge of the forgery. However, this only sustained the
bank insofar as the forgery in the strict sense was concerned and Gleeson CJ dealt with
the second uncertainty with s 166: the relevance of constructive knowledge.
Actual knowledge and ought to know apply to s 166
Gleeson CJ in Story made the pertinent point that invariably, the question as to forgery
in the wider sense, the lack of authority on the part of the forger, also arises. That is, the
second follows the first: if there is a forged signature on the seal, then there will be an
absence of authority from the company to enter into the transaction. Despite the wording
of s 166 confining the exception to actual knowledge, there is a symbiotic relation
between s 166 and the indoor management rule that requires investigation of what the
outsider ought to have known as well. This latter issue is dealt with under the principles
of agency together with the indoor management rule.
In Story, Gleeson CJ did not regard the bank’s absence of actual knowledge of the
forgery as conclusive of the dispute. The bank also had to rely on the assumption as to
due execution (former s 164(3)(e)) to enforce the mortgage. As there were no circum-
stances requiring inquiry by the bank, then the indoor management rule applied.
Significantly, when assessing what the bank ought to have known, Gleeson CJ alluded to
the company’s apparent interest and benefit in the loan transaction.20
In Koorootang, Hansen J articulated the “difficult question of construction concern-
ing the relationship between s 166 and s 164 [the indoor management rule assumptions
and exceptions].21 His Honour agreed with Gleeson CJ in Story and concluded that actu-
al knowledge is not the only fact that disentitles an outsider to access the indoor man-
agement rule assumptions when forgery is involved.
Debate as to the second uncertainty carries over into the reworded statutory protection.
Section 128(3): effect of fraud by officer or agent
Pursuant to the Company Law Review Act 1998, the statutory rule as to forgeries has been
physically shifted from a separate section following the indoor management rule, to
being fully integrated with the provisions that establish the scope of the rule. This obser-
vation may be important as it reflects on possible interpretations of the redrafted rule on
forgery. The simplified provision now states: “The assumptions may be made even if an
officer or agent of the company acts fraudulently, or forges a document, in connection
with the dealings.”
18 (1993) 11 ACLC 629.
19 [1998] 3 VR 16.
20 (1993) 11 ACLC 626, 639.
21 [1998] 3 VR 16, 124–125.
A major point of distinction with former s 166 was that s 166 included a specific pro-
viso that actual knowledge by the person of the fraud or forgery precluded reliance on
the assumptions.
Subsection 128(3) now does not explicitly refer to actual knowledge, but resolves the
ambiguity regarding the relation between the forgery assumption, the other statutory
assumptions and exceptions.
There are at least two arguments that follow:
1. As there are no specific exclusions mentioned in the section, there is not intend-
ed to be any proviso precluding an outsider making the assumptions in the case
of forgery or fraud. That is, the outsider may make the assumptions even where
they have actual knowledge of the fraud or forgery.22 This argument represents a
significant departure (reversal) from both the former s 166 and the preceding
common law principles relating to the effect of fraud and forgery on transac-
tions.
2. This provision is subject to the general exceptions in s 128(4).
Subsection 128(3) provides that fraud may be disregarded by the outsider in
making the assumptions, whereas s 128(4) specifies the circumstances where the
assumptions cannot be made, based on whether the outsider knew or suspected
the matter to be incorrect. Therefore, the general rule in s 128(3) is subject to
the exceptions in s 128(4). Whilst the effect of the exceptions is discussed in
chapter 8, the immediate consequence of the restructured provisions is that the
rule for fraud is explicitly subject to two exceptions. In Koorootang Nominees
Pty Ltd v ANZ Banking Group Ltd,23 Hansen J stated that the new drafting
“makes it abundantly clear” that, even in the case of fraud or forgery, a person
dealing with a company is not entitled to make any relevant assumption” when
the person knew or suspected that the assumption was incorrect.24
Conclusion: Fraud and the Exceptions to the Statutory Rule

There are two comments that we contribute as to the operation of s 128(3). First, the sec-
tion will only operate in the case of forgery in the strict sense, that is, where a signature
or seal is not genuine. Secondly, although chapter 8 examines the precise scope of the s
128(4) exceptions, the assumption as to fraud and the enumerated assumptions in s 129
are closer in alignment as both are subject to the same disentitling circumstances.
22 Although the structure of the reform has changed since the Second Corporate Law Simplification Bill 1995, there
was early commentary on whether the revised fraud section was subject to any proviso. See P Ryan, ‘Impact of the
Second Corporate Law Simplification Bill on Financiers’ Dealings with Companies’ (1997) 13 Australian Banking
Law Bulletin 19 who opined that “A financier will be entitled to rely on the statutory assumptions even where they
had actual knowledge that an officer or agent of a company acted fraudulently or forged a document...”
23 [1998] 3 VR 16.
24 [1998] 3 VR 16, 165. Also in agreement with this view: H A J Ford, R P Austin and I M Ramsay, Ford’s Principles
of Company Law (10th ed, 2001) [14.110] thought that the reformed fraud provision will operate differently from
former s 166 in that it will be subject to both of the statutory provisos. This was also the view expressed in P Lipton,
The Authority of Agents and Officers to Act for a Company: Legal Principles (1996) 57.
Chapter 8
The Limitations to the Statutory Assumptions

The History of the Exceptions
Chapter 3 examined the ambit of the common law rule, and chapter 4 identified and dis-
cussed in detail the provisos and exceptions that were developed that affected the opera-
tion of the common law rule. Those chapters noted that the rule’s operation was affected
by two sets of principles:
1. Direct exceptions to the rule, so that the assumptions of procedural regularity did
not operate where the outsider had knowledge that the assumption was incorrect.
Knowledge incorporates a spectrum from actual knowledge to due inquiry.
“Actual knowledge” includes subjective knowledge, wilful or reckless
blindness,1 or knowledge that insiders ought to know.2 “Due inquiry” incorpo-
rates the notion of outsiders reasonably acting on existing information.3
2. Indirect fetters to the rule, such as the doctrine of constructive notice (its abolition
discussed in chapter 5) and the rule against forgeries (discussed in chapter 7).
Similarly, the efficacy of the statutory rule must ultimately be judged according to
the exceptions. The statutory exceptions are loosely based on the common law. The oper-
ation of the statutory limitations to some extent serves the same purposes as the common
law exceptions to the Rule in Turquand’s case because they prevent a person dealing with
a company from assuming that the indoor management of a company is always regular.
They play a crucial role in determining the balance of interests between commercial con-
venience on the one hand and discouraging fraud and unauthorised acts by officers and
agents on the other. Of particular importance here is the extent to which the statutory lim-
itations differ from the common law exception to the Rule in Turquand’s case where the
outsider is put upon inquiry.
In relation to this knowledge exception, the legislative formulations, both in 1984
when the first round of statutory reform commenced4 and more recently in the Company
Law Review Act 1998, depart from the common law rule of “due inquiry”. The main
uncertainty is to assess the degree of correlation between the common law notion of due
inquiry and the current statutory exception. This part of the chapter argues that whilst the
statutory test appears different, it substantially relies on similar factors that gave rise to
the due inquiry exception.
Table 8.1 below sets out the two separate stages of statutory reform to the limitations.
Accordingly, this chapter adopts a chronological approach to developments.
1 Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156.

3 Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611.
4 Companies and Securities Legislation (Miscellaneous Amendments) Act 1983, commenced on 1 January 1984. The
legislative background was described in chapter 5, see particularly Table 5.3.
Table 8.1 The legislative history of the exceptions to the rule
The exception Companies Corporations Company Law Comment on

Code 1984 Law 1991 Review Act 1998 CLRA
“actual knowledge” S68A(4)(a) S164(4)(a) S128(4) Assumption not
S68A(5)(a) S164(5)(a) available if the person
“knew” it was
incorrect
Other knowledge S68A(4)(b) S164(4)(b) S128(4) The wording of the

S68A(5)(b) S164(5)(b) “knew or suspected exception has now
“connection or “connection or that the assumption changed, and requires
relationship with relationship with was incorrect” discussion whether
the company is the company is this changes the
such that he ought such that he ought previous law.
to know that the to know that the
matter... is not matter ...is not
correct” correct”
The boundaries of the exceptions identify the point where protection for the outsider
is lost. The immediate differences with the common law are in relation to the second limb
of the exception, as it is expressed in different terms than the common law “due inquiry”
principle. This leads to broader questions of policy to examine areas of overlap between
the common law and statute.
The 1984 Legislation

Significance of the statutory formulation of the knowledge exceptions
As outlined in Table 8.1 above, the first statutory codification of the indoor management
rule occurred in 1984, with the insertion of s 68A in the Companies Codes. With the com-
mencement of the Corporations Law in 1991, s 68A was renumbered s 164. Accordingly,
the wording of former s 68A is identical to the wording of former s 164. The latter pro-
vision is reproduced in Appendix I.
The assumptions in former ss 68A(3) and 164(3) were not available under ss 68A(4)
and 164(4) where either:
1. the outsider had actual knowledge that the matters were incorrect; or
2. the outsider had a connection or relationship with the company, which is, such
that the outsider ought to know that the assumption was incorrect.
The Explanatory Memorandum, in introducing s 68A(4), the predecessor of s 164(4),
stated that the purpose of these limitations was “to make it clear that the protection
afforded by the ‘indoor management rule’ is only available to ‘innocent’ parties”.5
The two limitations contained in former s 164(4) differentiated between situations
where the person dealing with the company had no “connection or relationship” with the
company and where there was such a connection or relationship. In the latter case, the
protective assumptions were lost where the person dealing with the company ought to
The Limitations to the Statutory Assumptions 111
have known of circumstances that would indicate that the assumptions were incorrect.
It is interesting that in the 1998 round of reforms, the legislature abandoned the “con-
nection or relationship” distinction, in favour of a more simply stated “actually knew or
suspected” exception (see s 128(4)). Before we can comment on the current provisions,
it is worth noting that the interpretation of the former provision in s 164(4) was far from
settled.6
Commentary on the former provisions is divided as to whether the different wording
effected any substantial change from the common law. The commentary presented three
views:
1. The “substantial change” view, that the statutory formulation was intended to
mean something different from the common law exceptions.7
2. The “amalgamated view”, that due inquiry as articulated in Northside
Developments Pty Ltd v Registrar-General8 applied to former s 164(4)(b).9 Kirby
P in Bank of New Zealand v Fiberi Pty Ltd10 contributed to the “amalgamated”
view, that is, that no substantial change had been effected.
3. A “hybrid view”, expressed in Lipton,11 that the second exception as to “connec-
tion or relationship” is substantially changed, but that the notion of due inquiry
forms part of the first exception in s 164(4)(a).
There is a significant distinction between the first and either the second or third view,
as it affects the degree of protection afforded to outsiders. Specifically, the first view
reduces the burden of inquiry on outsiders, as it is the “connection or relationship” that
triggers inquiry, not the circumstances of the transaction.12
The arguments for each of the views are presented below. The essential question, for
each view, is to determine the extent to which the statutory provisions mirrored the com-
mon law approach to actual knowledge and due inquiry.
6 See more comprehensively: C Hammond, ‘Section 164(4)(b) of the Corporations Law: ‘To be Put Upon Inquiry or
Not to be Put Upon Inquiry: Is that the Question?’ A Problem of Statutory Interpretation’ (1998) 16 Company and
Securities Law Journal 93.
7 P Lipton, ‘The Inquiry Exception to the Rule in Turquand’s Case: Past or Present?’ (1991) 9 Company and
Securities Law Journal 37, 44, but moderated this view with a different interpretation of the first exception. This
view was indirectly supported by those authors who speculated that had Northside Developments Pty Ltd v
Registrar-General been decided on the statutory provisions, the result may have been different.
See T Cain, ‘The Rule in Royal British Bank v Turquand in 1990’ (1990) 2 Bond Law Review 152 and L Law and D
Morrison, (1993) ‘Company Law: Recent Developments in the Indoor Management Rule’ paper presented at the
Accounting Association of Australia and New Zealand Conference, Darwin, 1993.
See also R Grantham, ‘Contracts with Companies: Rule of Law or Business Rules’ (1996) 17 New Zealand
Universities Law Review 39, for commentary on similar New Zealand provisions.
8 (1990) 8 ACLC 611.
9 M Mourell, ‘Northside’ (1991) 19 Australian Business Law Review 36; B Horrigan, ‘Third Party Securities –
Theory, Law and Practice’ in J Greig and B Horrigan (eds) Enforcing Securities (1994) 262 preferred the view that
the comments of Mason CJ and Brennan J in Northside “would have some ongoing relevance.”
10 (1994) 12 ACLC 48.
11 P Lipton, The Authority of Agents and Officers to Act for a Company: Legal Principles (1996) 61–62. See also J
Stumbles, ‘Corporate Benefit and the Guarantee’ in G Burton (ed) Directions in Finance Law (1989) 204, 216.
12 The Hon Justice Paul de Jersey, ‘A Question of Notice’ paper presented at QLS Securities Intensive V Seminar, Gold
Coast, 1991.
13 See the factors set in chapter 4 under ‘The Knowledge Exceptions’, for example a third party security that appeared
to be unrelated to the purposes of the company’s business and from which it derived no benefit: Northside
Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 622 (Mason CJ); 631 (Brennan J).
The ‘substantial change’ view of the statutory knowledge exceptions

The common law exception examines the circumstances that put the outsider on
inquiry.13 The former statutory rule required a connection or relationship such that the
outsider ought to know that the assumption is incorrect.14 When the statutory rule was
introduced, it provoked debate whether the “connection or relationship” parameter lim-
ited the common law exception.
The Explanatory Memorandum15 did not explain this difference in formulation
between the common law and the statute, other than to note:
“...A person dealing with a company, or with a person who has acquired, or purports to have
acquired, title to property from a company, will not be entitled to make assumptions under Bill sub-
cl. 164(3) where the person knows or ought to know that the assumption is incorrect.”
There were several cases on the statutory provisions that referred to the apparent dif-
ference between the common law and statute’s second exception, but not conclusively.
In Lyford v Media Portfolio Ltd,16 one of the first cases to consider s 164(4)(b), Nicholson
J stated that the common law “due inquiry” rule and the statutory “connection or rela-
tionship” rule were substantially different.17 His Honour agreed with Professor Ford18
who suggested that s 164(4)(b) applied only to a director, secretary, shareholder or
employee of the company who is having dealings with the company.
This view was endorsed in the subsequent case of Bell Resources Holdings Pty Ltd v
Commissioner for ACT Revenue Collections.19 Although the application of s 164(4)(b)
was not an issue requiring determination in that case, Jenkinson J pointed out that the
facts of the case illustrated the type of situation to which the “connection or relationship”
rule would apply. That case involved a share transfer executed under the respective com-
mon seals of the vendor and purchaser companies. Both companies had common officers
and the same two people affixed the respective seals at the same time. Jenkinson J held
that the “connection or relationship” of each of the two officers and the purchaser with
the vendor was such that they ought to have known of the irregular sealing.20
In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd,21 the Court
acknowledged that s 164(4) “does not incorporate the concept of being ‘put upon
inquiry’ and we are obliged to have regard to the assumptions, as defined by the section,
which the respondents [the lender] were entitled to make subject to the exceptions in sub-
s. 4.”
Studdert J (at first instance) in Advance Bank Australia Ltd v Fleetwood Star Pty Ltd
agreed with the comment in Brick & Pipe and held that: “the codified rule does not
attract consideration of those matters which prior to the codification might have been
considered to have put a person dealing with the company upon inquiry.”22
14 Section 164 (4)(b).

16 (1989) 7 ACLC 271.
17 (1989) 7 ACLC 271, 281.
18 H A J Ford, Principles of Company Law (4th ed, 1986) 102.
19 (1990) 8 ACLC 533.
20 (1990) 8 ACLC 533, 543.
21 (1992) 10 ACLC 253, 262.
22 (1992) 10 ACLC 703, 712. However, this view did not survive the appeal in Story v Advance Bank Australia Ltd
(1993) 11 ACLC 629, discussed below.
However, the substantial change view does not hold up to subsequent authority. This
is explained in the next section.
The amalgamated view of the statutory knowledge exceptions
The comments from Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd23
supporting the view that the statutory exceptions substantially alter the common law
ought not to be taken as highly influential,24 for two reasons:
1. The Court avoided the application of the second exception by taking a generous
approach to the threshold issues of the officers’ authority to transact. The case
involved contested authority of the officers to affix the seal to a guarantee. By
making the robust finding that the director, Goldberg, had the actual authority of
managing director, then the other signatory could be assumed under the holding
out assumption to be entitled to sign. The Court concentrated on the relation
between the sealing assumption and the actual knowledge exception.
2. The second exception was not substantially argued, nor did the Court specifically
indicate how the result might have been different under the common law rule,
other than to speculate that it may well be that the Rule in Turquand’s case may
not have assisted the lender. Although the Court acknowledged that the facts and
circumstances of Northside were “markedly analogous” to those here,25 this com-
ment is too superficial. There are also some marked differences between the
facts of Northside and Brick & Pipe that rule out the due inquiry exception in the
latter. In Brick & Pipe, the Court correctly asserted the similarities involving a
third party security for which there was no corporate benefit. But these two fac-
tors, according to Mason CJ in Northside, are not the only features of the trans-
action to alert inquiry. If the effect of Northside were this strict, then virtually
any third party security would be unenforceable unless the lender made inquiry.
The differences in this case, such as the agency principles curing the alleged
defect in authority via the acquiescence of the board, provide a stronger case for
the lender.
The year 1993 marked a turning point in judicial thinking as the first instance deci-
sions filtered through to appeal courts. Gleeson CJ in Story v Advance Bank Australia
Ltd26 commented that, with respect to former s 164(4)(b), “it is unlikely that Parliament
intended a radical narrowing of the qualification to the common law rule.”27
In 1994, the Court of Appeal of New South Wales handed down its decision in Bank
of New Zealand v Fiberi Pty Ltd.28 There were two judgments in the case: Kirby P and
Priestley JA (with whom Clarke JA agreed).
In the judgment of Kirby P, the language of s 164(4)(b) required clearer wording to
oust the common law notion of “due inquiry”. By way of justification, His Honour
endorsed the policy view of Mason CJ in Northside that the indoor management rule rep-
23 (1992) 10 ACLC 253, 262.

24 See also the similar view based on the absence of reasonable explanation by the Court for the inapplicability of the
second exception: Hammond (1998), supra n 6, 97.
25 (1992) 10 ACLC 253, 262.
26 (1993) 11 ACLC 629.
27 (1993) 11 ACLC 629, 639.
28 (1994) 12 ACLC 48.
resented a balancing of competing choices as to where the loss for fraud (in the wider
sense) should rest. In his opinion, the phrase “connection or relationship” still admitted
the common law alternatives of either:
• a person who had a particular relationship with the company and was in a posi-
tion to know about the company’s internal management; or
• the “connection” arising due to the nature of the transaction itself.
Given the features of the transaction entered into between the bank and Fiberi Pty
Ltd, and the similarity to Northside, the trial judge, Allen J, held that the bank was put
on inquiry.29 Kirby P affirmed this conclusion.
The same outcome was achieved by the decision of Priestley JA, however, his judg-
ment represents a more subtle approach to the amalgamated view. His Honour distin-
guished at least three possible meanings of the words “ought to know” following the con-
nection or relationship phrase in former s 164(4)(b). A person “ought to know” the
assumption was incorrect either:
1. because of facts actually in the person’s possession should cause them to realise
the true position; or
2. because the person is under some kind of obligation to inform themselves (the
nature of the duty was not specified); or
3. because the person is reasonably expected to know the true position of the matter
assumed. The test for this reasonable expectation was referred to in terms of the
knowledge a reasonably competent and prudent banker in the “factual matrix”
presented by this case, would be expected to know, regarding the identity of the
officers and agents of the corporate borrower, especially as this information is
not difficult to procure. If there is difficulty in obtaining this information from
the borrower, then the need for it becomes more obvious.30
The third approach was favoured, but from where did Priestley JA derive the duty of
the outsider to act reasonably in making the assumptions? No external authority was pro-
vided for this point: rather, it arose from the interpretation of the preceding phrase: “con-
nection or relationship”. The qualifying effect of those words requires the court to con-
sider the full factual circumstances of the outsider’s connection or relationship with the
company with regard to the particular matter or transaction.
Significantly, unlike Kirby P, Priestley JA did not claim to be influenced by the exist-
ing common law doctrine articulated in Northside. His Honour’s comments however are
consistent with common law doctrine, to the extent that the common law requirement of
“good faith” subsumes elements of reasonable conduct (see chapter 4 where we dis-
cussed this element of good faith).
The differences between the judgments are that Priestley JA did not completely
endorse Kirby P’s vision of the amalgamated view. In what has been described as a
“slight variation”31 to “somewhat different,”32 Priestley JA’s comments are more consis-
tent with an approach that interprets the statute with reference to, but not identical with,
the common law “due inquiry”:
30 (1994) 12 ACLC 48, 59.
31 Hammond (1998), supra n 6, 100.
32 Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16, 120.
“The concept introduced by s 68A(4)(b) seems to…be slightly different, although undoubtedly
there is some overlapping between the contents of the two concepts.”33
Priestley JA’s view is a more conservative one, and more logically consistent with the
wording of the statute. The statute specifically limited due inquiry by interposing the
phrase, “connection or relationship”, but respects the view in the Explanatory
Memorandum that the statutory provisions ensure that only innocent parties may take
advantage of the rule. In refusing special leave to appeal to the High Court, Brennan J
confirmed Priestley JA’s view that a reasonable bank in the position of BNZ would have
seen to it as a matter of routine that information confirming the identity of the compa-
ny’s secretary was in the bank’s possession.34 There was no specific discussion of the dif-
ferent interpretations of the statute by Kirby P and Priestley JA.
Kirby P’s view of the complete transposition between the common law and statuto-
ry law holds attraction as providing certainty: the meaning of due inquiry was fully
explored by the High Court in Northside. To determine the significance of the difference
between the two positions, two questions are relevant:
1. How has the distinction between the two Fiberi judgments been applied in sub-
sequent cases? In both Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd35 and
Pyramid Building Society v Scorpion Hotels Pty Ltd,36 the trial judges indicate
that the difference between “put on inquiry” and “ought to know” is more appar-
ent than real, suggesting that on the type of cases confronted, there would be no
difference in result. In both cases, the court referred to and agreed with both
Fiberi judgments, but their application was more aligned with Priestley JA’s
“reasonable and prudent banker” test, than in applying the various factors from
Northside. As Table 5.2 in chapter 5 shows, both cases were very similar to
Fiberi, as all three involved third party securities where corporate benefit was in
doubt, but significantly, the lenders did not ascertain from reliable sources the
identity of the signatories to the corporate seal. The results of these three cases
are sustainable on agency grounds, as the lenders dealt with purported officers
who were not appointed and had no authority to bind the company.
In Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd, Hansen J specifi-
cally preferred Priestley JA’s interpretation, as it gave higher regard to the word-
ing of the section.37 This case involved a different factual matrix, in that the bank
did a company search, but it made no difference38 and the bank knew that the
assets the subject of the third party securities were trust assets. His Honour held
that it was this information, that the bank knew, that lead to the requirement that
a reasonable and prudent banker would make further inquiries of the trustee’s
powers.
33 (1994) 12 ACLC 48, 60.

34 (1994) 12 ACLC 232, 236.
35 (1996) 14 ACLC 670, 671 (Hedigan J).
36 (1996) 14 ACLC 679, 697 (Nathan J).
37 [1998] 3 VR 16, 121.
38 It made no difference because one of the transactions involved a scrip lien, evidenced by the deposit of share certifi-
cates. The bank dealt with Jock Jeffries, who was a director of the company. In the second transaction, the mortgage,
the signature of the other person, whom the bank knew to be a director, had been forged.
In National Australia Bank v Sparrow Green Pty Ltd, Debelle J (at first instance)
held that even if the bank did not have actual knowledge that Green lacked
authority to make representations, the bank’s connection or relationship with the
company was such that it ought to have known.39 His Honour specifically cited
Priestley JA in Fiberi, but did not elaborate upon the factual matrix in this case
that gave rise to the need to inquire.
2. Does it make any practical difference, from the outsider’s point of view, whether
the common law is reflected by, or merely interpretative of, s 164(4)(b)?
Priestley JA presents us with a lesser degree of due inquiry, so are there circum-
stances involving a corporate borrower where Priestley JA’s view would provide
a greater protection threshold than would be the case under due inquiry? The
subsequent cases do not provide any examples. In each case, the courts applied
Priestley JA’s test to find that the lenders had not acted as reasonable and pru-
dent bankers. The difference is that the statute assesses what the particular per-
son acting reasonably would have known (the meaning of s 164(4)(b)); whereas
the common law involves the court in asking whether there were features of the
particular situation that required further inquiries.40 In the applications so far,
there is no practical difference in approach.
Finally, the overlap between common law and statute in relation to the first limb
“actual knowledge” is a matter that is not substantially argued in the amalgamated
approach. Debelle J at first instance in Sparrow Green said that “The common law rule
as to actual knowledge is now to be found in s164(4)…”.41 The significance of the for-
mer s 164(4)(a) actual knowledge is more important in the arguments relating to the
hybrid view, outlined below.
The hybrid view of the statutory knowledge exceptions
The “hybrid view” of the knowledge exceptions hypothesises that due inquiry is still rel-
evant, but as part of the concept of actual knowledge.
A strict reading of former s 164(4)(a) would indicate that this limitation is signifi-
cantly narrower than the common law exception that puts outsiders on inquiry. The Full
Court of the Supreme Court of Victoria alluded to this interpretation in the Brick and
Pipe Industries Ltd v Occidental Life Nominees Pty Ltd case by stating:
“The expression ‘actual knowledge’ means, we think what it says. It does not lend itself to defin-
ition or elaboration.”42
However the Court implicitly recognised that such a strict interpretation may afford
protection to an outsider in circumstances where this would be inappropriate.
Such circumstances may arise in the fact situation that occurred in the Northside
case. In applying the common law rules, all members of the High Court held that in the
circumstances, the lending bank was put on inquiry and therefore could not rely on the
39 Perkins v National Australia Bank (1999) 30 ACSR 256, 264, citing Priestley J in Fiberi. The appeal court in
Sparrow Green did not comment on the effect of former s 164(4)(b).
40 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 60 (Priestley JA).
41 Perkins v National Australia Bank (1999) 30 ACSR 256, 264. It is assumed His Honour is referring to s 164(4)(a)
only by this comment, as he later discusses “connection or relationship” in s 164(4)(b).
42 (1992) 10 ACLC 253, 264.
protection of the Rule in Turquand’s case because it had not made further inquiry when
its suspicions of irregularity should have been aroused. Under the statutory provisions, a
strict interpretation of “actual knowledge” in s 164(4)(a) would have resulted in the bank
being able to assert the protective assumptions in s 164(3). This is because despite the
existence of suspicious circumstances, the bank did not actually know that the company
seal had been affixed by persons unauthorised to do so.
To give protection to an outsider in these circumstances may encourage the outsider
to refrain from making reasonable inquiries in the fear that such inquiries may lead to the
acquisition of knowledge that would result in the loss of the protective assumptions. This
would encourage outsiders such as lenders to don blinkers and perhaps unwittingly assist
company officers to breach their duties or act without authority to the detriment of the
company and its innocent shareholders or creditors. Mason CJ in the Northside case
commented that to put a lender on inquiry in the circumstances of the case was to strike
a fair balance between promoting business convenience and discouraging fraud and dis-
honesty. It would compel lending institutions to act prudently and thereby enhance the
integrity of commercial transactions and morality.43
Perhaps in recognition of these policy considerations, the Full Court of the Supreme
Court of Victoria in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd44
retracted from a strict interpretation of “actual knowledge” when it added:
“What amounts to ‘actual knowledge’ is largely dependent on the facts and circum-
stances in a particular case and the inference they allow”.45
The court was prepared to impute to the lender the actual knowledge of its solicitor.
It was not necessary to establish the actual knowledge of the lender itself. This means
that the knowledge of an agent may be imputed as “actual knowledge” of a principal.46
This hybrid view derives from an interpretation of former s 164(4)(b) “connection or
relationship” that confines it to a species of actual knowledge, that is, knowledge that
insiders ought to know. That section provided that the assumptions were not available
where the person’s connection or relationship with the company is such that the person
ought to know that the assumption is not correct.
This limitation appears to adopt something similar to the common law inquiry excep-
tion to the Rule in Turquand’s case in situations where the person dealing with the com-
pany has a “connection or relationship” with the company. This limb of former s 164(4)
may strengthen the argument that the first limb should be given a narrow reading in the
interpretation of “actual knowledge”. The doubt raised by the wording of former s
164(4)(b) was that if Parliament intended the inquiry exception to apply generally, it
would not have restricted the section to situations where the person dealing with the com-
pany had a connection or relationship with it.
The purpose behind the second limb of former s 164(4) appears to be the adoption of
the common law principle that directors and other “insiders” of a company generally can-
not gain the protection of the Rule in Turquand’s case.47 This exception was restricted so
43 (1990) 8 ACLC 611, 622.

44 (1992) 10 ACLC 253.
45 (1992) 10 ACLC 253, 264.
46 (1992) 10 ACLC 253, 264, 264–5.
47 Morris v Kanssen [1946] AC 549.
as not to operate against a director who did not act as such in the particular transaction.48
Section 164(4)(b) does not refer to this distinction. Its terms are satisfied if there is a con-
nection or relationship with the company, irrespective of whether the person acted for the
company in the particular transaction.
On this interpretation it would appear that former s 164(4)(b) had a narrow applica-
tion so that it only applied to a non-arm’s length connection or relationship where the
person dealing with the company was an “insider”. The Explanatory Memorandum to the
1983 amendments stated the purpose of the provisions as being to protect persons who
are “innocent” and act in good faith. The existence of a connection or relationship which
resulted in a non-arm’s length dealing would strike at the innocence and good faith of the
person dealing with the company.
As mentioned under the substantial change view, this narrow interpretation of “con-
nection or relationship” has authority, notably in Lyford v Media Portfolio Ltd.49 Media
borrowed money from Broadlands and secured the loan by conferring a charge that was
executed under the common seal of Media. The common seal was affixed and signed by
a director who acted without authority. The articles of Media provided that the common
seal could only be affixed with the authority of a resolution of the board. Such a resolu-
tion was not passed. Broadlands sought to enforce the charge and relied on the assump-
tion of due sealing under former s 164(3)(e). Media argued that Broadlands was pre-
vented from relying on this assumption because Broadlands and one of its directors had
a relationship with the director of Media such that Broadlands ought to have known that
the director of Media was acting without authority. This argument asserted that former s
164(4)(b) prevented Broadlands from making the assumption. Nicholson J rejected this
argument and gave former s 164(4)(b) a narrow operation. He held that it referred to
knowledge that a person ought to have by reason of a connection or relationship with the
company and not to knowledge that the person ought to have because of the circum-
stances of the transaction itself.
Obviously, a person who is a director or secretary would have a connection or rela-
tionship with the company such that the person would be deemed to have knowledge of
irregularities in the company’s internal affairs. To allow an officer of the company the
protection of the statutory indoor management rule would be “to encourage ignorance
and condone dereliction of duty.”50 Such encouragement may arise where a director
gained protection so as to enforce a transaction that was not beneficial to the company
and also where directors are unaware of the articles of their company and whether the
internal proceedings are properly carried out.
A non-arm’s length relationship may also occur where the person dealing with the
company is an employee or solicitor of the company or perhaps a major shareholder. A
person may also be regarded as having a connection or relationship with a company for
the purposes of the narrow view of s 164(4)(b) where that person is involved in the oper-
ation of a group of companies of which the company with which he or she is dealing is
a member.51

49 (1989) 7 ACLC 271.
50 Morris v Kanssen [1946] AC 459, 476.
51 Bell Resources Holdings Pty Ltd v Commissioner for ACT Revenue Collections (1990) 8 ACLC 533, 543 (Jenkinson J).
According to Lyford v Media Portfolio Ltd, in order for the limitation contained in s
164(4)(b) to apply, it is necessary to refer to all the circumstances which show the nature
of the connection or relationship. It may then be assessed whether that connection or rela-
tionship was such that the person ought to have known that the assumption was incor-
rect. Nicholson J did not extend “connection or relationship” to include an arm’s length
business relationship with past dealings. On the contrary, he considered that the past
dealings indicated that the director of the chargor had the authority of the company to
affix the common seal. This was because the lender knew the director was in day-to-day
control of the management and finances of the company, the company’s office was the
director’s office and earlier borrowings in the name of the company had been concluded
by the director.52
The narrow interpretation outlined above has the effect of giving an outsider greater
scope under the statutory rules to enforce a contract despite refusing to make inquiries
about an apparent irregularity, than was the position previously at common law. This is
because the inquiry exception as applied in the Northside case only operates where the
person dealing with the company has a legal or non-arm’s length connection or relation-
ship with company.
Resolution of the former provisions
As a result of the decision in Bank of New Zealand v Fiberi Pty Ltd,53 the amalgamated
view was the preferred interpretation of former s 164(4) at the time the Company Law
Review Act 1998 was passed. However, this view was not entirely consistent with the
wording of the legislation. Although the approaches of both Priestley JA and Kirby P in
Fiberi caused a sensible result in accordance with the purpose of the legislation, this
required a departure from a plain reading of the legislation. In particular, they did not
address the ambit of former s 164(4)(a). The outsider was expressly required to make
inquiry only where a connection or relationship with the company existed. According to
the reasoning of the court in the Fiberi case, a connection or relationship would general-
ly arise where the circumstances of a transaction ought to lead to inquiries. In a circular
way, this then triggered the “ought to know” exception in former s 164(4)(b).
For this reason, we have continued to canvass the hybrid view, as a possible recon-
ciliation of former s 164(4)(a) and (b), as this exercise continues to make a contribution.
It remains relevant to note this deficiency in the drafting of former s 164(4)(a). The
Explanatory Memorandum to the 1983 amendments indicated that the predecessor of s
164 was aimed at protecting outsiders who acted “in good faith” or were “innocent”. In
this regard the statutory provisions were intended to adopt the policy behind the common
law Rule in Turquand’s case and its exceptions. Gummow J in Australian Capital
Television Pty Ltd v Minister for Transport and Communications54 thought that the pre-
decessor of s 164 was not so much a “comprehensive code” as a provision designed to
repair the failings of the common law. It is difficult to argue that the inquiry exception to
52 Recall that the view of Nicholson J that the statutory provisions did not include the common law inquiry exception
was supported by Studdert J in Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 and the
Full Court of the Supreme Court of Victoria in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
(1992) 10 ACLC 253, 262.
53 (1994) 12 ACLC 48.
54 (1989) 7 ACLC 525, 535.
the Rule in Turquand’s case is such a failure. The High Court in the Northside case
strongly indicated that the common law inquiry exception was crucial in achieving the
purposes of the rule.
Kirby P in Bank of New Zealand v Fiberi Pty Ltd55 saw the interaction of the com-
mon law and statutory rules in these terms.
“While effect should certainly be given to [former s 164] according to its terms, those terms do not
appear in a legal, social and economic vacuum...[former s 164] is not to be seen as a provision
which overrides well established principles and policies of the common law (as recently expressed
in Northside) unless that result is made plain by the language of the section.”
The strict wording of former s 164(4)(a), which revolves around the term “actual
knowledge”, did not adequately incorporate the policy behind the common law princi-
ples and as stated in the Explanatory Memorandum. This resulted in the courts showing
some willingness to adopt a liberal interpretation of this term in order to arrive at a result
which accords with the common law. It was through this route that we retain the inquiry
exception to the Rule in Turquand’s case or something similar to it, despite its apparent
removal from former s 164(4).
This interpretation is to be preferred because the policy considerations referred to in
the Northside case and the Explanatory Memorandum are largely concerned with the
probity of the person dealing with the company. In effecting a balance of interests
between a company and the outsider it is surely relevant to consider the “good faith” or
“innocence” of the outsider. This matter is not directly referred to by the former provi-
sion, which only speaks of the state of actual knowledge possessed by the outsider. This
state of actual knowledge on the strict, literal view is not affected by considerations such
as whether the outsider has wilfully donned blinkers, has recklessly failed to make
inquiries when the circumstances strongly point to the need to make them, whether an
honest and reasonable person would have had actual knowledge of the facts given the
surrounding circumstances and whether a reasonable and honest person would have been
put on inquiry as a result of knowledge of the circumstances.
In considering whether an outsider should have the protection contained in the for-
mer s 164(3) assumptions, the good faith and probity of the outsider must be relevant so
as to allow a consideration of these factors. This could have been achieved in the former
provisions extending the operation of s 164(4)(a) to include a situation where the outsider
ought to know that a protective assumption is not correct. The limitation would then be
attracted where the outsider is put on inquiry but fails to do so in circumstances such as
arose in the Northside case.
The implementation of this proposal also clarifies the operation of the former s
164(4)(a) limitation in accordance with the policy of the section and obviate the need for
judicial ingenuity by giving a strained interpretation to the words “actual knowledge”.
Otherwise, it remains uncertain as to when inferences arise which would enable a court
to deem an outsider as possessing actual knowledge when this cannot be strictly shown.
This extension of the limitation in former s 164(4)(a) to incorporate the inquiry
exception would be consistent with equitable principles in relation to constructive trusts.
A company may recover compensation from a third party who has assisted the compa-
55 (1994) 12 ACLC 48, 51.
ny’s officers in a dishonest transaction with knowledge of their breach of duty.56 The
meaning of “knowledge” in these constructive trust cases has been broadly interpreted so
as to include knowledge that would have been gained by a reasonable person put on
inquiry due to the circumstances (discussed in chapter 4). The law of constructive trusts
applies to directors who act in breach of duty as well as trustees. Therefore under equi-
table principles, a company may seek a remedy for the recovery of property from a third
party who made a “calculated abstention from inquiry.”57
If the equitable rules give a company greater scope to bring an action against an out-
sider to seek remedies to avoid the contract or recover property, a plaintiff company
would be well-advised to rely, if possible, on the equitable rules which give a broad
meaning to “knowledge”. However this would require the company to firstly establish a
breach of fiduciary duty by an officer. Former s 164 does not require this.
The extent to which “actual knowledge” may be inferred also causes significant
uncertainty. For example it is difficult to determine whether actual knowledge exists in
circumstances where the outsider is aware of various facts but may not have understood
that these have a combined significance which if understood would have resulted in the
acquisition of further actual knowledge. The circumstances where knowledge will be
deemed under equitable principles of constructive trusts are quite clearly defined. These
principles have evolved over a long period and it is difficult to determine the extent to
which they may be incorporated into former s 164(4)(a).
The Company Law Review Act 1998 redrafted the provisions, so it is necessary to
examine whether the new version of the rule overcomes these difficulties.
Recent Legislation: s 128(4)

This brief review of the statutory history of the indoor management rule is relevant as
similar questions arise since the introduction of the Company Law Review Act 1998. That
Act purports to contribute legislative change, prompting the question whether substan-
tive change has been effected in the scope of the second exception. This is examined
under the next heading.
The Explanatory Memorandum to the Company Law Review Act 1998 states that:
“A person will not be entitled to make an assumption if they knew or suspected that the assump-
tion was incorrect (Bill s 128(4)). This objective test is stricter than the [former] law and makes it
clear that the common law ‘put on inquiry test’ has no application to the statutory provisions: see
Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 14 ACSR 736.”58
These assertions warrant analysis. There are two apparent differences between the
wording of former s 164(4) and (5) and s 128(4):
1. there is a specific temporal connection introduced by the phrase “at the time of”;
and
56 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Baden Devaux and Lecuit v Societe
Generale [1983] BCLC 325; Ninety Five Pty Ltd v Banque National de Paris [1988] WAR 132.
57 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 408 (Stephen J).
2. The formulation of the knowledge required to preclude reliance has been

changed from “a connection or relationship with the company that is such that
the outsider ought to know that the assumption was incorrect” to “knew or sus-
pected”.
Significance of “at the time of ...”
The insertion of the phrase “at the time of” adds no particular significance to the previ-
ous section. In National Australia Bank v Sparrow Green Pty Ltd, Debelle J (at first
instance) confirmed that under former s 164, the relevant time to determine the outsider’s
knowledge is at the time when it entered into the transaction.59
Significance of “knew or suspected ...”
It is challenging to find a suitable interpretation of either “knew” (i.e. actual knowledge)
or “suspicion” that renders either exception an objective test as asserted in the
Explanatory Memorandum.60
Whilst attempting to avoid constructing an overly pedantic analysis of the meaning
of s 128(4), the Explanatory Memorandum gives rise to three points of uncertainty:
1. Elsewhere in the Corporations Act where the test “to suspect” appears, it is also
accompanied by the express qualification of reasonableness (discussed below). It
is the use of “suspect” and “reasonable” together that renders the suspicion an
objective test. Section 128(4) does not expressly use the word “reasonable”. It is
difficult to sustain the assertion in the Explanatory Memorandum that the test for
the exception is objective, unless the courts imply into s 128(4) the requirement
of “reasonableness”.
Alternatively, Ford, Austin and Ramsay61 argue that the test of suspicion is itself
subjective, but as the proof of the suspicion must be by inference, “consideration
of the behaviour of a hypothetical reasonable person can be part of the process
of proof.” It is in this sense that the test is objective. If the legislative intention
effectively was to make the test objective, they argue that the wording “ought to
know” should have been retained.
2. To express the legislative intention in terms of the new law being “more strict”
than the former law is ambiguous: from which party’s perspective does the
“strictness” operate? Is it “stricter” on the circumstances precluding reliance so
the exceptions are less frequent, or is it “stricter” on the outsider? The provision
is an exception that denies to the outsider the benefit of a particular protection.
The language of the Explanatory Memorandum approaches the expression in a
double negative. However, “on balance, it seems that the Parliamentary intention
59 Perkins v NAB (1999) 30 ACSR 256, 264.
60 Existing commentary is divided. For example, D Loxton, ‘One Step Forward, One Step Back: The Effect of
Corporate Law Reform on Procedures in Dealing with Companies Borrowing or Giving Guarantees’ (1999) 10
Journal of Banking and Finance Law and Practice 24, 32, states that it is clear that suspicion means “actual suspi-
cion”, not constructive knowledge, although in practice there would be some latitude for the courts to draw infer-
ences from a “deliberate shutting of eyes” to the obvious. B Horrigan, ‘Busting Guarantees!’ [1998] 7 National Law
Review [53], is more flexible in his view of the change: “Taking a wider view, it is likely that the jurisprudence on
the old common law ‘put on inquiry’ exception and the old statutory exceptions is likely to inform the new jurispru-
dence on new section 128(4), at least to some degree.”
61 H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (2001, 10th ed) [13.300].
was to create a provision which is more favourable to third parties than that
which existed previously.”62
3. The debate as to the ambit of former s 164(4)(b) was not concluded, so an inten-
tion to depart from the previous law is ambiguous. As discussed above, the
meaning of s 164(4)(b) equivocates between either of the two views expressed in
Fiberi: Kirby P’s, that it equates with the common law “put on inquiry” and
Priestley JA’s that “ought to know” means an examination of the conduct of a
reasonable and prudent outsider faced with the particular factual matrix. As the
Explanatory Memorandum excludes “put on inquiry” and refers to Fiberi, but
not to any specific judgment or passage, this could be interpreted as implicit sup-
port for the view of Priestley JA over Kirby P’s “put on inquiry”. This interpre-
tation is supported by the fact that the Priestley JA view was concurred with by
Clark JA.
Examining the wording of the provision, a new element is potentially introduced by
using the word “suspect”. The test “to suspect” is used elsewhere in the Corporations Act
(e.g. s 588G), and in other areas of law (e.g. bankruptcy), and has existing principle upon
which to base its application.
The classic definition of “suspect” as applied in Australia appears in the judgment of
Kitto J in Queensland Bacon Pty Ltd v Rees:63
“A suspicion that something exists is more than mere idle wondering whether it exists or not; it is
a feeling of actual apprehension or mistrust ... Consequently, a reason to suspect that a fact exists
is more than a reason to consider or look into the possibility of its existence.”
As a definition of the degree of awareness that does not amount to “suspicion”, Kitto
J’s test has proved useful in corporate law applications. Degrees of awareness that have
been distinguished from suspicion are:
• more than a mere idle wondering;64
• association of action with risk;65
• mere passing suspicion;66
• compelling inference;67
• awareness of a reasonable and prudent person in the position of the outsider;68
• expectation or prediction;69
62 C Hammond, ‘Put Upon Inquiry Has Been Put to Rest Under Section 128(4) of the Corporations Law, But Have
Third Parties Dealing With Companies Been Placed in a Stronger Position? – A Question of Statutory Interpretation’
(1998) 16 Company and Securities Law Journal 562, 563.
63 (1966) 115 CLR 266, 303.
64 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266.
65 Spedley Securities Ltd v Southern Sea Farms Ltd (1991) 9 ACLC 1367. Young J held that even where a person makes
a decision, aware that it is associated with risk, this is not a sufficient connection with the concept of suspicion.
66 H A J Ford (1986, 4th ed), supra n 18, 101 distinguished a “mere passing suspicion” from the basis for compelling
inference, formed for example when the outsider has knowledge of some facts from which a reasonable person
could infer that the assumption was incorrect.
67 Ibid.
68 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 59 (Priestley JA). There is negligible difference between
this formulation and the one above.
69 To “suspect” as opposed to “expect” has been acknowledged in the insolvent trading cases to incorporate different
degrees of awareness: 3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185, 192 (Foster J). See also Metropolitan
Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699, 711 (Einfeld J): “From the cases in which the meaning of these
words has been considered, it would appear that to ‘suspect’ something requires a lower threshold of knowledge or
awareness than to ‘expect’ it: see a discussion on ‘to suspect’ by Kitto J in Queensland Bacon Pty Ltd v Rees (1966)
115 CLR 266, at 303; and 3M Australia at 192.”
• “put on inquiry”,70 in the context as described in Northside and Kirby P in

Fiberi;
• actual knowledge.
Suggested meanings for “suspicion” include:
• “a positive feeling of apprehension or mistrust, amounting to a slight opinion but
without sufficient evidence”;71
• “a degree of satisfaction, not necessarily amounting to belief, but at least extend-
ing beyond speculation as to whether an event has occurred or not”;72
• “not necessarily a belief that something is occurring, but something more than
merely considering the possibility, that is, a positive feeling that it may be occur-
ring.”73
These descriptions of awareness are presented as a continuum in Figure 8.2, with the
levels of awareness flagged, to indicate, in the middle range, the boundaries where “sus-
picion” is triggered. This is not intended as an exercise in precision but to create a con-
text for “suspicion” to operate.
The participatory liability cases discussed in chapter 6 provide another source of def-
inition of degrees of knowledge. In the Baden case,74 Peter Gibson J defined knowledge
according to a five-point scale, from subjective (actual) to constructive. These categories
of knowledge are illustrated in Figure 8.1, then merged into Figure 8.2.
70 Ford Austin and Ramsay, supra n 61, (10th ed, 2001) [13.300]: “While every case of suspicion in the Queensland
Bacon sense would be a case of being put on enquiry, not every case of being put on enquiry amounts to a suspi-
cion.”
71 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, 303.
72 CAC v Guardian Investments Pty Ltd [1984] VR 1019, 1025 (Ormiston J).
73 Loxton, supra n 60, 31. This definition was formulated by amalgamating the case law and dictionary definitions of
“suspect”.
74 Baden, Delvaux and Lecuit v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en
France SA [1983] BCLC 325.
Figure 8.1 Degrees of knowledge: Baden

NO KNOWLEDGE
5. KNOWLEDGE OF CIRCUMSTANCES
WHICH PUT AN HONEST AND
REASONABLE PERSON ON INQUIRY
4. KNOWLEDGE OF CIRCUMSTANCES
WHICH INDICATE THE FACTS TO AN
HONEST & REASONABLE PERSON
3. WILFUL & RECKLESS FAILURE TO MAKE

INQUIRY
2. WILFUL SHUTTING OF EYES
1. ACTUAL KNOWLEDGE
ACTUAL KNOWLEDGE
Figure 8.2 Degrees of awareness to pinpoint “suspicion”

NO AWARENESS
Qld Bacon v Rees Mere wondering BADEN SCALE
CONSTRUCTIVE KNOWLEDGE
South Sea Farms Decision associated with risk
Mere passing suspicion
Northside 5. KNOWLEDGE OF
Kirby P in Fiberi Put on inquiry
CIRCUMSTANCES
WHICH PUT AN HONEST
AND REASONABLE
PERSON ON INQUIRY
S
U Reasonable and prudent 4. KNOWLEDGE OF
Fiberi, per Priestley JA banker in the factual matrix CIRCUMSTANCES
S
WHICH INDICATE THE
P FACTS TO AN HONEST
E & REASONABLE
C
T Compelling inference 3. WILFUL & RECKLESS
? FAILURE TO MAKE
INQUIRY
Metropolitan Fire Expectation 2. WILFUL SHUTTING OF

Systems v Miller EYES
Actual knowledge 1. ACTUAL KNOWLEDGE
ACTUAL KNOWLEDGE
ACTUAL AWARENESS
Dismissing due inquiry or subjective suspicion

To suspect, in its subjective sense, lies in the middle of the continuum represented in
Figure 8.2. Mere suspicion is not enough, but the next three levels down from mere sus-
picion represent the point where more objective considerations, other than the outsider’s
beliefs, are triggered. Taking into account the wording of the Explanatory Memorandum,
with its reference to objectivity, strictness, Fiberi and its express denial of due inquiry, it
would be legitimate for Australian courts to interpret “suspicion” in the range from “rea-
sonable and prudent” outsider to “compelling inference” as indicated in Figure 8.2. In
reaching this conclusion, the prior work of Bland is acknowledged, who has argued com-
pellingly that the Baden scale should be reordered.75 The fourth category of knowledge
more logically belongs second on the scale after actual knowledge.
One extreme of this range confirms that suspicion is wholly subjective, albeit depen-
dent upon reasonable inference of the outsider’s state of mind.76 Such an interpretation of
“suspect” may accord with the judicial definitions outlined earlier, but it does not suit the
context in which it is used. An overly subjective interpretation of s 128(4) would mean
that the provision:
“effectively reduces a person’s incentive to make inquiries when dealing with a company as their
inquiry may lead to the person forming a ‘suspicion’ that a fact which they would otherwise be able
to rely on by virtue of the statutory assumption may not be correct.”77
The statutory rule would not be intended to reward lazy or wilfully bind outsiders.
This is consistent with the content of the more specific assumptions in s 129. For exam-
ple, s 129(2) allows the outsider to assume that a person named in public documents as
officer has been properly appointed. Whilst the outsider does not have to prove actual
reliance on the public record, failure to search has, in past decisions, lead to an unaccept-
able risk of being unable to rely on the assumption. Whilst the assumption provides incen-
tive to search the public record, the exception cannot effectively cancel out that incentive.
At the other extreme, s 128(4) could just mean the same as Priestley JA’s interpreta-
tion of former s 164(4)(b). The latter argument has more theoretical appeal in the sense
that it is consistent with the derivation and development of the rule, (i.e. that it is avail-
able to “innocent” outsiders). This is consistent with the Explanatory Memorandum and
also consistent with the wider commercial themes discussed in chapter 3, in emphasising
the role of the outsider’s conduct in the transaction and Mason CJ’s78 notion of balancing
commercial convenience with morality.
The new provision has stimulated debate about whether any real change will be
reflected in judicial attitudes to the indoor management rule. The available commentary
on the new provision is similarly confident that the provision is flexible enough to admit
the existing jurisprudence.79 Accordingly, the existing case law such as the due inquiry
75 M Bland, Knowledge, Constructive Notice and Unconscionable Conduct LLM thesis presented to Queensland
University of Technology Faculty of Law, 1995.
76 Supported by Loxton, supra n 60, 32.
77 I Ramsay, The New Corporations Law (1998) 35.
78 As expressed in Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 621–622.
79 Hammond (1998), supra n 62, 564: “it is not inconceivable that a court, when faced with a transaction lacking cor-
porate benefit, could find that a reasonable person in the position of the lender would have a real apprehension of
fear that the assumption ... was not correct.” See also Horrigan (1998), supra n 60, 17: “this term is sufficiently
open-ended to allow judges some flexibility to disentitle financiers and other outsiders dealing with companies from
relying upon the assumptions in the right matrix of circumstances.” Contrast, Loxton, supra n 60, 32.
exception is likely to remain relevant to s 128(4). The significance of earlier cases is dis-
cussed below.
The likelihood of the reasonable and prudent banker test
Although the scope of the second limb of the exception, “to suspect” in s 128(4) is not
precise, a starting point is to examine a common scenario. It has been argued above that
to suspect is not the same as the common law “put on inquiry”, nor, at the other extreme,
is it the same as a wholly subjective belief. The more compelling view is that Priestley
JA’s test – the suspicion that a reasonable and prudent banker, placed in the factual matrix
of the case, would need to find out more – satisfies the competing interests of outsiders
in enforcing the transaction and protecting stakeholders from abuse of power.
Both in the common law and statutory cases to date, the courts demand some level
of accountability in transactions. Using the theme “commercial morality” discussed in
chapter 3, the case law imposes on outsiders certain obligations to act in a manner that is
not completely oblivious to the issues that dealing with corporate borrowers/mortgagors
create. It is not enough just to bring the transaction under the umbrella of s 129 assump-
tions. The outsider must also conduct the transaction in a manner that does not trigger the
exceptions. The emphasis here is on the positive obligation to monitor conduct; access to
s 129 cannot be regarded as an automatic right.
The remaining questions are:
• What is the “factual matrix” that triggers Priestley JA’s test and how is Priestley
JA’s test different to the common law “put on inquiry” formulation?
• Consequently, what errors are indicated from past cases that may help formulate
guidelines for conduct under the current provisions?
1. The factual matrix
Taken directly from Mason CJ’s judgment in Northside, the first four factors below are
enough to trigger “due inquiry”:
1. the existence of a third party security;
2. no indication that the loan transaction is related to the company’s business;
3. no indication that the company derives any benefit from the loan transaction
(described by Mason CJ as “decisive”); and
4. the outsider makes no searches or enquiries about the company.
Additional matters, to satisfy Priestley JA’s factual matrix triggering the reasonable
and prudent banker test, are evident from the cases such as Fiberi, Sixty-Fourth Throne
Pty Ltd v Macquarie Bank Ltd,80 Pyramid Building Society v Scorpion Hotels Pty Ltd81
and Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd.82 The features comprising
this factual matrix have been compiled relying on the matters discussed in Table 5.1 in
chapter 5.
5. The company is not a trading entity, but merely owns assets. This was apparent
from Fiberi, as well as Northside.
6. The outsider has had no previous dealings or relations with the company. It is
not enough that the lender has had previous dealings with the individuals who
80 [1998] 3 VR 133.
81 (1996) 14 ACLC 679.
82 [1998] 3 VR 16.
purport to act for the company, as those previous dealings with the individuals
do not create enough of a connection, or representation of a connection, with the
company.
7. The general circumstances giving rise to the requirement of the financing trans-
action, such as the desperation of the borrower, the urgency with which the
transaction is conducted, or the quantum of the loan.
8. The person deriving the benefit from the transaction is the director proffering
the company’s assets as security for loans for the director’s personal or external
interests. This is the next step in awareness for the lender taking out a third
party security. Due to past dealings with the director in other capacities, the
lender has actual knowledge that the common director is the link between the
borrower and the security provider. This actual knowledge was emphasised in
Koorootang.
9. The assets secured are trust assets.
10. The assets secured are of a non-commercial nature such as a family home not
normally associated with corporate security transactions.
11. The outsider believes they are dealing with a corporate group, but does not
independently confirm the relationship between the entities.
12. The outsider believes they are dealing with a “managing director”, but does not
independently confirm their authority. Similarly, the outsider may deal with
several officers, mistakenly believing it is dealing with the board, but never
authenticates that belief. In Sixty-Fourth Throne, the bank dealt with both Mr
and Mrs Kandy, who were directors of other companies in past dealings, but
did not authenticate their authority to deal for the corporate security provider.
13. The outsider has sought further information, but relied on a non-authoritative
source for confirmation. For example, in Sparrow Green, the company’s
accountant contributed to the bank’s belief that the second director had
resigned. In Sixty-Fourth Throne, the bank relied on assertions from a solicitor,
but it was the borrower’s solicitor, not the company’s solicitor.
14. The outsider chooses to disregard the public record. In Sparrow Green, the
bank chose to believe the assertions of one director that the other director had
resigned, even though the public record did not show that resignation. In Sixty-
Fourth Throne, the bank’s solicitors obtained a company search that accurately
reflected the appointment of officers, but did not correlate that information with
the sealed document.
15. The outsider has requested further information, but then does not insist on fol-
lowing through. This can be specific, such as in Sparrow Green, where the
bank required a copy of the director’s resignation, but settled the transaction
without it; or it can relate to evidence of departure from the bank’s usual prac-
tice. In Koorootang, the bank settled the transaction despite its officers not
complying with the bank’s usual procedure requiring legal confirmation that the
trust’s assets could be provided as enforceable security for the borrower.
16. The ease with which the outsider can access information about the corporate
security provider. This factor highlights the difficult line-drawing exercise for
the outsider. Priestley JA in Fiberi held that for the bank to obtain information
verifying Doyle’s assertions as to the identity of Fiberi’s officers should have
been a matter of no difficulty, and if it was, then the need for obtaining the
information becomes more obvious.83
17. The existence of an independent duty between outsider and borrower creates an
insider relationship and may preclude the indoor management rule. Although
the circumstances in which it may arise in the case of a lender and corporate
borrower may be unusual, Rolfe J in Beach Petroleum84 held that a person deal-
ing with a company is not entitled to rely on the assumptions if they have an
independent duty to the company, for example, a fiduciary relationship. The
rule cannot allow the person dealing with the company to avoid this duty.
This list is not exhaustive. For example, although Table 5.2 in chapter 5 mentions the
role of shareholder ratification, it was not directly relevant in any of the cases, but is still
relevant to the overall question of outsider protection. Nor does this list suggest that all
factors need to be part of the outsider’s awareness in every case. There is a point of accu-
mulation. The courts that mention the “factual matrix” are not specific as to its global
content or the point of accumulation. The extent to which the factual matrix can gener-
ate guidelines for outsider’s conduct is discussed in the recommendations in Chapter 10.
Given this matrix, Northside, a case on due inquiry, shares similar features to Fiberi,
Sixty-Fourth Throne, and Scorpion, prompting comparison with the common law due
inquiry test and Priestley JA’s interpretation of “ought to know”. The two tests are dif-
ferent, although Hansen J in Koorootang acknowledged that: “It is difficult to imagine,
but there may be, cases in which the difference between these two views could be deci-
sive...”.85 If the latter is still relevant to s 128(4), then the Explanatory Memorandum
requires a distinction. Several points are relevant to the distinction:
1. Northside was based on the Rule in Turquand’s case, which is not specific as to
the types of assumptions that may be made. The application of the exceptions to
the case was a substantive pre-condition to the issue whether the rule applied and
whether it was a procedural matter that Barclays was seeking to assume.
2. Under the statutory cases, the outsider first has to satisfy the court that the
assumption applies before the company has argued the exceptions. In four of the
five “ought to know” cases involving the corporate seal (Fiberi, Sixty-Fourth
Throne, Scorpion, Sparrow Green), the lender could not access the assumption
as to due sealing, but the courts still considered how the exception would have
defeated the lenders in any event. Koorootang was decided the other way
around, that is, instead of nominating the assumption that the bank was entitled
to rely on, Hansen J dismissed the issue by deciding that the exception applied in
any event.
84 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 33 ACSR 1. This case involved the availability of the
statutory assumptions to the company’s solicitor and is not directly on point in discussing a lender’s duties.
85 [1998] 3 VR 16, 119.
3. The courts in the statutory cases have provided more detail to justify the factors
that resolved the “ought to know” issue than is evident from Northside. Although
the cases have been declared as similar, the later cases emphasise factors other
than the “third party security without corporate benefit” factor. Northside sug-
gests that “due inquiry” is triggered by the first four elements in the matrix, list-
ed above. To the extent that Table 5.2 represents that other features were relevant
in that case, these other features were not all emphasised in the case.
4. The indoor management rule cases involving a disputed sealing, whether based
on “due inquiry” or “ought to know”, would still be decided the same under the
1998 version of the rule. All cases involved issues of agents’ and officers’
authority, the defects in which are not cured by the indoor management rule.
Koorootang is an exception to the extent that it involved two different transac-
tions: a scrip lien and a subsequent mortgage. The scrip lien was just an issue of
agency, as the bank accepted the deposit of share certificates in Koorootang’s
name under cover of a letter signed by one director, Jock Jeffries, without any
corroboration that he had the authority of the company to enter into the transac-
tion. The mortgage was sealed with the forged signature of the other director, so
the case would turn on whether the bank actually knew or suspected the forgery.
Given the added factual complication that the bank had actual knowledge that
the assets charged under the third party security were trust assets, the issue is
whether the trust asset point is a strong enough point of distinction with Story to
trigger the suspicion. The indoor management rule does not allow the bank to
assume that a corporate trustee has complied with its trust deed in granting the
security, so dealing with a trust provided the bank with additional responsibilities
of inquiry.
5. The distinction between categories of knowledge is still relevant under trust law,
particularly the circumstances of the lender’s knowledge that may lead to con-
structive trust liability. The rule does not preclude the imposition of the construc-
tive trust remedy. This was discussed in chapter 5. A constructive trust was
argued successfully in Koorootang and unsuccessfully in Equiticorp and the
Sixty-Fourth Throne appeal.
The statutory “ought to know” exception was successfully avoided in Brick & Pipe
and Story, which at first glance are also similar. Closer inspection reveals that they do not
fit the matrix. In Brick & Pipe,86 the lender made searches and inquiries as to the appro-
priate officers of the company but relied on a representation from the company to resolve
inconsistencies. Brick and Pipe itself was also a trading company. In Story, Gleeson CJ
commented that the case was different from Northside in that the company received
some benefit from the loan transaction due to the intermingling of the financial affairs of
Mr Story’s external interests and the company.87 Equiticorp does not fit the matrix
because firstly the majority of the New South Wales Court of Appeal accepted that group
welfare equated to corporate purpose. Secondly the majority accepted that the bank was
dealing with a managing director who had the actual authority of the companies to enter
into the transaction.
86 Although the Court did remark on how “analogous” the facts were to Northside.
87 (1993) 11 ACLC 629, 638.
The next chapter contains particular guidelines recommended to assist outsiders’ to

obtain maximum benefit from the statutory rule, particularly in avoiding the factual
matrix of suspicion. The factors of comparison in Table 5.2 from chapter 5 are used as a
basis for the recommendations.
Chapter 9
Implications for Lenders

The Factual Matrix That May Preclude Reliance on the Statutory
Indoor Management Rule
Chapter 8 analysed the limitations to the statutory assumptions. We concluded that the
factors of “due inquiry” that were highlighted by the High Court in Northside
Developments Pty Ltd v Registrar-General1 according to the common law are likely to
continue to be relevant to the statutory formulation of “knew or suspected” in s 128(4).
The factors of due inquiry or “suspicion” were identified according to the collective
description of the “factual matrix”. This adopts the approach of Priestley JA in Bank of New
Zealand v Fiberi Pty Ltd.2 If the circumstances of the borrowing transaction fit the “factu-
al matrix”, the “worst case” for the outsider is that the new statutory rule still imposes the
same obligations of inquiry as formulated by Priestley JA in Fiberi, that is, the standard of
a reasonable and prudent banker. That standard at least comprises three main elements:
1. identifying the parties involved in the transaction, the nature of their involvement
(e.g borrower, security provider, guarantor) and their relationship with each other;
2. identifying the officers of the corporate parties; and
3. relying on information on the public record to confirm identification.
Formulating recommendations to fit all transactions is imprecise due to the number
of factors in the matrix. Other commentators have prefaced their practical suggestions
with different concerns or priorities, for example:
• the new provisions should give rise to an expectation that the incentive to inquire
is reduced.3
• There is a circular argument that could develop regarding the practical steps that
a lender takes. If the lender adopts a particular practice as a safeguard, does that
then become an inquiry that a reasonable and prudent banker would take,
prompted by suspicion?4
• Under the former provisions, Horrigan described the line-drawing exercise
between wilful blindness and making routine enquiries that initiate other
queries.5 That comment still applies, as there is little support for a view that “to
suspect” something completely neutralises wilful blindness.
1 (1990) 11 ACLC 611.
2 (1994) 12 ACLC 48.
3 I Ramsay, The New Corporations Law CCH (1998) 35.
4 B Horrigan, ‘Busting Guarantees!’ (1998) 7 National Law Review [78]: “might the presence of such a provision
prompt an activist judge to conclude that putting it into the documentation must be an indication that the financier in
these circumstances ‘suspected’ something was amiss?”
5 B Horrigan, ‘Third Party Securities – Theory, Law and Practice’ in J Greig and B Horrigan (eds) Enforcing
Securities (1994) 244–245. Also see D Loxton, ‘One Step Forward, One Step Back: The Effect of Corporate Law
Reform on Procedures in Dealing with Companies Borrowing or Giving Guarantees’ (1999) 10 Journal of Banking
and Finance Law and Practice 24, 33: “when designing standard procedures, the level of risk of a transaction being
set aside if you did not get further information needs to be balanced against getting it wrong, or being placed on
notice of further defects.”
The factors in the matrix are cumulative. As most of the litigation has concerned
transactions with lenders, we formulate guidelines to maximise the lenders’ reliance on
the statutory rule. First, we indicate the general types of situations that may trigger the
exceptions to the rule. Second, we recommend positive steps that lenders may take to
maximise their position. Third, we examine in detail some particular scenarios, recurring
in past litigation and illustrate how our recommended procedures may be applied or var-
ied, as the particular factual matrix may require.
Situations that Risk Triggering the Exceptions

The courts have shown an increasing willingness to prevent lenders enforcing security
rights in circumstances where the lender has failed to follow up information that ought
to provide grounds for suspicion that an officer is acting without authority. In this
respect, lenders appear to be treated more strictly than other outsiders such as trade cred-
itors because they are in a stronger position to insist upon detailed scrutiny. The nature
of financial transactions is such that it is appropriate to engage in thorough checking that
the circumstances are regular.
The existence of the following circumstances should set off alarm bells for a prudent
lender and lead to the making of further inquiries:
1. An officer who affixed the company seal is not named as an officer in the public
documents lodged with ASIC. Company searches and further inquiries if unex-
pected information arises are crucial.
2. An ordinary director or secretary has more limited customary authority than does
a managing director. However, even in the case of a managing director, implied
actual or apparent authority may not extend to unusual transactions outside the
ordinary activities of the company, contracts which are contrary to the best inter-
ests of the company or which secure assets of other companies in the group
which carry on different activities.
3. The absence of consent or acquiescence of directors other than the ones with
whom the lender deals, especially where those with whom the lender deals are
the only ones to benefit from the transaction.
4. A mortgage secures the major asset of the company and there is no benefit to the
company. This is particularly the case where the asset is of a non-commercial
nature such as a residence.
5. The directors appear to be acting in their own self-interest or to the detriment of
the company. The rules of constructive trusts probably operate in addition to the
statutory provisions and may be more effective from the company’s point of
view to enable it to retain or recover its assets against a lender.
General Guidelines For Lenders

The following steps are proffered as general guidelines for lenders dealing with corpo-
rate borrowers:
1. Get to know the borrower at first hand. A lender should establish a relationship
and make such inquiries as will enable the lender to understand the relationship
Implications for Lenders 135
between the directors and shareholders of the borrower, its purposes and busi-
ness activities, the reasons behind the proposed borrowings and the nature of the
secured assets.
2. Carry out an ASIC search to ascertain the identity of the officers of the
corporate borrower/third party security provider. This information is currently
available in secondary form (printout ASCOT search) from the ASIC’s transcrip-
tion from primary documents. Discount any risk that the information is inaccu-
rate.6
For purposes other than reliance on the rule, the lender also needs to know the
existence and terms of prior registered charges, as the doctrine of constructive
notice still applies to charges: s 130(2).
3. Where the company search reveals the names of directors or significant share-
holders with whom the lender has had no contact, inquiries should be made as to
whether they consent or are opposed to the borrower entering into the proposed
transaction.
4. Once the lender has carried out the search, its accuracy must be relied on to the
exclusion of all other inconsistent assertions. If the information revealed by a
company search is out of date or a search does not reveal required information
because the borrower has been newly registered or a change of officers has
occurred, it is best to wait until the appropriate returns are duly lodged. Where
there is a sense of urgency that the transaction proceed quickly, the lender should
obtain a certificate signed by a person who has actual authority of the company
(the board, a managing director or the company’s solicitor), stating that the rele-
vant officers of the borrower have been duly appointed, are authorised to enter
into the transaction and relevant returns have been lodged or will be lodged as
soon as practicable
In National Australia Bank v Sparrow Green Pty Ltd7 and Brick and Pipe
Industries Ltd v Occidental Life Nominees Pty Ltd,8 the lender was persuaded to
rely on information contrary to the public record. In the latter, the lender was
successful through the circuitous route of proving that the source of the alternate
information was a person with the actual authority of the company to make
assertions regarding the authority of other officers. This type of representation
was unsuccessful in Bank of New Zealand v Fiberi Pty Ltd,9 Pyramid Building
Society v Scorpion Hotels Pty Ltd,10 Sixty-Fourth Throne Pty Ltd v Macquarie
Bank Ltd11 and Sparrow Green, as the parties who made the representations
regarding the officers did not have the actual authority to do so. The facts and
outcomes of these cases were discussed in detail in chapters 2 and 5.
6 Loxton, ibid, 34 discusses the scenario of an error in the initial search that renders it an abundance of caution to
obtain document images of the returns. The possibility that an ASIC error will adversely affect the outsider’s
reliance on the rule was discounted in the discussion on s 129(2) in chapter 6.
7 (1999) 17 ACLC 1665.
8 (1992) 10 ACLC 253.
9 (1994) 12 ACLC 48.
10 (1996) 14 ACLC 679.
11 [1998] 3 VR 133.
In Sparrow Green, Debelle J (at first instance) noted that the lender called for
a copy of the form recording the director’s resignation.12 Even this strategy is
unreliable to counter the information on the public record, as there is no evi-
dence that it has been lodged with ASIC. The pressure may be on the lender to
accept such evidence if the transaction timetable is tight. To accept a copy of a
form to be lodged would also require the lender to demand some evidence that
it had been lodged (such as an ASIC receipt) prior to the transaction being
executed.
In Sixty-Fourth Throne, the Court indirectly suggested it was a case of wilful
blindness for the lender to obtain a search of the corporate security provider but
then not cross-reference this information when presented with the signed mort-
gage.13
5. Do not obtain a copy of the company’s constitution, as the information within
is not required for any of the specific assumptions in s 129(1)–(7). Myers v
Aquarell Pty Ltd14 demonstrates that knowledge of the constitution was irrele-
vant for the outsider to access the assumption that the single director had valid-
ly affixed the seal to the mortgage.
6. If the lender already has a copy of the constitution (for example, from past
dealings), then this will constitute actual knowledge of its contents. However,
as Brick & Pipe and Sparrow Green show, this precludes reliance on the
assumption in s 129(1), but it does not preclude reliance on other assumptions
as to execution. In Sparrow Green, the bank’s actual knowledge that the consti-
tution required two directors, combined with its failure to rely on the public
information as to officers, meant that the assumption as to proper execution
was not available. This contrasts with the effect of Myers, as even if the lender
had knowledge of the constitution, the sealing clause would be satisfied where
there was only one director on the public record and that director affixed the
seal as director and secretary.
7. Generally audit the other information that the lender routinely collects with a
view to critically assessing the merit of that information. The facts from com-
plex cases such as Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd 15
indicate that the bank had accumulated a variety of information over the years
that had become distributed amongst different files, which overall would have
given it a high degree of insight into the activities of the borrower and the third
party company.
8. Ascertain, in general terms, the purpose of the loan. This is information that
banks routinely collect and is a particularly difficult factor to dismiss. On the
one hand, the assertions by the borrower at the time of the loan application may
be useful in demonstrating corporate purpose, either of the company itself, or
for the third party security provider. (The third party situation is discussed
under the particular factual matrices below). On the other hand, it may render
12 Perkins v National Australia Bank (1999) 30 ACSR 256.

13 [1998] 3 VR 133.
14 [2000] VSC 429.
15 [1998] 3 VR 16.
an otherwise routine transaction difficult for the lender, if the disclosure hints at
anything involving non-corporate purpose. Non-corporate purpose encompasses
the exercise of corporate power for illegal purposes (e.g. financing self
dealings16) or improper purpose (e.g. directors breaching duties to the company,
such as using funds for personal projects or simply some other potential for
conflict) or just generally, lack of corporate benefit (e.g. loan being used to
fund loans to or activities of other entities). An adverse disclosure of the pur-
pose of the loan affects the lender because it relates to one of the factors in the
matrix, lack of corporate benefit. As discussed below under the particular factu-
al matrices, the effect of lack of corporate benefit as the sole factor is uncertain,
as it is only one of the factors in the matrix for the reasonable and prudent
banker test that triggers suspicion. To the extent that the disclosure hints at
other matters such as illegality or fiduciary breach, the lender may also be vul-
nerable in equity, either because they will not be a bona fide purchaser for
value without notice or they may become subject to participatory liability (dis-
cussed in chapter 6).
9. Do not accept a document signed either under seal, or on behalf of the compa-
ny, without cross referencing the signatories to the ASIC search information.
Also, do not accept a seal unless it accurately consists of the company’s full
name, the expression “Australian Company Number” and that number: s 123.
10. Avoid the situation arising where the company’s officers execute documents on
the lender’s premises or otherwise in the vicinity of the lender’s officers, as this
may arouse actual knowledge. In the common law case of Efron’s Tie,17 it was
held that executing documents in the bank’s premises meant that it had actual
knowledge of a breach of the constitution. Actual knowledge of a breach of the
constitution does not directly affect proper execution, but actual knowledge of
some adverse factors adds to the factual matrix and the climate of suspicion.
11. Do not rely on any assertions from any individuals purporting to represent the
company until it is confirmed first, that they are officers from the public record,
and secondly, that they have the actual authority to bind the company. This lat-
ter point is a barrier for reliance by an outsider. Only the managing director, the
board as a whole and the shareholders in general meeting (subject to some lim-
its) have the authority of the company. To rely on any of these sources for actu-
al authority requires further inquiries: the existence of actual authority is not a
matter that can be assumed. Here, the best evidence is a board resolution
approving the transaction and the officers’ authority to execute specific con-
tracts. The situations where actual authority was found “with hindsight” by the
courts, notably Brick & Pipe and Equiticorp Finance Ltd v Bank of New
Zealand,18 represent risky strategies for universal application. The lender cannot
rely on any judicial disposition to treat high profile and self-appointed individu-
als as managing directors without some independent corroboration.
16 “Illegal” in the sense that s 260D imposes civil penalty orders on those persons involved in the company’s contra-
vention of s 260A.
17 Re Efron’s Tie & Knitting Mills Pty Ltd [1932] VLR 8. Discussed in chapter 4.
18 (1993) 11 ACLC 952.
12. Corporate benefit is not a major concern unless the transaction involves a third
party security (see the specific scenarios below); or in some other way the
lender has actual knowledge of its absence, such as discussed in point 8 above.
13. Check any relevant trust deed if the borrower or security provider is a trustee.
14. If doubts remain, the lender can incorporate draft minutes of proceedings of the
board with the offer to finance.
These minutes should record:
• that named persons executing the required documentation are authorised to
do so,
• that the company seal is affixed by persons with authority and in compliance
with the constitution,
• the directors who were present.
Particular Factual Matrices

Particular recommendations are offered below, designed for typical factual matrices. The
factual matrices, distinguished numerically, have been developed from the types of
indoor management rule disputes already litigated.
Type 1: the third party security
A third party security has featured in all of the cases discussing the rule’s exceptions
(except National Australia Bank v Sparrow Green Pty Ltd19). It is a pervasive factor in
lenders’ enforcement failures. A conservative strategy to adopt is that the absence of
obvious corporate benefit to the third party security provider means that there is none.
However, the significance of absence of corporate benefit is unclear. None of the s 129
assumptions directly relate to assuming that the transaction has some corporate benefit.
Absence of corporate benefit is one factor in the matrix (although “decisive” under the
common law “due inquiry” test). It has been argued above that the new s 128(4) at least
signals some change in direction to favour outsiders and that a third party security, by
itself, should not be considered a suspicious transaction. In past disputes, however, suf-
ficient other elements from the matrix have been present, to combine with the third party
security and absence of corporate benefit factor, to trigger the exception. If third party
security exists in isolation from other elements in the factual matrix, as for example in
Story v Advance Bank Australia Ltd,20 then further inquiry about the transaction is not
warranted. Effectively, to totally isolate the third party security transaction from the
matrix requires proactive strategies on the part of the lenders:
1. Enquire of the borrower the identity of the corporate third party security provider
and its connection with the borrower. (Common examples include group rela-
tionships, see type 2 scenario below; trading relationships, evidence of which
may indicate mutual corporate purpose; or personal relationships, that raise dubi-
ous corporate benefit connections).
2. Corroborate the connection from the third party company, or a source other than
the borrower (if the borrower alleges a group situation, see type 2 below). In
19 (1999) 17 ACLC 1665.

20 (1993) 11 ACLC 629.
contacting the third party company direct, the lender creates evidence of corpo-
rate benefit. Hansen J in Koorootang Nominees Pty Ltd v ANZ Banking Group
Ltd21 was critical of the bank’s failure to contact other officers of the trustee
company, or even the beneficiaries of the trust. External sources that have not
been accepted by the courts include solicitors acting for the borrower with no
evidence that they were retained by the security provider (Sixty-Fourth Throne
Pty Ltd v Macquarie Bank Ltd22) and, although not a case on third party securi-
ties, the company’s accountant (National Australia Bank v Sparrow Green Pty
Ltd23).
3. As in the general guidelines, ascertain the identity of the officers of the third
party company from ASIC and rely only on that information.
Failure to take these proactive steps in a third party security situation does not auto-
matically trigger the exception to render the rule unavailable. The risk of the failure is
that, with hindsight, an aggrieved corporate third party could accumulate enough of the
factors to argue the existence of a factual matrix that indicates a reasonable and prudent
banker would have made inquiries.
Type 2: the “group” transaction
A particular subset of the third party scenario is the intra-group transaction, where it may
be that the lender has more latitude in assuming corporate benefit than in the case of a
less obvious connection between the borrower and the third party company. Equiticorp
Finance Ltd v Bank of New Zealand24 illustrates that lending transactions involving cor-
porate groups often have sufficient corporate benefit to take them out of the factual
matrix. However, there have been doubts expressed about a subsidiary’s guarantees of
holding company debts.25 Further, the High Court in Walker v Wimborne26 recognised a
potential flowdown corporate benefit where company A, the holding company, makes a
loan to a subsidiary to allow it to continue to trade. The transaction may be judged, from
the standpoint of company A, to be in its interests. There was no discussion of correla-
tive “upflow” benefits. Since ANZ Executors & Trustee Company Ltd v Qintex Australia
Ltd, there have been developments legitimising the upflow benefits. For example, s 187
now provides that directors of a wholly owned subsidiary may act in the interests of the
holding company. The Companies and Securities Advisory Committee has released its
report suggesting that this apply to partly owned subsidiaries.27
Similarly with type 1, the lender must corroborate the group connection from an
independent source. Common directorships do not create a group in the sense of com-
21 [1998] 3 VR 16.
22 [1998] 3 VR 133.
23 (1999) 17 ACLC 1665.
24 (1993) 11 ACLC 925.
25 ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd [1991] 2 Qd R 360. See also G D Cooper and D B
Robertson, ‘Subsidiary Companies’ Guarantees – Their Continued Existence’ (1990) 1 Journal of Banking and
Finance Law and Practice 284, 286; the Honourable Justice Paul de Jersey, ‘Lending to Company Groups – The
Problems of Corporate Power and Directors’ Authority’, Paper presented at the 9th Annual Banking Law and
Practice Conference, Gold Coast, April 1992, p 14; J Lambrick, ‘Corporate Benefit in Financial Transactions: A
Policy Perspective’ (1997) 8 Journal of Banking and Finance Law and Practice 212, 223–225.
26 (1976) 137 CLR 1, 6 (Mason J).
27 CASAC, Corporate Groups: Final Report (May, 2000) [243]–[246].
mon ownership.28 (See type 3 below). Corroboration reflects back to one of Priestley JA’s
comments in Bank of New Zealand v Fiberi Pty Ltd29 relating to the ease of acquiring the
information. Ownership is a matter of public record. The disputes litigated show two
types of group structures:
1. the formal structure where ultimately a public company is involved as a holding
company, leading to a high level of disclosure in the market about the public
company’s entities.30 In cases such as Equiticorp and Brick & Pipe, the lenders
were dealing with major corporate groups and this would be easy to corroborate
from public information.
2. The informal structure, involving loose alliances usually of proprietary compa-
nies where outsiders have assumed that common directors equates to some for-
mal group structure. This incorrect assumption is evident for example in Fiberi.
In these situations, confirmation of the genuine group connection may be more
difficult given the absence of financial reporting by proprietary companies,31 but
share allotment information is available from the ASIC32 and the registers are
public documents.33
Type 3: directors proffering “other” security for their personal loans
The common director connection between the borrower and the third party company
adds another factor to the third party security matrix. This factor has a facet of inevitabil-
ity about it, because if the lender is going to enforce any signed documents, then under s
129(5) and (6), the lender should know who the officers are. The existence of the com-
mon director then raises the suspicion that corporate benefit is lacking, or is this factual
connection merely “idle wondering”? To have information on the common director con-
nection is verging on wilful blindness if the lender fails to pursue it. Failure to pursue the
connection was instrumental to the due inquiry exception in Northside Developments Pty
Ltd v Registrar-General,34 but has also been significant in the statutory cases. Cases such
as Bank of New Zealand v Fiberi Pty Ltd,35 Pyramid Building Society v Scorpion Hotels
Pty Ltd,36 and Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd37 show that sole
reliance on the common director for corroboration of the connection is unsatisfactory.
The type of connection that the lender needs to corroborate includes that the common
directorship arises through a genuine group structure, such as in Equiticorp Finance Ltd
v Bank of New Zealand,38 (and preferably downflow or intra-group, not upflow between
subsidiary and holding company, see type 2 above) or some other mutual trading inter-
est between unrelated companies. For example, in Story v Advance Bank Australia Ltd,39
28 Walker v Wimborne (1976) 137 CLR 1, 6 (Mason J). His Honour said that to speak of the companies in that case as
a group was “something of a misnomer” where there is not interlocking shareholdings, just common directors.
29 (1994) 12 ACLC 48, 59.
30 AASB1024 “Consolidated Accounts” requires reporting entities to present consolidated accounts of all entities con-
trolled by it.
31 Although this excludes large proprietary companies, which are required by s 292 to prepare financial reports.
32 Section 254X.
33 Section 173.
34 (1990) 11 ACLC 611.
35 (1994) 12 ACLC 48, 59.
36 (1996) 14 ACLC 679.
37 [1998] 3 VR 16.
38 (1993) 11 ACLC 952.
39 (1993) 11 ACLC 629.
the Court was satisfied that the company, Fleetwood Star Pty Ltd, derived financial ben-
efit from Mr Story’s dealings with the bank in his other capacities.40
Type 4: trust assets as security
Trust assets as security are a special case, whether or not the security is a third party secu-
rity. The indoor management rule does not allow the lender to assume that the trust has
the power to grant security. If it does, there is a further level of inquiry to check if the
trustee has the power to grant a third party security. Even if it does, access to the indoor
management rule may be denied if there is an accumulation of the factors of third party
security for an entity controlled by a common director and no corporate benefit.
Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd41 illustrates how this scenario
triggers the “reasonable and prudent” banker test to make enquiries regarding the matter
sought to be assumed. That case also highlights the further exposure of outsiders to the
risk of constructive trusteeship when dealing with a corporate trustee.
Conclusion
Does the new statutory indoor management rule decrease the burden of inquiry for
lenders dealing with corporate borrowers and security providers? The Explanatory
Memorandum issues the instruction to disregard the common law burden of due inquiry.
The standard of commercial morality imposed by judges requires the lender to be alert
to whether a corporate borrowing transaction balances too far in favour of facilitating
corporate fraud through inadequate inquiry. Applying this theme leads to the likelihood
that the reasonable and prudent banker standard42 will survive the transition into the new
provisions. The ramification is that the new provisions do not change the threshold prob-
lems of corporate dealing involving identifying the corporate officers and ascertaining
their authority. The Explanatory Memorandum expressed the intention to impose a
“stricter test”. This intention may be achieved through a change in emphasis in the fac-
tors already identified in the past cases as comprising good conduct by outsiders, rather
than imposing a major doctrinal shift. That is, there may now be a more careful analysis
of the factors in a particular factual matrix to trigger suspicion that the assumption is not
correct, than may have been the case under the former provision. The factors in the
matrix, however, still comprise those that have been identified from previous cases and
highlighted in Table 5.2 in Chapter 5.
40 “The intermingling of the financial affairs of Mr Story and the company, which was known to the people who were
the sole shareholders and sole directors, and the ultimate application of part of the loan funds for the purposes of the
company, make the facts of the case significantly different from those in Northside Developments.” (1993) 11 ACLC
629, 638 (Gleeson CJ).
41 [1998] 3 VR 16.
42 Per Priestley J in Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48.
Chapter 10
Overview
Introduction
This final chapter provides our summary of the issues and our research findings, includ-
ing a restatement of the research’s significance to commercial practice involving financ-
ing contracts with companies.
This chapter is structured as follows: first, it provides a brief overview and summa-
ry of the research context of corporate contracts. Following the summary, we present a
comprehensive guide to the findings, particularly in relation to the interpretation and
operation of the statutory reforms analysed in the earlier chapters. Whilst chapter 9 con-
tains our analysis of necessary guidelines to maximise the statutory protection to out-
siders and their contracts, these recommendations are restated in a summarised form.
Finally, we present conclusions drawn from the findings, primarily areas of reform wor-
thy of reconsideration or renewed attention.
In presenting our conclusion, it is worthwhile to note perceived limitations within
this work. We have examined the corporate law issues surrounding corporate contracts,
involving the existence of corporate power and the exercise of corporate power by the
company’s officers. Tangential issues not considered in this monograph include:
• The exercise by shareholders of corporate power, both in terms of ratifying
directors’ actions or subverting directors’ authority;
• Contract law doctrines, such as unconscionability and misrepresentation, that
may also give rise to remedies due to the circumstances surrounding the forma-
tion of contracts;
• Subsequent events to the circumstances of the formation, such as insolvency, that
may render a contract vulnerable.
We have touched on the relevance of fiduciary duties affecting the scope of officers’
authority and the relevance of participatory liability where a contract is entered into in
breach of duty or trust. However, we do not present in this work a comprehensive analy-
sis of either the substantive content of directors’ fiduciary duty nor of the principles of
participatory liability and constructive trusts.
The monograph focuses on corporate debt finance and corporate security transac-
tions. However, even though such transactions often involve dealings in land, we have
not digressed to consider the effect on outsiders of the various state land titles registra-
tion systems and indefeasibility of title.
Summary
The purpose of this monograph is to examine the regulatory rules designed to facilitate
the formation of external contracts and to comment on the efficacy of legislative reform.
We have reviewed both general law developments prior to statutory intervention and the
Overview 143
statutory reforms. The current phase of statutory reform is contained in the Corporations
Act provisions inserted in 19981 covering the reforms to corporate power and ultra vires
and the changes to the wording of the statutory indoor management rule.
Companies may only enter into contracts through agents, usually its officers. The
terms of the officers’ appointment, meaning the grant of authority, is not required to be
disclosed and is not discernible to the outsider. The common law and s 129 provide
default rules for officers’ authority that arises as a matter of law. By virtue of the princi-
ples of agency, there are three types of authority that an agent may possess: actual, cus-
tomary and apparent. In particular, the rules of customary authority are useful in compa-
ny law, as officers appointed to a certain position are automatically granted the authori-
ty that customarily goes with that position. This is consolidated in s 129(2)(3).
The scope of officers’ authority is constrained by the requirement to exercise the
company’s powers for a corporate purpose. Further, officers are subject to fiduciary con-
straints when exercising their authority. Together, these constraints operate to define the
limits of authority to exercise corporate power. The advantage from the outsider’s point
of view is that the law sets out the default rules of customary authority and fiduciary duty
that are well established. The disadvantage is that issues of non-compliance with author-
ity and fiduciary duty may affect the validity of contracts entered into with outsiders on
behalf of the company.
The preceding chapters examined the general law and recent legislative reform that
affects the formation of corporate contracts. There are two potential threats to finance
contracts: first, where the company lacks power to enter into the contract, so that it is
void ab initio, and second, where the company has power, but there is some abuse by
officers in exercising the power. The usual result in the second case is that contracts are
voidable.
Whilst the Corporations Act overcomes the void effect of the first threat, ultra vires,
whether the external contract’s enforceability is enhanced by the ultra vires statutory
reforms also depends upon the application of the indoor management rule. The rule is
designed to allow outsiders to make certain assumptions regarding the officers’ exercise
of corporate power, for example that the procedural preconditions to the exercise of
power have been complied with. The rule has two main limitations affecting the extent
to which it assists outsiders enforcing contracts.
1. It is not comprehensive in overcoming all problems associated with dealing with
agents. For example, it is not possible to assume that officers have not acted ille-
gally, nor is it possible to assume, from a person’s assertion alone, that they are
an officer of the company. Accordingly, the outsider must ascertain from an
external source, usually ASIC records, the identity of the company’s officers.
2. The rule has express exceptions where the assumptions are not available, based
on the knowledge of the outsider.
Chapter 6 reinforces the relevance of the outsider’s knowledge of the officers’ abuse
of authority. The outsider is affected by their degree of knowledge of the circumstances
of the abuse, either because their knowledge of lack of corporate purpose:
1 Part 2B.1 – Company powers and how they are exercised, Part 2B.2 – Assumptions people dealing with companies
are entitled to make and Part 2B.4 – Replaceable rules and constitution inserted as a result of the Company Law
Review Act 1998, operational 1 July 1998. The sections are set out in Appendix I.
• precludes the statutory protection of the indoor management rule in enforcing

contracts; or
• invokes participatory liability. Despite the recent reforms to the Corporations
Act, the statute does little to protect the outsider from the application of equitable
principles imposing constructive trust liability.
These are the main limits to the scope of protection provided to the outsider by the
legislation. Below, we comment on the effect of the specific statutory reforms.
The abolition of ultra vires
Classic ultra vires refers to contracts with outsiders being void due to lack of corporate
capacity. This arises because the contract is outside the objects clause of the constitution.
Due to the impracticality of the void effect on outsiders, the common law classic ultra
vires operated unfairly or inconsistently on outsiders. As discussed in chapter 5, the leg-
islature has effectively abolished the doctrine of ultra vires. This is achieved by a com-
bination of:
• the simplification of the registration requirements with the absence of a manda-
tory constitution (ss 117 & 118);
• the express grant of contractual capacity in s 124(1);
• the express recognition in s 124(2) that an act for a non-corporate purpose
(expressed as “the company’s interests are not, or would not be, served”) does
not affect the company’s capacity ;
• the provision in s 125 that the exercise of a power by the company is not invalid
merely because it is contrary to an express restriction or prohibition in the com-
pany’s constitution; and
• abolishing constructive notice of corporate documents, except for registered
charges (s 130).
The statutory reform addresses the direct effects of classic ultra vires, that is, that
contracts will not be void for lack of capacity. Although s 124 may be subject to ad hoc
interpretations of limitation,2 this will not affect actual contractual capacity. The suscep-
tibility of s 124(1) to ad hoc limitation has been reduced since the 1998 reforms, as unlike
the former s 161(1), s 124(1) is no longer expressly “subject to” the Corporations Act.
This change reduces the likelihood that a company’s capacity is affected if that type of
contract otherwise contravenes some other provision of the Corporations Act.
However, the reform cannot relieve outsiders of all indirect effects that may flow
from disputes as to capacity. Even though a constitution is no longer required for regis-
tration since 1 July 1998, it is quite feasible that outsiders will be dealing with compa-
nies that still have a specific constitution. This circumstance may arise either because the
company was registered pre-1 July 1998 and it has not repealed its constitution under s
136(2), or it is a No Liability (s 112(2)(b)) or charitable company (s 150) that still require
a constitution. Some companies formed for specific purposes also wish to specifically
state precise objects. In any event, the replaceable rules are part of the definition of “con-
stitution” in s 134. The outsider’s rights under the contract (as opposed to the contract
itself) may be indirectly affected by internal validity disputes, if shareholders take action
2 For example, Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (No 2) (1987) 5 ACLC 38 held that a com-
pany did not have the capacity to represent itself in legal proceedings.
Overview 145
to enforce the constitution. For example, chapter 5 showed that an “ultra vires” transac-
tion entered into by officers is still relevant in other actions involving:
1. a winding up application;
2. the oppression remedy;
3. proceedings under statute against officers for breach of the Act;
4. a common law action for damages against officers for breach of constitution (as
the constitution forms the terms of the contract between members and officers, s
140).
Although these effects do not directly affect enforcement of the external contract,
they can disrupt or inconvenience the outsider’s rights, especially in the winding up sit-
uation.
The indoor management rule reforms
Ultra vires in the classic sense refers to corporate capacity. The indoor management rule
was not designed to cure defects in the company’s capacity to contract. Therefore, appli-
cation of the rule is subject to first satisfying inquiry as to the existence of corporate
capacity.3
The common law indoor management rule was developed since the mid nineteenth
century as a rule of procedural convenience, so that external parties dealing with com-
panies were entitled to assume that the company’s officers were complying with the com-
pany’s constitution. The Rule in Turquand’s case prevented outsiders from being affect-
ed by internal irregularities of which they had no means of discovering. Logical excep-
tions to the rule developed, based on the knowledge of the external party. Accordingly,
if the outsider knew of the internal non-compliance, or knew facts that would lead a rea-
sonable person to inquire further, then the rule was not available. However, by the early
twentieth century, the rule was considered “moribund or at least seldom applicable.”4
Some of the reasons for this were posited in earlier chapters, for example:
• Misapplication of the doctrine of constructive notice5 preventing the rule’s opera-
tion, as a proviso to Rule in Turquand’s case was that the outsider could not
assume regularity where the assumption was inconsistent with the public docu-
ments.
• A forgery exception was also developed, as the outsider could not assume regu-
larity in relation to forgeries. However, the case law was inconsistent as to what
forgery meant. The rule was inapplicable if the contract was forged in the sense
of a false signature,6 but the exception was also applied were the signatures were
genuine, but the contract was a forgery in the sense of unauthorised by the com-
pany.7 This extension of the forgery exception was an unnecessary complication
to the rule’s operation.
3 Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611, 619 (Mason CJ): “Of course, in applying
the rule, account must be taken of the doctrine of ultra vires and the constitution of the company”.
4 Northside Developments Pty Ltd v Registrar-General (1987) 5 ACLC 642, 648 (Young J at first instance) citing H
Street, A Treatise on the Doctrine of Ultra Vires (1930).
5 Constructive notice means notice of the contents of the public documents.
6 Ruben v Great Fingall Consolidated [1906] AC 439.
7 Kreditbank Cassel GmbH v Schenkers [1927] 1 KB 826.
• The nature of the common seal, and its importance in early common law doc-
trine that considered the seal as being the only method of expression of the com-
pany’s assent.8
Although the first statutory efforts in 1983 to set out the rule stated that the legisla-
ture was simply clarifying and codifying the existing law9 in Royal British Bank v
Turquand,10 comparisons between the old law and the statutory law were inevitable.
Immediate differences between the common law and the 1983 statutory version of the
rule were:
• Formal qualifying circumstances were drafted into the rule. That is, a person had
to have “dealings with the company” and be involved in “proceedings in relation
to those dealings”, to access the rule.
• The statutory rule enumerated the assumptions that could be made. Apart from
the first assumption (compliance with the constitution) the other specific statuto-
ry assumptions were not clearly derived from the common law rule at all. Rather,
they represented the statutory adoption of procedural assumptions analogous to
the rule, for example, from the rules of agency.
• The common law exceptions of actual and due inquiry were redrafted, initially
as actual knowledge or “connection or relationship with the company” such that
the outsider ought to have known that the assumption was incorrect.
• The common law exception of forgery was clarified, so that the rule applied
regardless of allegations of forgery, although subject to the outsider’s actual
knowledge of forgery.
Given the statutory redrafting in 1998, similar issues require examination, giving rise
to five main uncertainties regarding the rule’s current statutory form. These arise from:
1. The qualifying circumstances to relying on the statutory rule;
2. The revised rule as to forgeries;
3. The scope of the knowledge exceptions;
4. The scope of the specific assumption in s 129(4) that officers “properly perform
their duties to the company”; and
5. The scope of the specific assumptions in s 129(6) and (7) relating to execution
of documents with or without the seal and whether this relates to substantive
authority or merely procedural authority to enter into contracts.
These uncertainties, and suggested resolutions, are discussed below.
1. The pre-conditions to reliance in ss 128(1) and (2)
The drafting of the former statutory provision suggested three pre-conditions for the out-
sider to meet before they could access the rule. The outsider had to have:
• “dealings” with the company,
• in “proceedings in relation to those dealings”
• where the company asserted matters contrary to the assumption.
8 K E Lindgren, ‘The Negative Corporate Seal Rule and Exceptions Thereto’ (1974) 9 Melbourne University Law
Review 411.
9 Explanatory Memorandum, Company and Securities (Miscellaneous Provisions) Act 1983, [188].
10 (1856) 119 ER 886.
Overview 147
The new streamlined drafting of s 128(1) and (2) suggests only one element for the
outsider to prove: “dealing” with the company. Previous case law has given a wide mean-
ing to “dealing”. Removal of the second and third element, while superficially a drafting
simplification, may actually make the rule more accessible.
2. The protection against forgery in s 128(3)
To the extent that the statutory provisions modify the forgery rule, this now refers to
“forgery” in the strict sense only. This statutory modification protects outsiders more
than the common law rule that rendered forgeries void. Under the statutory rule, a forgery
can be assumed to be valid execution, subject to the rule’s exceptions.
However, the Company Law Review Act 1998 effects both new drafting of the
forgery rule and a re-structure of the provision. There are three main differences. The
forgery rule is now found in s 128(3) (instead of in its own self contained section as with
former s 166). It appears before the exceptions in s 128(4) instead of after the exceptions
in former s 164(4). It no longer contains the express proviso of being subject to the out-
sider’s actual knowledge. The re-ordering of the forgery provision now suggests that the
forgery assumption is subject to the same “know or suspect” exception is s 128(4) that
the assumptions in s 129 are subject to. Formerly the forgery assumption was only sub-
ject to the actual knowledge exception, but there was debate about the meaning of actu-
al knowledge in former s 166.11
3. The exception “to suspect” in s 128(4)
The wording of the first statutory version of the knowledge exception, depended both
upon what the outsider actually knew and what they ought to know, based on their “con-
nection or relationship” with the company. When enacted in 1983, this wording prompt-
ed comparison with the common law constructive knowledge exception of due inquiry.
Similarly, the redrafting of s 128(4) to substitute “suspect” for “connection or rela-
tionship” such that the outsider “ought to know” requires comparison. To “suspect”
something is a test that is found in other commercial applications. However, “suspect” in
these other contexts is usually treated as objective because it is used in conjunction with
the specific qualifier of reasonableness. For the purposes of s 128(4), the main uncer-
tainty is the extent to which “suspect” will be treated as an objective test, particularly in
the absence of express words such “reasonable” or “ought to know”. To have, or not to
have, a suspicion is to have a subjective belief. At least in an evidentiary sense, it would
be difficult for a court to accept someone’s belief when surrounded by many factors that
make that belief unsustainable.
In this respect, the “factual matrix” concept referred to by Priestley JA in Bank of
New Zealand v Fiberi Pty Ltd12 (and discussed in detail in chapter 8) still has a role to
play in building a case against the outsider’s reliance on the assumptions in s 129. The
“factual matrix” concept as described by Priestley JA describes the suspicion that a rea-
sonable and prudent “banker”,13 placed in the factual matrix of the case, would need to
find out more. The factual matrix comprises the factors from Northside and other cases,
including Fiberi, which initiate an obligation of inquiry by the outsider. These factors
include (sourced from Table 5.2 in chapter 5):
11 See P Lipton, The Authority of Agents and Officers to Act for a Company: Legal Principles (1996) 57.
12 (1994) 12 ACLC 48.
13 Priestley JA expressed the test using the word “banker”, as the external party was a bank.
• third party security;

• no indication that the loan transaction is related to the company’s business;
• the person deriving the benefit from the transaction is the director proffering the
company’s assets as security for loans for the director’s personal or external
interests;
• the assets secured are trust assets; and/or
• no indication that the company derives any benefit from the loan transaction.
This first group of factors primarily shows lack of corporate purpose. This demon-
strates that whilst corporate purpose is not a positive factor that an outsider needs to be
concerned about in every transaction, evidence of lack of corporate purpose can operate
negatively, in the sense of denying the benefit of the rule’s assumptions.
Other factors that may comprise the factual matrix include:
• the outsider makes no searches or enquiries about the company;
• the company is not a trading entity, but merely owns assets;
• the outsider has no previous dealings or relations with the company;
• the general circumstances giving rise to the requirement of the financing transac-
tion, such as the desperation of the borrower, the urgency with which the trans-
action is conducted, or the quantum of the loan;
• a corporate group is involved (does the outsider independently confirm the com-
panies’ relationship?);
• purported dealings with a “managing director” are involved (does the outsider
independently confirm their authority?);
• similarly, dealings with several different officers may be involved (does the out-
sider mistakenly believe they are dealing with the board?);
• the outsider has sought further information, but relies on a non-authoritative
source for confirmation, or does not follow up requests for information;
• the outsider disregards the public information;
• the ease with which the outsider can access information about the corporate
security provider;
• whether there exists an independent duty between the outsider and the company
that creates a requirement for inquiries to be made. For example, Beach
Petroleum14 involved the non-availability of the statutory assumptions to the
company’s solicitor, where the fiduciary duty between the solicitor and the com-
pany obliged the solicitor to make inquiries.
The factual matrix concept remains important to the new statutory rule, either:
• because a court will hold that Priestley JA’s “reasonable and prudent” outsider
test survives the redrafting of the rule; or
• in a less extreme view, it may be that the factual matrix concept is relevant in the
evidentiary sense in proving the outsider’s suspicion.
4. The assumption as to performance of duties in s 129(4)
Since the statutory rule was enacted in 1983, there has been uncertainty regarding the
ambit of the particular assumption that refers to proper performance of duties. The new
provision, s 129(4), retains the existing wording. However, the wide view can be argued
14 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 33 ACSR 1.

Overview 149
as a logical consequence of the process of clarifying and codifying the common law rule.
Outsiders would benefit more from an interpretation of the statutory rule that maximised
the scope of the assumption. It does not ignore the interests of the company’s sharehold-
ers in favouring a wide interpretation, as the rule is subject to exceptions based on
whether the outsider has actual knowledge or suspected directors’ breach of fiduciary
duty. Further, the company can pursue remedies in equity for breach of fiduciary duty.
The statute does not expressly provide that the assumption in s 129(4) is subject to the
equitable rules, so it is unlikely that the rule of procedural regularity overcomes the equi-
table remedies for breach of fiduciary duty.15
5. The assumption as to execution of documents in s 129(5) and (6)
The assumptions as to execution of documents in s 129(5) and (6) were substantially
redrafted in 1998. This redrafting was due to two factors flowing from other Company
Law Review Act 1998 reforms:
1. the change to an optional common seal (s 123); and
2. the simplification of the former s 182 that set out in detail the rules for the for-
mation and execution of company contracts directly, indirectly and by agents
with authority.16 The rules for execution of contracts have now been simplified in
s 127. Contracts may be executed without a seal, by the signature of two offi-
cers, or under seal, witnessed by two officers.
Ramsay, Stapledon and Fong examined the significance of the redrafted s 127, and
its effect on the correlative assumptions in s 129(5) and (6).17 Ramsay, Stapledon and
Fong discuss whether this change in drafting has rendered a substantive change in the
ambit of the indoor management rule. They distinguish between substantive authority to
enter into contracts and formal authority to affix the seal. The former provision (s 68A)
did not cure defects in authority,18 nor was the common law indoor management rule
intended to create authority where there was none. 19
Accordingly, Ramsay, Stapledon and Fong conclude that the redrafted assumptions
only relate to formal authority, so that s 129(6) does not overcome lack of substantive
authority.
The above discussion summarises the highlights of the analysis of statutory reform
in relation to ultra vires and the indoor management rule. The efficacy of the provisions
is analysed below by examining some typical safeguards. Further, the extent to which
the statutory provisions could be enhanced with additional changes, is addressed at the
end of this chapter.
Typical Safeguards in Dealing with Abuse of Corporate Authority

In analysing the statutory protection, we have adopted the perspective of an external
party (“the lender”) entering into a contract with a corporate borrower or security
provider. This perspective is compelling for two reasons:
15 L Law and J Pascoe, ‘Financiers and Constructive Trusts: Protection Versus Liability’ (2000) 11 Australian Journal
of Corporate Law 219, 245.
16 Former s 182 is set out in Appendix I.
the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38.
18 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 9 ACLC 324, 343 (Ormiston J).
150 Enforcing Contracts in Dealings with Corporate Officers and Agents
1. Much of the litigation over the last decade has involved disputes arising from
corporate lending and security transactions. This allows a more specific and
meaningful focus.
2. The corporate lending transaction would be considered by most industry partici-
pants to be an important decision in the life of a company and one attended by
much formality. The nature of the risks and the quantum in such transactions
illustrate the tension involved in balancing the interests of the external parties
against the interests of the borrower’s shareholders when assigning loss for the
outcome in abuse of corporate power.
Chapter 9 presents detailed guidelines and justifications. Below is a summary of the
main elements to the lender’s successful enforcement of corporate contracts.
The certificate of registration
The lender needs to know the name of the company and the date of its registration. The
certificate of registration provides this information. The date is important, is it indicates
the date from which the company has the power to enter into contracts (s 119).
Otherwise, pre-registration contracts are enforced subject to the rules in Part 2B.3
Corporations Act.
The name of the company indicates the type of company according to the liability of
its members. The name is significant because:
• A proprietary company may legitimately have only one director (s 201A).
Accordingly, it is contemplated by s 127 that such a company may execute docu-
ments by one signatory. Pursuant to s 198E (a replaceable rule), the single direc-
tor has the authority to exercise the powers of the company.
• A public company must have at least three directors (s 201A). Accordingly,
under s 127 a public company would execute documents by two signatories.
Pursuant to s 198A (a replaceable rule), the business of a company is to be man-
aged by all of its directors collectively.
• A public company that is a No Liability company is expressly required to have a
constitution that restricts it purpose to mining: s 112(2). Dealing with a No
Liability company is covered under the heading “Particular circumstances”
below.
• A company that has no abbreviation after its name is a charitable company,
which under s 150 is restricted to charitable purposes only. Dealing with a chari-
table company is covered under the heading “Particular circumstances” below.
The registered office
A company has a registered office from the date of registration (s 117(2)(g), s 121) and
all companies must notify ASIC of changes: s 142. The significance is that all documents
can be sent to the company’s registered office: s 109X.
The corporate constitution
The corporate constitution does not have any effect on the lender, so the lender does not
need to obtain a copy. It has been an entrenched commercial practice for many years for
lenders, particularly banks, to collect these documents. It serves no purpose now to
acquire that information, and if the lender does, it can create additional problems. If the
Overview 151
lender already has these documents, then the significance of knowledge attribution was
discussed in chapter 4 and summarised below.
If a bank insists on a copy of the constitution, for those companies that do not have
one, consider submitting a copy of s 141 (a table that signposts the replaceable rules), or,
for more detail, submit a summary of the content of the replaceable rules, available from
ASIC.20
It is important to emphasise that any information contained in the company’s consti-
tution is not required for any of the specific assumptions in s 129(1)–(7).
The company’s officers
Relying on the company’s officers to bind the company requires the lender to identify the
officers. This enables the lender to know who has the authority to exercise corporate
power and enables the lender to access the assumptions as to officers’ authority and as to
proper execution.
The most reliable source of information on the officers’ identity is the ASIC database.
Discount any risk that the regulator’s information is inaccurate. Exclude any assertions
inconsistent with the ASIC database. If the lender is pressured to accept a copy of a form
to be lodged changing the ASIC database, this cannot be accepted without some evidence
that it had been lodged (such as an ASIC receipt) prior to the execution of the contract.
If the lender deals with someone not named on the ASIC database, or relies on incon-
sistent assertions, then the lender, in any dispute, will have to rely on the doctrine of
apparent authority. This involves proving that the person who made the contrary asser-
tion had the actual authority to do so. This can be difficult. Lenders have not been suc-
cessful, for example, where they relied on the company’s accountant for information,21 or
where they relied on self-proclaimed managing directors.22
The lender does not need to prove that they actually identified the officers before they
rely on the procedural assumptions in the indoor management rule. It is expected that
lenders identify the officers, but it is also expected that once obtained, this information
will not be disregarded.
The form of the contract
The lender is usually in the position to dictate the form of the contract. Loans and secu-
rity transactions are invariably written documents. The practice is usually for them to be
signed under common seal, although it should be noted that since 1998, companies are
not required to have a seal. In lieu of a seal, a contract may still be executed under the
signature of the company’s officers: s 127(1).
Regardless of whether the contract is sealed or not, the lender should first cross-ref-
erence the signatories to the ASIC search information (see the heading “The company’s
officers”, above). Also, the seal should comply with s 123 by accurately recording the
company’s full name, the expression “Australian Company Number” and that number.
20 ASIC’s information sheet on “Replaceable rules outlined” is reproduced in Appendix II. Obtained from the ASIC
website: www.asic.gov.au.
21 National Australia Bank v Sparrow Green Pty Ltd (1999) 17 ACLC 1665.
22 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, Pyramid Building Society v Scorpion Hotels Pty Ltd
(1996) 14 ACLC 679, Sixty-Fourth Throne Pty Ltd v Macquarie Bank Ltd [1998] 3 VR 133 and National Australia
Bank v Sparrow Green Pty Ltd (1999) 17 ACLC 1665.
Corporate purpose
On balance, it is difficult to sustain any counsel other than that the lender must ascertain,
in general terms, the purpose of the loan or the security provision. Such a routine dis-
closure can be seen in a positive light, as the assertions by the borrower at the time of the
loan application may be useful in discounting the effect of lack of corporate purpose.
The lender does not need to prove corporate purpose. However, as a matter of prac-
ticality, evidence of corporate purpose may be useful to have on file, to counter any
attack that may subsequently be made by the company, whether the company is seeking
to avoid the contract, or whether the company is seeking a remedy against the lender for
participating in a breach of the directors’ fiduciary duty (constructive trusts). Nothing in
the Corporations Act prevents the company taking action on the contract, seeking to
avoid the contract, or seeking remedies under constructive trust law. Lack of corporate
purpose is relevant because of:
1. The voidability of contracts in equity: a company can avoid a contract that is
entered into by abuse of power (whether in the sense of directors exceeding the
scope of their authority due to non-corporate purpose, or the sense of breach of
fiduciary duty). The remedy is not sustainable against the lender who acted in
good faith, for value and without notice of the abuse of power. Although equity
uses the term “notice” here, notice at least refers to “constructive knowledge”, in
the sense of what the lender reasonably ought to have known about the transac-
tion. Therefore, the company will be successful in avoiding the contract if it can
prove that the lender ought reasonably to have had knowledge of the lack of cor-
porate purpose.
2. The imposition of constructive trust liability on an lender who receives “trust”
property, with knowledge of an underlying breach of fiduciary duty: liability
under Barnes v Addy23 depends upon the claimant proving that the recipient rea-
sonably ought to have known that the property was transferred to and acquired
by them in breach of the company’s officers’ fiduciary duty. Therefore, the com-
pany will be successful in imposing constructive trust liability on a lender where
it can prove that the lender received the company’s assets in circumstances
where the lender knew or reasonably ought to have had knowledge of directors’
failure to act in the interests of the company as a whole.
3. Even where the indoor management rule may assist the lender to assume corpo-
rate purpose (e.g. s 129(4)), lack of corporate purpose is relevant to the factual
matrix concept. Lack of corporate purpose is one of the factors in the matrix for
the reasonable and prudent banker test that triggers the second exception to the
rule, rendering the specific procedural assumptions unavailable.
The register of charges
The doctrine of constructive notice still applies to charges: s 130(2). For purposes other
than reliance on the rule, (for example, to check whether a prior charge prohibits the cre-
ation of subsequent charges) the lender needs to know the existence and terms of prior
registered charges.
23 (1874) LR 9 Ch App 244.

Overview 153
Knowledge attribution
In corporate lending and finance transactions, the lender itself is usually a company. The
lender’s officers deal face to face with the company. The identity of the lender’s officers
may change, or there may be a hierarchical structure to decision making in relation to the
contract. At various levels, the lender will have acquired information about the corporate
borrower. As constructive (not actual) knowledge of lack of corporate purpose is all that
is required to expose the lender to risk, then the lender invariably has an information
management problem. The significance is that the law will attribute the knowledge col-
lected from disparate sources to the corporate outsider. Once the lender knows certain
information about the company, then this will trigger the reasonable obligation to inquire
further (constructive knowledge) or at least accumulate the factors under the factual
matrix concept that triggers the rule’s exception. Whether they have sought the informa-
tion or not, some facts will come to the attention of the lender from other sources. The
types of information that the lender must not disregard, even where they have not sought
it, it summarised under “Particular situations”, below.
Particular situations
Situations where lenders particularly need to be wary of lack of corporate purpose are
listed below.
1. No liability and charitable companies
As the Corporations Act requires No Liability and charitable companies to have consti-
tutions, it may be argued that the company type constitutes express notice of corporate
purpose. However, more than notice of the mandatory constitution would be required to
prove that the lender had knowledge of the non-corporate purpose in their particular
transaction. Further, for No Liability companies, s 112(5) provides protection, as a con-
tract is not invalid merely because it is outside the company’s mining purposes.
2. Third party security
By the very nature of the third party security transaction, the lender will know that the
borrower and the security provider are not the same person. The third party security is
merely one factor towards lack of corporate purpose, not conclusive. It is suggested that
the lender act a little more proactively in the third party security situation, by at least cor-
roborating the connection between the borrower and the security provider. This corrob-
oration should be from a source other that the borrower or the borrower’s solicitor. Direct
contact with the security provider is a logical step; the response by the security provider
generates evidence of corporate purpose.
3. The group situation
A particular subset of the third party scenario is the intra-group transaction, where the
lender may be more relaxed about corporate purpose, but where some proactive steps are
still recommended. The main recommendation is to corroborate the group structure, from
some independent source. Equiticorp Finance Ltd v Bank of New Zealand24 illustrates
that financing transactions involving genuine corporate groups have sufficient corporate
purpose to take them out of the factual matrix concept. Note that Equiticorp did not
involve a guarantee. ANZ Executors and Trustee Ltd v Qintex Australia Ltd25 illustrates
24 (1993) 11 ACLC 952.

25 [1991] 2 Qd R 360.
that guarantees are considered a gift of assets, and at least in insolvency situations, will
be regarded as an abuse of corporate power by company officers.
4. Directors proffering “other” security for their loans
In another variation on the third party security scenario, the lender’s risk is increased
where the borrower is a director of the third party security provider and the director is
proffering the company’s assets as security for their personal loans. This connection adds
another factor to the factual matrix concept. The lender’s risk increases, because the
transaction alerts suspicion as to lack of corporate purpose in the sense of the breach of
fiduciary duty. Suspicion of a breach of fiduciary duty indicates a risk of voidability of
the contract, a risk of participatory liability and a risk that the rule’s assumptions will not
be available. Due to the increased risk of exposure, it is suggested that the lender adopt
a more inquiring stance. The only real safeguard is for the lender to demand direct evi-
dence of corporate purpose from the third party security provider, such as a board minute
or, more conclusively, a shareholder resolution approving the third party security.
5. Trust assets as security
Trust assets as security are a special case, whether or not the security is a third party secu-
rity. The Corporations Act does not allow the lender to assume that the trustee has the
power to grant security. In this case, there are ultra vires issues regarding the trust, as well
as factors that add to the factual matrix concept that may inhibit access to the assump-
tions as to due execution. In view of the extra risk, the lender needs to make inquiry, pri-
marily perusing a copy of the trust deed.
Conclusion
By analysing the new provisions in detail, the law reform achieves a fair balance between
outsiders’ and stakeholders’ interests. However, the law reform should not be attributed
with any major change from prior legislative attempts. Abuse of corporate authority is
relevant in several respects and short of expressly attacking the general law remedies
available to companies aggrieved by the actions of their officers in exercising power, the
Corporations Act provides useful presumptions to facilitate contract enforcement.
Although statutory intervention in the rules relating to corporate contracts has been
ongoing for the last twenty years, our findings suggest there are matters in the
Corporations Act that could benefit from some reappraisal or clarification. These are:
1. The simplified format of s 125, with the complete absence of any explicit effects
of non-compliance with the corporate constitution, leaves a gap. The
Explanatory Memorandum states that non-compliance with the constitution may
still be asserted or relied upon in other actions under the Act (for example breach
of the statutory duties, oppression remedy and winding up). The Company Law
Review Act 1998 represents a new streamlined drafting style that elsewhere
includes notes and tables signposting to other relevant provisions. Section 125
could have benefited from such a drafting technique.
2. Section 129(4) could benefit from an express description of the “duties”, for
example “fiduciary” or “substantive” to overcome the debate that the assumption
is restricted to some formalistic notion of administrative duties.
Overview 155
3. Section 129 as a whole could be improved by an express reservation that the

assumptions apply, but not in derogation of general law remedies. This drafting
technique is used elsewhere, for example, in directors’ duties (s 185) and
prospectus disclosure liability (s 729(4)). The advantage is that s 129 is signalled
as a rule of procedural regularity only, and does not interfere with the company’s
other remedies in equity, such as to avoid the contract or constructive trusts.
Appendix I
The major statutory provisions relevant to the monograph, before and after the Company
Law Review Act 1998 changes
CORPORATIONS ACT SINCE 1 JULY 1998
SECTION 123 COMPANY MAY HAVE COMMON SEAL

123(1) [Common seal] A company may have a common seal. If a company does have a
common seal, the company must set out on it:
(a) for a company that has its ACN in its name the company’s name; or
(b) otherwise the company’s name, the expression “Australian Company Number” and
the company’s ACN.
Note 1: A company may make contracts and execute documents without using a seal (see
sections 126 and 127).
Note 2: For abbreviations that can be used on a seal, see section 149.
123(2) [Duplicate] A company may have a duplicate common seal. The duplicate must
be a copy of the common seal with the words “duplicate seal”, “share seal” or “certifi-
cate seal” added.
123(3) [Prohibition] A person must not use, or authorise the use of, a seal that purports
to be the common seal of a company or a duplicate if the seal does not comply with the
requirements set out in subsection (1) or (2).
CHAPTER 2B BASIC FEATURES OF A COMPANY

PART 2B.1 COMPANY POWERS AND HOW THEY ARE EXERCISED
SECTION 124 LEGAL CAPACITY AND POWERS OF A COMPANY

124(1) [Capacity and powers] A company has the legal capacity and powers of an indi-
vidual both in and outside this jurisdiction. A company also has all the powers of a body
corporate, including the power to:
(a) issue and cancel shares in the company
(b) issue debentures
(c) grant options over unissued shares in the company
(d) distribute any of the company’s property among the members, in kind or otherwise
(e) give security by charging uncalled capital
(f) grant a floating charge over the company’s property
(g) arrange for the company to be registered or recognised as a body corporate in any
place outside this jurisdiction
(h) do anything that it is authorised to do by any other law (including a law of a foreign
country).
A company limited by guarantee does not have the power to issue shares.
Note:
For a company’s power to issue bonus, partly-paid, preference and redeemable prefer-
ence shares, see section 254A.
124(2) [Company’s interests] A company’s legal capacity to do something is not affect-
ed by the fact that the company’s interests are not, or would not be, served by doing it.
SECTION 125 CONSTITUTION MAY LIMIT POWERS AND SET OUT

OBJECTS
125(1) [Limitations in constitution] If a company has a constitution, it may contain an
express restriction on, or a prohibition of, the company’s exercise of any of its powers.
The exercise of a power by the company is not invalid merely because it is contrary to
an express restriction or prohibition in the company’s constitution.
125(2) [Company’s objects] If a company has a constitution, it may set out the compa-
ny’s objects. An act of the company is not invalid merely because it is contrary to or
beyond any objects in the company’s constitution.
SECTION 126 AGENT EXERCISING A COMPANY’S POWER TO MAKE

CONTRACTS
126(1) [Acting on company’s behalf] A company’s power to make, vary, ratify or dis-
charge a contract may be exercised by an individual acting with the company’s express
or implied authority and on behalf of the company. The power may be exercised without
using a common seal.
126(2) [Non-application] This section does not affect the operation of a law that
requires a particular procedure to be complied with in relation to the contract.
SECTION 127 EXECUTION OF DOCUMENTS (INCLUDING DEEDS) BY

THE COMPANY ITSELF
127(1) [Execution without seal] A company may execute a document without using a
common seal if the document is signed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company sec-
retary – that director.
Note:
If a company executes a document in this way, people will be able to rely on the assump-
tions in subsection 129(5) for dealings in relation to the company.
127(2) [Execution with seal] A company with a common seal may execute a document
if the seal is fixed to the document and the fixing of the seal is witnessed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company sec-
retary that director.
Appendix I 159
Note:
If a company executes a document in this way, people will be able to rely on the assump-
tions in subsection 129(6) for dealings in relation to the company.
127(3) [Execution as a deed] A company may execute a document as a deed if the doc-
ument is expressed to be executed as a deed and is executed in accordance with subsec-
tion (1) or (2).
127(4) [No limitation] This section does not limit the ways in which a company may
execute a document (including a deed).
PART 2B.2 –ASSUMPTIONS PEOPLE DEALING WITH COMPANIES ARE

ENTITLED TO MAKE
SECTION 128 ENTITLEMENT TO MAKE ASSUMPTIONS

128(1) [Entitlement] A person is entitled to make the assumptions in section 129 in rela-
tion to dealings with a company. The company is not entitled to assert in proceedings in
relation to the dealings that any of the assumptions are incorrect.
128(2) [Title to property] A person is entitled to make the assumptions in section 129
in relation to dealings with another person who has, or purports to have, directly or indi-
rectly acquired title to property from a company . The company and the other person are
not entitled to assert in proceedings in relation to the dealings that any of the assumptions
are incorrect.
128(3) [Fraud or forgery] The assumptions may be made even if an officer or agent of
the company acts fraudulently, or forges a document, in connection with the dealings.
128(4) [Knowledge or suspicion] A person is not entitled to make an assumption in sec-
tion 129 if at the time of the dealings they knew or suspected that the assumption was
incorrect.
SECTION 129 ASSUMPTIONS THAT CAN BE MADE UNDER SECTION 128

129(1) Constitution and replaceable rules complied with. A person may assume that
the company’s constitution (if any), and any provisions of this Law that apply to the com-
pany as replaceable rules, have been complied with.
129(2) Director or company secretary. 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
129(3) Officer or agent. A person may assume that anyone who is held out by the com-
pany 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.
129(4) Proper performance of duties. A person may assume that the officers and agents
of the company properly perform their duties to the company.
129(5) Document duly executed without seal. A person may assume that a document
has been duly executed by the company if the document appears to have been signed in
accordance with subsection 127(1). For the purposes of making the assumption, a person
may also assume that anyone who signs the document and states next to their signature
that they are the sole director and sole company secretary of the company occupies both
offices.
129(6) Document duly executed with seal. A person may assume that a document has
been duly executed by the company if:
(a) the company’s common seal appears to have been fixed to the document in accor-
dance with subsection 127(2); and
(b) the fixing of the common seal appears to have been witnessed in accordance with that
subsection.
For the purposes of making the assumption, a person may also assume that anyone who
witnesses the fixing of the common seal and states next to their signature that they are
the sole director and sole company secretary of the company occupies both offices.
129(7) Officer or agent with authority to warrant that document is genuine or true
copy. A person may assume that an officer or agent of the company who has authority to
issue a document or a certified copy of a document on its behalf also has authority to war-
rant that the document is genuine or is a true copy.
129(8) [Application of assumptions] Without limiting the generality of this section, the
assumptions that may be made under this section apply for the purposes of this section.
SECTION 130 INFORMATION AVAILABLE TO THE PUBLIC FROM

ASIC DOES NOT CONSTITUTE CONSTRUCTIVE NOTICE
130(1) [Information available from ASIC] A person is not taken to have information
about a company merely because the information is available to the public from ASIC.
130(2) [Registrable charge] Subsection (1) does not apply in relation to a document that
has been lodged with ASIC to the extent that the document relates to a charge that is reg-
istrable under this Act.
130(3)
(Repealed by No 61 of 1998, Sch 1 (effective 1 July 1998)
PART 2B.4 – REPLACEABLE RULES AND CONSTITUTION
SECTION 134 INTERNAL MANAGEMENT OF COMPANIES

134 A company’s internal management may be governed by provisions of this Act that
apply to the company as replaceable rules, by a constitution or by a combination of both.
Note:
There are additional rules about internal management in ordinary provisions of this Act
and also in the common law.
Appendix I 161
SECTION 135 REPLACEABLE RULES

135(1) Companies to which replaceable rules apply. A section or subsection (except
subsection 129(1), this section and sections 140 and 141) whose heading contains the
words:
(a) replaceable rule applies as a replaceable rule to:
(i) each company that is registered after the commencement of this Part; and
(ii) any company registered before that commencement that repeals its constitution
after that commencement; and
(b) replaceable rule for proprietary companies and mandatory rule for public companies
applies:
(i) as a replaceable rule to any proprietary company that is registered after the com-
mencement of this Part; and
(ii) as a replaceable rule to any company that is registered after that commence-
ment and that changes to a proprietary company (but only while it is a propri-
etary company); and
(iii) as a replaceable rule to any proprietary company registered before that com-
mencement that repeals its constitution after that commencement; and
(iv) as an ordinary provision of this Act to any public company whenever regis-
tered.
The section or subsection does not apply to a proprietary company while the same per-
son is both its sole director and sole shareholder.
Note 1:
See section 224B for the special provisions that apply to a proprietary company while
the same person is both its sole director and sole shareholder.
Note 2:
A company may include in its constitution (by reference or otherwise) a replaceable rule
that does not otherwise apply to it.
135(2) Company’s constitution can displace or modify replaceable rules. A provision
of a section or subsection that applies to a company as a replaceable rule can be displaced
or modified by the company’s constitution.
135(3) Failure to comply with replaceable rules. A failure to comply with the replace-
able rules as they apply to a company is not of itself a contravention of this Act (so the
provisions about criminal liability, civil liability and injunctions do not apply).
Note:
Replaceable rules that apply to a company have effect as a contract (see section 140).
SECTION 136 CONSTITUTION OF A COMPANY

136(1) [Adoption] A company adopts a constitution:
(a) on registration – if each person specified in the application for the company’s regis-
tration as a person who consents to become a member agrees in writing to the terms
of a constitution before the application is lodged; or
(b) after registration – if the company passes a special resolution adopting a constitution.
Note 1:
The memorandum and articles of a company immediately before the commencement of
this Part are taken together to make up the company’s constitution after commencement
(see section 1415).
Note 2:
The Life Insurance Act 1995 has rules about how benefit fund rules become part of a
company’s constitution and about amending those rules. They override this Act.
Consequential amendments to the rest of the company’s constitution can be made under
that Act or this Act. See Subdivision 2 of Division 4 of Part 2A of that Act.
136(2) [Modification or repeal] The company may modify or repeal its constitution, or
a provision of its constitution, by special resolution.
136(3) [Further requirement] The company’s constitution may provide that the special
resolution does not have any effect unless a further requirement specified in the consti-
tution relating to that modification or repeal has been complied with.
136(4) [Modification or repeal of further requirement] Unless the constitution pro-
vides otherwise, the company may modify or repeal a further requirement described in
subsection (3) only if the further requirement is itself complied with.
136(5) [Public company] A public company must lodge with ASIC a copy of a special
resolution adopting, modifying or repealing its constitution within 14 days after it is
passed. The company must also lodge with ASIC within that period:
(a) if the company adopts a constitution – a copy of that constitution; or
(b) if the company modifies its constitution – a copy of that modification.
This also applies to a proprietary company that has applied under Part 2B.7 to change to
a public company, while its application has not yet been determined.
SECTION 137 DATE OF EFFECT OF ADOPTION, MODIFICATION OR

REPEAL OF CONSTITUTION
137(1) [Date of effect] A special resolution adopting, modifying or repealing a compa-
ny’s constitution takes effect:
(a) if no later date is specified in the resolution – on the date on which the resolution is
passed; or
(b) on a later date specified in, or determined in accordance with, the resolution.
Note:
The Life Insurance Act 1995 has rules about when approved benefit fund rules (which
become part of the company’s constitution), and amendments to them, take effect. It also
has rules about when consequential amendments to the rest of the company’s constitu-
tion made under that Act take effect.
They override this Act. See Subdivision 2 of Division 4 of Part 2A of that Act.
137(2) [Change of name etc] Subsection (1) does not apply to the date of effect of a spe-
cial resolution passed in connection with a change of name, change of type or a variation
or cancellation of class rights.
Appendix I 163
Note:
For the date of effect of these changes, see subsection 157(3) (name), subsection 164(5)
(type) and subsection 246D(3) and section 246E (class rights).
SECTION 138 ASIC MAY DIRECT COMPANY TO LODGE CONSOLIDAT-

ED CONSTITUTION
138 ASIC may direct a company to lodge a consolidated copy of its constitution with
ASIC.
SECTION 139 COMPANY MUST SEND COPY OF CONSTITUTION TO

MEMBER
139 A company must send a copy of its constitution to a member of the company with-
in 7 days if the member:
(a) asks the company, in writing, for the copy; and
(b) pays any fee (up to the prescribed amount) required by the company.
SECTION 140 EFFECT OF CONSTITUTION AND REPLACEABLE

RULES
140(1) [Contract] A company’s constitution (if any) and any replaceable rules that apply
to the company have effect as a contract:
(a) between the company and each member; and
(b) between the company and each director and company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and perform the constitution and rules so far
as they apply to that person.
140(2) [Modification of constitution] Unless a member of a company agrees in writing
to be bound, they are not bound by a modification of the constitution made after the date
on which they became a member so far as the modification:
(a) requires the member to take up additional shares; or
(b) increases the member’s liability to contribute to the share capital of, or otherwise to
pay money to, the company; or
(c) imposes or increases restrictions on the right to transfer the shares already held by the
member, unless the modification is made:
(i) in connection with the company’s change from a public company to a propri-
etary company under Part 2B.7; or
(ii) to insert takeover approval provisions of a kind referred to in section 671.
SECTION 198A POWERS OF DIRECTORS (REPLACEABLE RULE —

SEE SECTION 135)
198A(1) [Management of business] The business of a company is to be managed by or
under the direction of the directors.
Note:
See section 198E for special rules about the powers of directors who are the single direc-
tor /shareholder of proprietary companies .
198A(2) [Exercise of powers] The directors may exercise all the powers of the compa-
ny except any powers that this Act or the company’s constitution (if any) requires the
company to exercise in general meeting.
Note:
For example, the directors may issue shares, borrow money and issue debentures .
SECTION 198B NEGOTIABLE INSTRUMENTS (REPLACEABLE RULE—

SEE SECTION 135)
198B(1) [Execution of negotiable instrument] Any 2 directors of a company that has
2 or more directors, or the director of a proprietary company that has only 1 director ,
may sign, draw, accept, endorse or otherwise execute a negotiable instrument.
198B(2) [Directors may determine different execution] The directors may determine
that a negotiable instrument may be signed, drawn, accepted, endorsed or otherwise exe-
cuted in a different way.
SECTION 198C MANAGING DIRECTOR (REPLACEABLE RULE—SEE

SECTION 135)
198C(1) [Conferral of powers] The directors of a company may confer on a managing
director any of the powers that the directors can exercise.
198C(2) [Power can be revoked or varied] The directors may revoke or vary a confer-
ral of powers on the managing director.
SECTION 201M EFFECTIVENESS OF ACTS BY DIRECTORS

201M(1) [Effectiveness of acts]
An act done by a director is effective even if their appointment, or the continuance of
their appointment, is invalid because the company or director did not comply with the
company’s constitution (if any) or any provision of this Act.
201M(2) [Ramifications not addressed] Subsection (1) does not deal with the question
whether an effective act by a director:
(a) binds the company in its dealings with other people; or
(b) makes the company liable to another person.
Note:
The kinds of acts that this section validates are those that are only legally effective if the
person doing them is a director (for example, calling a meeting of the company’s mem-
bers or signing a document to be lodged with ASIC or minutes of a meeting). Sections
128–130 contain rules about the assumptions people are entitled to make when dealing
with a company and its officers.
Appendix I 165
EQUIVALENT PROVISIONS OF THE CORPORATIONS ACT

PRIOR TO 1 JULY 1998
PART 2.3 LEGAL CAPACITY, POWERS AND STATUS

Division 1 Legal capacity and powers
SECTION 159 INTERPRETATION [66B]

159 In sections 160, 161 and 162:
(a) a reference to the doing of an act by a company includes a reference to the making of
an agreement by the company and a reference to a transfer of property to or by the
company; and
(b) a reference to legal capacity includes a reference to powers.
SECTION 160 OBJECT OF SECTIONS 161 AND 162 [66C]

160 The object of sections 161 and 162 is:
(a) to abolish the doctrine of ultra vires in its application to companies; and
(b) without affecting the validity of a company’s dealings with outsiders, to ensure that
the company’s officers and members give effect to provisions of the company’s con-
stitution relating to objects or powers of the company;
and those sections shall be construed, and have effect, accordingly.
SECTION 161 LEGAL CAPACITY [67]

161(1) [Company to have legal capacity of a natural person] A company has, both
within and outside this jurisdiction, the legal capacity of a natural person and, without
limiting the generality of the foregoing, has, both within and outside this jurisdiction,
power:
(a) to issue and allot fully or partly paid shares in the company;
(b) to issue debentures of the company;
(c) to distribute any of the property of the company among the members, in kind or oth-
erwise;
(d) to give security by charging uncalled capital;
(e) to grant a floating charge on property of the company;
(f) to procure the company to be registered or recognised as a body corporate in any place
outside this jurisdiction; and
(g) to do any other act that it is authorised to do by any other law (including a law of a
foreign country).
161(2) [Effect of subsec (1)] Subsection (1) has effect in relation to a company:
(a) subject to this Law (other than subsection 162(2));
(b) in a case where the company’s constitution contains an express or implied restriction
on, or an express or implied prohibition of, the exercise by the company of any of its
powers despite any such restriction or prohibition;
(c) in a case where the memorandum of the company contains a provision stating the
objects of the company despite that fact; and
(d) despite subsection 162(2).

161(3) [Actions not in company’s best interests] The fact that the doing of an act by a
company would not be, or is not, in its best interests does not affect its legal capacity to
do the act.
SECTION 162 RESTRICTIONS ON COMPANIES [68]

162(1) [Restriction or prohibition in constitution] A company’s constitution may con-
tain an express restriction on, or an express prohibition of, the exercise by the company
of a power of the company.
162(2) [Power exercised contrary to restriction or prohibition] Where:
(a) a company exercises a power contrary to an express restriction on, or an express pro-
hibition of, the exercise of that power, being a restriction or prohibition contained in
the company’s constitution; or
(b) the memorandum of a company contains a provision stating the objects of the com-
pany and the company does an act otherwise than in pursuance of those objects;
the company contravenes this subsection.
162(3) [Officer in contravention] An officer of a company who is involved in a con-
travention by the company of subsection (2) contravenes this subsection.
162(4) [Contravention not an offence] A person who contravenes subsection (2) or (3)
is not guilty of an offence.
162(5) [Action not invalid by contravention] Where, by exercising a power as men-
tioned in paragraph (2)(a), or by doing an act as mentioned in paragraph (2)(b), a com-
pany contravenes subsection (2), the exercise of the power, or the act, as the case may
be, is not invalid merely because of the contravention.
162(6) [Act of officer not invalid] An act of an officer of a company is not invalid mere-
ly because, by doing the act, the officer contravenes subsection (3).
162(7) [Reliance on fact of act] The fact that:
(a) by exercising a power as mentioned in paragraph (2)(a), or by doing an act as men-
tioned in paragraph (2)(b), a company contravened, or would contravene, subsection
(2); or
(b) by doing a particular act, an officer of a company contravened, or would contravene,
subsection (3);
may be asserted or relied on only in:
(c) a prosecution of a person for an offence against this Law;
(d) an application for an order under section 230;
(e) an application for an order under section 260;
(f) an application for an injunction under section 1324 to restrain the company from
entering into an agreement;
(g) proceedings (other than an application for an injunction) by the company, or by a
member of the company, against the present or former officers of the company; or
(h) an application by the Commission or by a member of the company for the winding
up of the company.
Appendix I 167
162(8) [Court may order damages] Where, if subsection (7) had not been enacted, the
Court would have power under section 1324 to grant, on the application of a person, an
injunction restraining a company, or an officer of a company, from engaging in particu-
lar conduct constituting a contravention of subsection (2) or (3), as the case may be, the
Court may, on the application of that person, order the first-mentioned company, or the
officer, as the case may be, to pay damages to that person or any other person.
SECTION 164 PERSONS HAVING DEALINGS WITH COMPANIES

ETC.[68A]
164(1) [Certain assumptions not to be denied by companies] A person having deal-
ings with a company is, subject to subsection (4), entitled to make, in relation to those
dealings, the assumptions referred to in subsection (3) and, in any proceedings in rela-
tion to those dealings, any assertion by the company that the matters that the person is so
entitled to assume were not correct shall be disregarded.
164(2) [Persons entitled to assume good title from company] A person having deal-
ings with a person who has acquired or purports to have acquired title to property from
a company (whether directly or indirectly) is, subject to subsection (5), entitled to make,
in relation to the acquisition or purported acquisition of title from the company, the
assumptions referred to in subsection (3) and, in any proceedings in relation to those
dealings, any assertion by the company or by the second-mentioned person that the mat-
ters that the first-mentioned person is so entitled to assume were not correct shall be dis-
regarded.
164(3) [Persons entitled to make certain assumptions when dealing with company]
The assumptions that a person is, by virtue of subsection (1) or (2), entitled to make in
relation to dealings with a company, or in relation to an acquisition or purported acqui-
sition from a company of title to property, as the case may be, are:
(a) that, at all relevant times, the company’s constitution has been complied with;
(b) that a person who appears, from notices or returns lodged under section 242 or 335
or with a person under a previous law corresponding to section 242 or 335, to be a
director or a secretary of the company has been duly appointed and has authority to
exercise the powers and perform the duties customarily exercised or performed by a
director or by a secretary, as the case may be, of a company carrying on a business of
the kind carried on by the company;
(c) that a person who is held out by the company to be an officer or agent of the compa-
ny has been duly appointed and has authority to exercise the powers and perform the
duties customarily exercised or performed by an officer of the kind concerned;
(d) that an officer or agent of the company who has authority to issue a document on
behalf of the company has authority to warrant that the document is genuine and that
an officer or agent of the company who has authority to issue a certified copy of a
document on behalf of the company has authority to warrant that the copy is a true
copy;
(e) that a document has been duly sealed by the company if it bears what appears to be
an impression of the company’s seal and either:
(i) the sealing of the document appears to be witnessed by 2 people, one of whom
may be assumed to be a director of the company because of paragraph (b) or (c)
and the other of whom may be assumed to be a director or a secretary of the
company because of those paragraphs; or
(ii) the sealing of the document appears to be witnessed by one person who may be
assumed to be a director and a secretary of the company because of paragraph
(b) or (c) but only if it is stated next to the signature that the person witnesses
the sealing in the capacity of sole director and sole secretary of the company;
164(4) [Exception where actual knowledge] Despite subsection (1), a person is not
entitled to make an assumption referred to in subsection (3) in relation to dealings with
a company if:
(a) the person has actual knowledge that the matter that, but for this subsection, the per-
son would be entitled to assume is not correct; or
(b) the person’s connection or relationship with the company is such that the person
ought to know that the matter that, but for this subsection, the person would be enti-
tled to assume is not correct;
and where, by virtue of this subsection, a person is not entitled to make a particular
assumption in relation to dealings with a company, subsection (1) has no effect in rela-
tion to any assertion by the company in relation to the assumption.
164(5) [No assumption to good title where actual knowledge to contrary] Despite
subsection (2), a person is not entitled to make an assumption referred to in subsection
(3) in relation to an acquisition or purported acquisition from a company of title to prop-
erty if:
(a) the person has actual knowledge that the matter that, but for this subsection, the per-
son would be entitled to assume is not correct; or
(b) the person’s connection or relationship with the company is such that the person
ought to know that the matter that, but for this subsection, the person would be enti-
tled to assume is not correct;
and where, by virtue of this subsection, a person is not entitled to make a particular
assumption in relation to dealings with a company, subsection (2) has no effect in rela-
tion to any assertion by the company or by any other person in relation to the assump-
tion.
SECTION 166 EFFECT OF FRAUD [68D]

166 Section 164 operates:
(a) to entitle a person to make the assumptions referred to in subsection (3) of that sec-
tion in relation to dealings with a company; or
(b) to entitle a person to make the assumptions referred to in subsection (3) of that sec-
tion in relation to an acquisition or purported acquisition (whether direct or indirect)
of title to property from a company;
even if a person referred to in paragraph 164(3)(b), (c) or (e) or an officer, agent or
employee of the company referred to in paragraph 164(3)(d) or (f):
(c) has acted or is acting fraudulently in relation to the dealings, or in relation to the
acquisition or purported acquisition of title to property from the company, as the case
may be; or
Appendix I 169
(d) has forged a document that appears to have been sealed on behalf of the company;
unless the person referred to in paragraph (a) or (b) of this section has actual knowl-
edge that the person referred to in paragraph 164(3)(b), (c) or (e), or the officer, agent
or employee of the company referred to in paragraph 164(3)(d) or (f), has acted or is
acting fraudulently, or has forged a document, as mentioned in paragraph (c) or (d) of
this section.
SECTION 125 ARTICLES OF ASSOCIATION [74]

125(1) [Articles to be registered] There may, in the case of a company limited by shares
(other than a Table A proprietary company) or a no liability company, and there shall, in
the case of a company limited by guarantee, a company limited both by shares and by
guarantee or an unlimited company, be registered with the memorandum, articles signed
by the subscribers to the memorandum prescribing regulations for the company.
125(2) [Subscribers may sign articles] At any time before the registration under this
Division of a Table A proprietary company, the subscribers to the company’s memoran-
dum may sign articles prescribing regulations for the company.
125(3) [Table A proprietary companies] Where, as at the registration under this
Division of a Table A proprietary company, no articles prescribing regulations for the
company have been signed under subsection (2), the company may, at any time after that
registration, make such articles by special resolution.
125(4) [Articles to be printed, etc.] Articles shall be:
(a) printed;
(b) divided into numbered paragraphs; and
(c) unless made under subsection (3) signed by each subscriber to the memorandum in
the presence of at least one witness (not being another subscriber).
125(5) [Witness] A witness to a signature to the articles of a subscriber to the memoran-
dum shall attest the signature and add the address of the witness.
125(6) [Articles to state share capital] In the case of an unlimited company that has a
share capital, the articles shall state the amount of share capital with which the company
proposes to be registered and the division of that share capital into shares of a fixed
amount.
SECTION 172 ALTERATIONS OF MEMORANDUM [73]

172(1) [Alteration by special resolution] Subject to this section, a company may, by
special resolution, alter the memorandum of the company:
(a) if the memorandum contains a provision stating the objects of the company by alter-
ing or omitting that provision;
(b) if the memorandum does not contain a provision stating the objects of the company
by inserting in the memorandum a provision stating the objects of the company; or
(c) in any case by altering, omitting or inserting any other provision with respect to the
objects of the company or any provision with respect to the powers of the company.
172(2) [Provision which could be in articles] Subject to this section, subsection 180(3)
and section 260, if a provision of the memorandum of a company could lawfully have
been contained in the articles of the company, the company may, by special resolution,
alter the memorandum:
(a) unless the memorandum prohibits the alteration of that provision by altering that pro-
vision; or
(b) unless the memorandum prohibits the omission of that provision by omitting that pro-
vision.
172(3) [Restriction on effect of special resolution] The memorandum of a company
may provide that a special resolution altering, adding to or omitting a provision con-
tained in the memorandum, being a provision that could lawfully have been contained in
the articles of the company, does not have any effect unless and until a further require-
ment specified in the memorandum has been complied with.
172(4) [Examples of requirement] Without limiting the generality of subsection (3), the
further requirement referred to in that subsection may be a requirement:
(a) that the relevant special resolution be passed by a majority consisting of a greater
number of members than is required to constitute the resolution as a special resolu-
tion;
(b) that the consent or approval of a particular person be obtained; or
(c) that a particular condition be fulfilled.
172(5) [Particular class rights] Nothing in subsection (2) permits the alteration or omis-
sion of a provision of the memorandum of a company that relates to rights to which only
members in a particular class of members are entitled.
172(6) [Persons entitled to notice] Notice of a general meeting specifying the intention
to propose, as a special resolution, a resolution for the alteration of the memorandum of
a company, being an alteration provided for by subsection (1), shall be given:
(a) to all members;
(b) to all trustees for debenture holders; and
(c) if there are no trustees for, or for a particular class of, debenture holders to all deben-
ture holders, or all debenture holders in that class, as the case may be, whose names
are, at the time of the posting of the notice, known to the company.
172(7) [Court may dispense with notice] The Court may, in the case of any person or
class of persons, for such reasons as seem sufficient to the Court, dispense with the notice
referred to in subsection (6).
172(8) [Cancellation of alteration] If an application for the cancellation of an alteration
of the memorandum of a company is made to the Court in accordance with this section
by:
(a) in the case of an alteration provided for by subsection (1) the holders of not less than
10% in nominal value of the company’s debentures; or
(b) in any case the holders of not less, in the aggregate, than 10% in nominal value of the
company’s issued share capital or any class of that capital or, if the company is not
limited by shares, not less than 10% of the company’s members;
the alteration does not have any effect except so far as it is confirmed by the Court.
Appendix I 171
172(9) [Application to be made within 21 days] The application shall be made within
21 days after the date on which the resolution altering the memorandum of the company
was passed, and may be made, on behalf of the persons entitled to make the application,
by such one or more of their number as they appoint in writing for the purpose.
172(10) [Power of Court] On the application, the Court shall have regard to the rights
and interests of the members of the company or of any class of them as well as to the
rights and interests of the creditors and may do any or all of the following:
(a) adjourn the proceedings so that an arrangement may be made to the satisfaction of the
Court for the purchase (otherwise than by the company or a subsidiary of the compa-
ny) of the interests of dissentient members;
(b) give directions and make orders for facilitating or carrying into effect any such
arrangement;
(c) make an order cancelling the alteration or confirming the alteration either wholly or
in part and on specified terms and conditions.
172(11) [Interpretation] A reference in this section to a provision of the memorandum
of a company that could lawfully have been contained in the articles of the company is,
in the case of a memorandum of a Division 2 or 3 company, a reference to a provision of
the memorandum of the company that could lawfully have been contained in the articles
of the company if the memorandum and articles of the company had originally been reg-
istered under this Law.
SECTION 173 LODGING, AND TAKING EFFECT, OF RESOLUTIONS

PASSED UNDER SECTION 172 [73]
173(1) [Overriding provision] Where a resolution altering a company’s memorandum
as provided by subsection 172(1) or (2) is passed, this section has effect despite any other
provision of this Law.
173(2) [Lodgment of resolution] If this Law requires a copy of the resolution to be
lodged, the company shall:
(a) if no application is made to the Court in accordance with section 172 lodge such a
copy within 14 days after the end of the period of 21 days after the day on which the
resolution is passed; or
(b) otherwise lodge such a copy, together with an office copy of the order of the Court,
within 14 days after:
(i) the end of that period of 21 days; or
(ii) the Court determines the application;
whichever happens later.
173(3) [When resolution takes effect] Otherwise, the resolution shall not take effect
before the end of 21 days after the day on which the resolution is passed.
SECTION 174 EFFECT OF MEMORANDUMS OF CERTAIN DIVISION 2

COMPANIES
174(1) [Definitions] In this section:
“entrenchable provision” , in relation to the memorandum of a body corporate, means a
provision of the memorandum that could lawfully have been contained in the body’s arti-
cles;
“translation day” , in relation to a company, means the prescribed day.
174(2) [Alteration of entrenchable provisions] Where, throughout the period begin-
ning immediately before a Division 2 company’s translation day and ending immediate-
ly before its registration day, the company’s memorandum:
(a) prohibited the alteration of an entrenchable provision; or
(b) provided as mentioned in a previous law corresponding to subsection 172(3) in
respect of a special resolution altering or adding to an entrenchable provision;
then, so long as it continues so to prohibit, or so to provide, the company’s memorandum
is taken:
(c) also to prohibit the omission of the entrenchable provision; or
(d) also to provide the same effect in respect of a special resolution omitting the entrench-
able provision;
as the case may be.
174(3) [Effect of subsection] Subsection (2) has effect in relation to a memorandum
except so far as the memorandum expressly provides to the contrary.
SECTION 175 ARTICLES ADOPTING TABLE A OR B [75]

175(1) [Adoption] Articles may:
(a) in the case of a company other than a no liability company adopt all or any of the reg-
ulations contained in Table A; or
(b) in the case of a no liability company adopt all or any of the regulations contained in
Table B.
175(2) [Company limited by shares] Where a Division 1 company is a company limit-
ed by shares, the regulations contained in Table A, except in so far as they are excluded
or modified by articles of the company that are registered, or signed or made, as the case
requires, under section 125, shall be, so far as applicable, the company’s articles in the
same manner, and to the same extent, as if they were contained in registered articles.
175(3) [Regulations deemed to be included in Articles] Except in so far as the regula-
tions contained in Table A are excluded or modified by, or are otherwise inconsistent
with, provisions that are proved for the purposes of a proceeding in an Australian court
to be included (otherwise than by virtue of subsection (2)) at a particular time in the arti-
cles of a Table A proprietary company, those regulations shall be deemed for the purpos-
es of that proceeding to have been included in the company’s articles at that time.
175(4) [No liability company] In the case of a Division 1 company that is a no liability
company, if articles are not registered, or if articles are registered then in so far as they
do not exclude or modify the regulations contained in Table B, those regulations shall, so
far as applicable, be the articles of the company in the same manner, and to the same
extent, as if they were contained in registered articles.
Appendix I 173
SECTION 176 ALTERATION OF ARTICLES

[76]
176(1) [Alteration by special resolution] Subject to this Law, a company may by spe-
cial resolution alter or add to its articles.
176(2) [Restrictions on effect] The memorandum of a company may provide that a spe-
cial resolution altering or adding to the articles of the company does not have any effect
unless and until a further requirement specified in the memorandum has been complied
with.
176(3) [Examples of requirements] Without limiting the generality of subsection (2),
the further requirement referred to in that subsection may be a requirement:
(a) that the relevant special resolution be passed by a majority consisting of a greater
number of members than is required to constitute the resolution as a special resolu-
tion;
(b) that the consent or approval of a particular person be obtained; or
(c) that a particular condition be fulfilled.
176(4) [Validity of addition or alteration] Subject to this Law, an alteration or addition
so made in the articles is, on and from the date of the special resolution or such later date
as is specified in the resolution, as valid as if originally contained in the articles and is
subject in like manner to alteration by special resolution.
176(5) [Power to amend by adoption of Table A or Table B] Subject to this section, a
company has the power, and shall be deemed always to have had the power, to amend its
articles:
(a) unless it is a no liability company by the adoption of all or any of the regulations con-
tained in Table A; or
(b) if it is a no liability company by the adoption of all or any of the regulations contained
in Table B;
by reference only to the regulations in the Table or to the numbers of particular regula-
tions contained in the Table, without being required in the special resolution effecting the
amendment to set out the text of the regulations so adopted.
SECTION 180 OPERATION OF MEMORANDUM AND ARTICLES

[78]
180(1) [Memorandum and articles in contract] Subject to this Law, the constitution of
a company has the effect of a contract under seal:
(a) between the company and each member;
(b) between the company and each eligible officer; and
(c) between a member and each other member;
under which each of the above-mentioned persons agrees to observe and perform the pro-
visions of the constitution as in force for the time being so far as those provisions are
applicable to that person.
180(2) [Money payable by member of debt] Subject to section 385, any money payable
by a member of a company to the company under the company’s constitution is a debt
from the member to the company and is of the nature of a specialty debt.
180(3) [Member not bound by alteration] A member of a company, unless either

before or after the alteration is made the member agrees in writing to be bound by it, is
not bound by an alteration of the constitution made after the date on which the member
became a member so far as the alteration:
(a) requires the member to take or subscribe for more shares than the number held by the
member at the date of the alteration;
(b) in any way increases the member’s liability as at the date of the alteration to con-
tribute to the share capital of, or otherwise to pay money to, the company; or
(c) increases, or imposes, restrictions on the right to transfer the shares held by the mem-
ber at the date of the alteration.
180(4)
(Omitted by No 115 of 1995, Sch 4 (effective 9 December 1995).)
180(5) [“eligible officer”] In this section, “eligible officer”, in relation to a company,
means a director or a secretary of the company.
SECTION 182 CONFIRMATION OF CONTRACTS AND AUTHENTICA-

TION AND EXECUTION OF DOCUMENTS
182(1) [Power to make, vary or discharge contracts] So far as concerns the formali-
ties of making, varying or discharging a contract, a person acting under the express or
implied authority of a company may make, vary or discharge a contract in the name of,
or on behalf of, the company in the same manner as if that contract were made, varied or
discharged by a natural person.
182(2) [Effectiveness] The making, variation or discharging of a contract in accordance
with subsection (1) is effectual in law and binds the company and other parties to the con-
tract.
182(3) [Affixation of common seal] A contract or other document executed, or purport-
ing to have been executed, under the common seal of a company is not invalid merely
because a person attesting the affixing of the common seal was in any way, whether
directly or indirectly, interested in that contract or other document or in the matter to
which that contract or other document relates.
182(4) [Use of common seal] This section does not prevent a company from making,
varying or discharging a contract under its common seal.
182(5) [Operation of section] This section does not apply in relation to a Division 2, 3
or 4 company in relation to the making, variation or discharging of a contract before the
company’s registration day, but applies otherwise in relation to such a company whether
it gives its authority before, on or after that day.
182(6) [No effect on law requiring consent] This section does not affect the operation
of a law that requires some consent or sanction to be obtained, or some procedure to be
complied with, in relation to the making, variation or discharge of a contract.
182(7) [Authentication by signature of officer] A document or proceeding requiring
authentication by a company may be authenticated by the signature of an officer of the
company and need not be authenticated under the common seal of the company.
Appendix I 175
182(8) [Appointment of agent or attorney] A company may, by writing under its com-
mon seal, empower a person, either generally or in respect of a specified matter or speci-
fied matters, as its agent or attorney to execute deeds on its behalf, and a deed signed by
such an agent or attorney on behalf of the company and under his, her or its seal or, sub-
ject to subsections (10) and (11), under the appropriate official seal of the company, binds
the company and has the same effect as if it were under the common seal of the company.
182(9) [Duration of authority] The authority of an agent or attorney empowered under
subsection (8), as between the company and a person dealing with him, her or it, contin-
ues during the period (if any) mentioned in the instrument conferring the authority or, if
no period is so mentioned, until notice of the revocation or termination of his, her or its
authority has been given to the person dealing with him, her or it.
182(10) [Official seals] A company may, if authorised by its articles, have for use in
place of its common seal outside the State or Territory where its common seal is kept one
or more official seals, each of which shall be a facsimile of the common seal of the com-
pany with the addition on its face of the name of every place where it is to be used.
182(11) [Use of official seals] The person affixing such an official seal shall, in writing
signed by the person, certify on the instrument to which it is affixed the date on which
and the place at which it is affixed.
182(12) [Deemed sealed with common seal] A document sealed with such an official
seal shall be deemed to be sealed with the common seal of the company.
SECTION 219 PUBLICATION OF COMPANY’S NAME AND REGISTRA-

TION NUMBER
219(1) [Company name and number on seal] A company shall set out in legible char-
acters on its common seal, and on each of its other seals, its name followed by, unless its
registration number is part of its name, the expression “Australian Company Number”
and its registration number.
219(2) [Name on documents] A company shall set out its name, in legible characters,
on:
(a) every public document of the company that is signed, issued or published; and
(b) every eligible negotiable instrument of the company that is signed or issued.
219(2A) [Name and number on documents to be lodged] On every public document of a
company that, when it is signed, issued or published:
(a) is intended to be lodged; or
(b) is required by or under this Law or the ASC Law to be lodged;
the company must, unless its registration number is part of its name, set out in legi-
ble characters, after the company’s name where it first appears, the expression
“Australian Company Number” and the company’s registration number.
219(3) [Number on documents] On:
(a) every public document of a company that is signed, issued or published; and
(b) every eligible negotiable instrument of a company that is signed or issued;
after 31 December 1991, the company must, unless its registration number is part of
its name, set out in legible characters, after the company’s name where it first appears,
the expression “Australian Company Number” and the company’s registration number.
219(3A) [Limited effect] Subsection (3) has effect subject to Division 2 of Part 4.2.
219(4) [Permitted abbreviations] A company may comply with subsection (1), (2),
(2A) or (3) by setting out:
(a) the abbreviation “Aust.” instead of the word “Australian”;
(b) the abbreviation “Co.” instead of the word “Company”;
(c) the abbreviation “No.” instead of the word “Number”; or
(d) the abbreviation “A.C.N.” instead of the expression “Australian Company Number”.
219(5) [Prohibition against non-compliance of subsec (1), (2), (2A) or (3)] A person
(whether or not an officer of the company) shall not, on a company’s behalf:
(a) use, or authorise the use of, a seal that purports to be a seal of the company but con-
travenes subsection (1); or
(b) issue, sign or publish a public document of the company that contravenes subsection
(2), (2A) or (3).
219(6) [Prohibition against non-compliance of subsec (2)] A person (whether an offi-
cer of the company or not) shall not sign or issue, or authorise to be signed or issued, on
a company’s behalf, an eligible negotiable instrument of the company that contravenes
subsection (2).
219(7) [Person in contravention liable] A person who contravenes subsection (6) is
liable to the holder of the eligible negotiable instrument for the amount due on it unless
that amount is paid by the company.
219(8) [Signs] A company shall paint or affix and keep painted or affixed, in a conspic-
uous position and in letters easily legible, on the outside of its registered office and of
every office and place at which its business is carried on and that is open and accessible
to the public:
(a) its name; and
(b) in the case of its registered office the expression “Registered Office”.
SECTION 226 VALIDITY OF ACTS OF DIRECTORS AND SECRETARIES

[224]
226(1) [Defect in appointment or qualification] The acts of a director or secretary of a
company are valid notwithstanding any defect that may afterwards be discovered in his
or her appointment or qualification.
226(2) [Vacation of office] Where a person whose office as director of a company is
vacated pursuant to subsection 224(1) or was vacated pursuant to a corresponding previ-
ous law purports to do an act as a director of the company, that act is as valid, in relation
to a person dealing with the company in good faith and for value and without actual
knowledge of the matter because of which the office of the first-mentioned person was
vacated, as if that office had not been vacated.
Appendix II
The summary of the replaceable rules, prepared by ASIC, that companies without a con-
stitution may download and use as their “hardcopy” constitution.
Source: www.asic.gov.au/info4companies.htm
Refer: chapter 5
Replaceable rules outlined

A company’s internal management may be governed by provisions of the Corporations
Act 2001 (the Act) that apply to the company as replaceable rules, by a constitution or
by a combination of both. There are additional requirements concerning internal man-
agement contained in ordinary provisions of this Act and also in common law.
Replaceable rules apply to companies registered after the commencement of Section
135(1) and to companies registered prior to the commencement that repeal their consti-
tution after 1 July 1998.
A company may modify some or all of the replaceable rules by adopting a constitution.
(See also the Information Sheet ‘Constitution and Replaceable Rules’ for more informa-
tion on the actual operation of these concepts.)
Replaceable rules do not apply to sole member/director companies if the member/direc-
tor is the same person. Please see section –198E, 201F, 202C, for special provisions that
apply to these companies.
This information sheet is to be used as a guide only. You should consult the Act and
Corporations Regulations 2001 (the Regulations) on any specific matter of law.
Please note: The text quoted for each section in this information sheet is only that part of
the section which is the replaceable rule. The full section needs to be read in some
instances as other conditions may need to be met subsequently to following a replaceable
rule.
The following table sets out the provisions of the Act that apply as replaceable rules
(Section 141) as at the date of this Information Sheet. Readers should note that the Act
outlining these rules may be altered and companies should always refer to a current ver-
sion of the Act for a definitive reference to the replaceable rules at any given time.
Provisions that apply Section No
as replaceable rules
Officers and Employees
1 Director interested in contract 194 If a director of a proprietary company has a
with proprietary company material personal interest in a matter that relates to
the affairs of the company and:
(a) under section 191 the director discloses the
nature and extent of the interests and its relation to
the affairs of the company at a meeting of the direc-
tors; or

(b) the interest is one that does not need to be dis-
closed under section 191; then
(c) the director may vote on matters that relate to
the interest; and
(d) any transaction that relate to the interest may
proceed; and
(e) the director may retain benefits under the trans-
action even though the director has the interest; and
(f) the company cannot avoid the transaction merely
because of the existence of the interest.
If disclosure is required under section 191, para-
graph (e) and (f) apply only if the disclosure is
made before the transaction is entered into.
Note: A Director may need to give notice to the
other directors if the director has material personal
interest in a matter relating to the affairs of the com-
pany (see section 191)
2 Powers of directors 198A The business of the company is to be man-

aged by or under the direction of the directors. The
directors may exercise all the powers of the compa-
ny except any powers that this Law or the compa-
ny’s constitution (if any) requires the company to
exercise in a general meeting. For example, the
company may issue shares, borrow money and issue
debentures.
3 Executing negotiable 198B Any two directors of a company that has two
instruments or more directors, or the director of a proprietary
company that has only one director, may sign, draw,
accept, endorse or otherwise execute a negotiable
instrument. The directors may determine that a
negotiable instrument may be signed, drawn,
accepted, endorsed or otherwise executed in a dif-
ferent way.
4 Managing director 198C The directors of a company may confer on a
managing director any of the powers that the direc-
tors can exercise. The directors may revoke or vary
a conferral of powers on the managing director.
5 Company may appoint a 201G A company may appoint a person as a director

Director by resolution passed in general meeting
Appendix II 179

6 Directors may appoint other 201H The directors of a company may appoint a
directors person as a director. A director can be appointed as
a director in order to make up a quorum for a direc-
tors’ meeting even if the total number of directors of
the company is not enough to make up that quorum.
The appointment must be confirmed by resolution
within 2 month after the appointment by a propri-
etary company, and at the next AGM for public
company.
7 Appointment of managing 201J The directors of a company may appoint 1 or

directors more of themselves to the office of managing direc-
tor of the company for the period, and on the terms
(including as to remuneration), as the directors see
fit.
8 Alternate directors 201K With the other directors’ approval, a director

may appoint an alternate to exercise some or all of
the director’s powers for a specified period. The
appointment and terms of appointment must be noti-
fied to ASIC (refer to s.205B)
9 Remuneration of directors 202A The directors of a company are to be paid the

remuneration that the company determines by reso-
lution. The company may also pay the directors’
travelling and other expenses that they incur in
attending meetings and in conjunction with the
company’s business. (Refer also to chapter 2E for
public companies)
10 Director may resign by giving 203A A director of a company may resign as a

written notice to company director of the company by giving a written notice
of resignation to the company at its registered
office.
11 Proprietary company may 203C A proprietary company may by resolution

remove director remove a director from office and appoint another
person as a director instead.
12 Termination of appointment 203F A person ceases to be managing director if

of managing director they cease to be a director. The directors may
revoke or vary an appointment of a managing direc-
tor.

13 Terms of office determined 204F A secretary holds office on the terms and
by directors conditions (including the remuneration) that the
directors determine
Inspection of books
14 Company or directors may 247D The directors of a company, or the company
allow member to inspect by a resolution passed at a general meeting, may
books authorise a member to inspect the books of the com-
pany.
Directors’ Meetings
15 Circulating resolutions 248A The directors of a company may pass a reso-
lution without a directors’ meeting being held if all
the directors entitled to vote on the resolution sign a
document containing a statement that they are in
favour of the resolution set out in the document.
Separate copies of a document may be used for
signing by directors if the wording of the resolution
and statement is identical in each copy and the reso-
lution is passed when the last director signs.
16 Calling directors’ meetings 248C A directors’ meeting may be called by a direc-

tor giving reasonable notice individually to every
other director. A director who has appointed an
alternate director may ask for the notice to be sent
to the alternate director
17 Chairing directors’ meetings 248E The directors may elect a director to chair
their meetings. The directors may determine the
period for which the director is to be the chair. The
directors must elect a director present to chair a
meeting or part of it, if:
a) a director has not already been elected to chair
the meetings; and
b) a previously elected chair is not available or
declines to act, for the meeting or the part of the
meeting.
Appendix II 181

18 Quorum at directors’ meetings 248F Unless the directors determine otherwise, the
quorum for a directors’ meeting is two directors and
the quorum must be present at all times.
For resolutions of single director proprietary compa-
nies without meetings see S 248B
For special quorum rules for public companies, see
section 195
19 Passing of directors’ 248G A resolution of the directors must be passed

resolutions by a majority of the votes cast by directors entitled
to vote on the resolution. The chair has the casting
vote, if necessary, in addition to any vote they have
in their capacity as a director.
Meetings of Members
20 Calling of meetings of 249C A director may call a meeting of the members
members by a director
21 Notice to joint members 249J(2) Notice to joint members must be given to

the joint member named first in the register of
members.
22 When notice by post or fax 249J(4) A notice of meeting sent by post is taken to
is given be given three days after it is posted. A notice of
meeting sent by fax, or other electronic means, is
taken to be given on the business day after it is sent.
23 Notice of adjourned meetings 249M When a meeting is adjourned, new notice of

the resumed meeting must be given if the meeting is
adjourned for one month or more
24 Quorum 249T The quorum for a meeting of the company’s

members is two members and the quorum must be
present at all times during the meeting.
25 Chairing meetings of members 249U The directors may elect an individual to chair
meetings of the company’s members
26 Business at adjourned meetings 249W(2) Only unfinished business is to be transact-

ed at a meeting resumed after an adjournment.

27 Who can appoint a proxy? 249X A member of a company who is entitled to
(proprietary co. only) attend and cast a vote at a meeting of the company’s
members may appoint a person as the member’s
proxy to attend and vote for the member at the
meeting.
28 Proxy vote valid even if 250C(2) Unless the company has received written
member dies, revokes notice of the matter before the start or resumption
appointment etc of the meeting at which a proxy votes, a vote cast
by the proxy will be valid even if, before the proxy
votes:
a) the appointing member dies; or
b) the member is mentally incapacitated; or
c) the member revokes the proxy’s appointment; or
d) the member revokes the authority under which
the proxy was appointed by a third party; or
e) the member transfers the shares in respect of
which the proxy was given.
A proxy’s authority to vote is suspended while the
member is present at the meeting (see subsection
249Y(3).)
29 How many votes a member has 250E Subject to any rights or restrictions attached
to any class of shares, at a meeting of members of a
company with a share capital.
a) on a show of hands each member has one vote;
and
b) on a poll each member has one vote for each
share they hold.
30 Jointly held shares 250F If a share is held jointly and more than one
member votes in respect of that share, only the vote
of the member whose name appears first in the reg-
ister of members counts.
31 Objection to right to vote 250G A challenge to a right to vote at a meeting of

a company’s members may only be made at the
meeting and must be determined by the chair,
whose decision is final.
Appendix II 183

32 How voting is carried out 250J A resolution put to the vote at a meeting of a
company’s members must be decided on a show of
hands unless a poll is demanded. Before a vote is
taken the chair must inform the meeting whether
any proxy votes have been received and how the
proxy vote must be cast.
On a show of hands, a declaration by the chair is
conclusive evidence of the result provided that the
declaration reflects the show of hands and the votes
the proxies received. Neither the chair or the min-
utes need to state the number or proportion of the
votes recorded in favour or against.
33 When and how polls must 250M A poll demanded on a matter other than the
be taken election of a chair or the question of an adjournment
must be taken when and in the manner the chair
directs. A poll on the election of a chair or on the
question of an adjournment must be taken immedi-
ately.
Shares
34 Pre-emption for existing 254D Before issuing shares of a particular class, the
shareholders on issue of directors of the proprietary company must offer
shares in proprietary company them to the existing holders of the shares of that
class. As far as practicable, the number of shares
offered to each shareholder must be in proportion to
the number of shares of that class that they already
hold (subsection 1)
To make the offer, the directors must give the share-
holders a statement setting out the terms of the offer
including the number of shares offered and the peri-
od for which it will remain open.
The directors may issue shares not taken up under
the offer under subsection 1 as they see fit.
The company may by resolution passed at a general
meeting authorise the directors to make a particular
issue of shares without complying with subsection 1.
35 Other provisions about paying 254U The directors may determine that a dividend
dividends is payable and fix the amount, the time for payment
and the method of payment.
The methods of payment may include the payment
of cash, the issue of shares, the grant of options and
the transfer of assets.

36 Dividend rights for shares in 254W(2) Subject to the terms on which shares in a
proprietary companies proprietary company are on issue, the directors may
pay dividends as they see fit.
Transfer of shares
37 Transmission of shares on 1091AA If a shareholder who does not own shares
death jointly dies, the company will recognise only the
personal representative of the deceased shareholder
as being entitled to the deceased shareholder’s inter-
est in the shares.
38 Transmission of shares on 1091AB If a person entitled to shares because of the

bankruptcy bankruptcy of a shareholder gives the directors the
information they reasonably require to establish the
persons entitlements
39 Transmissions of shares on 1091B If a person entitled to shares because of the

mental incapacity mental incapacity of a shareholder gives the direc-
tors the information they reasonably require to
establish the person’s entitlement to be registered as
the holder of the shares
a) the person may:
(i) by giving a written and signed notice to the com-
pany, elect to be registered as the holder of the
shares; or
(ii) by giving a completed transfer form to the com-
pany, transfer the shares to another person; and
b) the person is entitled, whether or not registered
as the holder of the shares, to the same rights as the
shareholder.
40 Registration of transfers 1091D A person transferring shares remains the
holder of the shares until the transfer is registered
and the name of the person to whom they are being
transferred is entered in the register of members in
respect of the shares.
41 Additional general discretion 1091E The directors of a proprietary company may

for directors of proprietary refuse to register a transfer of shares in the company
companies to refuse to for any reason.
register transfers
Updated: 16/07/2001
Bibliography
Journal Articles, Essays and Conference Papers
Armstrong F, ‘Third Party Mortgages – Their Enforceability In The Absence Of A
Solicitors Certificate’ paper presented at QLS Banking and Finance Law Intensive,
Brisbane, October 2000
Austin R, ‘Constructive Trusts’ in P Finn (ed) Essays in Equity (1985) Sydney: Law
Book Company
Austin RP, ‘The Melting Down of the Remedial Trust’ (1988) 11 New South Wales Law
Journal 66.
Barkehall S Thomas, ‘Knowing Receipt and Knowing Assistance: Where do we Stand?’
(1997) 20 University of New South Wales Law Journal 1
Baxt R, ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of
Ultra Vires’ (1991) 19 Australian Business Law Review 147
Baxt R, ‘Informality may be a Good Thing but it may be Very Dangerous’ (1996) 24
Australian Business Law Review 463
Baxt R, ‘Ultra Vires – Has it Been Revived?’ (1991) 1 Company and Securities Law
Journal 101
Baxt R, ‘Should Third Parties Have to Inquire About the Ability of Directors to bind
Their Company?’ (1997) 15 Company and Securities Law Journal 434
Baxt R, ‘Just When You Thought it was Safe to Deal With Third Parties’ (1996) 14
Company and Securities Law Journal 362
Baxter C, ‘Ultra Vires and Agency Untwined’ (1970) 28 Cambridge Law Journal 280
Bird J, ‘The Duty of Care and the CLERP Reforms’ (1999) 17 Company and Securities
Law Journal 141
Brindle M and R Hooley, ‘Does Constructive Knowledge Make a Constructive
Trustee?’(1987) 61 Australian Law Journal 281
Brown G, ‘Abuse of Power by Trustees in Financial Transactions’ paper presented at
QLS Securities VII Seminar, Coolum, October 1993.
Bryan M, ‘Cleaning Up After Breaches of Fiduciary Duty – the Liability of Banks and
Other Financial Institutions as Constructive Trustees’ (1995) 7 Bond Law Review 67
Cain T, ‘The Rule in Royal British Bank v Turquand in 1990’ (1990) 2 Bond Law Review
152
Cain T, ‘Ultra Vires in 1984’ (1985) 1 Qld Institute of Technology Law Journal 31
Campbell I, ‘Contracts With Companies’ (1959) 75 Law Quarterly Review 469
Campbell I, ‘Contracts with Companies’ (1960) 76 Law Quarterly Review 115
Carroll R, ‘Duly Sealed Documents and Knowledge of Directors’ Breach of Fiduciary
Duty’ (1993) 23 Western Australian Law Review 200
Carroll R, ‘Proper Performance of Duties by Company Officers: The Statutory
Assumption in s 164(3)(f)’ (1995) 69 Australian Law Journal 200
Carroll R, ‘Third Party Liability for Corporate Activity: Recent Developments’ (1996) 26
Western Australian Law Review 332
Cooper GD and DB Robertson, ‘Subsidiary Companies’ Guarantees – Their Continued
Existence’ (1990) 1 Journal of Banking and Finance Law and Practice 284
de Jersey P, ‘A Question of Notice’, Paper presented at QLS Securities Intensive V
Seminar, Royal Pines, Gold Coast, October 1991, 115–136
de Jersey P, ‘Lending to Company Groups: The problems of Corporate Power and
Directors’ Authority’, Paper presented at the 9th Annual Banking Law and Practice
Conference, Gold Coast, April 1992
de Jersey P, ‘Securities Case Law – The Year in Review’, Paper presented at QLS
Banking and Finance Law Intensive Seminar, Brisbane, October 2000
Dharmananda K, ‘Ultra Vires Goes Ultra Violet (1997) 71 Australian Law Journal 622
Dodds J, ‘The New Constructive Trust: An Analysis of its Nature and Scope’ (1988) 16
Melbourne University Law Review 482
Duong J, ‘Ought to Have Known it Was Put on Inquiry: Section 164(4)(b) of the
Corporations Law’ (1996) 7 Journal of Banking and Finance Law and Practice 245
Egert G, ‘The Doctrine of Ultra Vires – Recent Developments’ (1986) 2 Queensland
University of Technology Law Journal 73
Finn P, ‘The Liability of Third Parties for Knowing Receipt or Knowing Assistance’ in
D Waters (ed), Equity Fiduciaries and Trusts (1993) Toronto: Carswell
Gallimore J, ‘The Authority of Companies to Enter into Transactions – a New Twist’
(1994) 14 (8) Proctor 10.
Gardner S, ‘Knowing Assistance and Knowing Receipt: Taking Stock’ (1996) 112 Law
Quarterly Review 56
Glover J, ‘Bankruptcy and Constructive Trusts’ (1991) 19 Australian Business Law
Review 98
Grantham R, ‘Attributing Responsibility to Corporate Entities: A Doctrinal Approach’
(2001) 19 Company and Securities Law Journal 168
Grantham R, ‘Contracting With Companies: Rule of Law or Business Rules?’ (1996) 17
New Zealand Universities Law Review 39
Grantham R, ‘Illegal Transactions and the Power of Company Directors’ (1999) 115 Law
Quarterly Review 296
Grantham R, ‘Corporate Knowledge: Identification or Attribution?’ (1996) 56 Modern
Law Review 732
Grantham R, ‘Ultra Vires: Gone But Not Forgotten’ (1993) 10 Australian Bar Review
233
Grantham R, ‘Civil Liability for Money Laundering’ (1999) 18 New Zealand
Universities Law Review 378
Gray J and S Mannix, ‘ Statutory Indoor Management Rule – Recent Cases’ (1994) 5
Journal of Banking and Finance Law and Practice 291
Bibliography 187
Griggs L and P Nitschke, ‘Wider Ultra Vires – the Reincarnation of a Former Ghost’
(1993) 10 Australian Bar Review 176
Hammond C, ‘Section 164(4)(b) of the Corporations Law: ‘To be Put Upon Inquiry or
Not to be Put Upon Inquiry: Is that the Question?’ A Problem of Statutory
Interpretation’ (1998) 16 Company and Securities Law Journal 93
Hammond C, ‘Put Upon Inquiry Has Been Put to Rest Under Section 128(4) of the
Corporations Law, But Have Third Parties Dealing With Companies Been Placed in
a Stronger Position? – A Question of Statutory Interpretation’ (1998) 16 Company and
Securities Law Journal 562
Handley K, ‘When are Outsiders on Notice that Corporate Agents Lack Authority?’
Paper presented at QLS Securities Intensive VII Seminar, Coolum, October 1993,
20–34
Harpum C, ‘The Stranger as Constructive Trustee’ (1986) 102 Law Quarterly Review 114
Heydon JD, ‘Directors’ Duties and the Company’s Interests’ in PD Finn (ed) Equity and
Commercial Relationships (1987) Sydney: Law Book Company
Heydon JD, ‘Recent Developments in Constructive Trusts’ (1977) 51 Australian Law
Journal 635
Horrigan B, ‘Busting Guarantees! (New Developments in Challenging Corporate and
Personal Third Party Securities)’ (1998) 7 National Law Review
Horrigan B, ‘Third Party Securities – Theory, Law and Practice’ in J Greig and B
Horrigan (eds), Enforcing Securities (1994) Sydney: Law Book Company
Kriewaldt J, ‘Execution of Deeds by Corporations – a Further Comment’ (1986) 2
Australian Bar Review 183
Lambrick J, ‘Corporate Benefit in Financial Transactions: A Policy Perspective’ (1997)
8 Journal Banking and Finance Law and Practice 212
Langton R and L Trotman, ‘Defining ‘The Best Interests of the Corporation’: Some
Australian Reform Proposals’ (1999) 3 Flinders Journal of Law Reform 163
Law L, ‘Security Transactions With Companies: Mitigating the Effect of Defective
Execution’ (1995) 25 Queensland Law Society Journal 409
Law L, ‘Suspect transactions – some practical guidelines’ [1996] Australian Corporate
News 51
Law L and D Morrison, ‘Company Law: Recent Developments in the Indoor
Management Rule’ paper presented at the Accounting Association of Australia and
New Zealand Conference, Darwin, July 1993
Law L and D Morrison, ‘The Brick and Pipe Appeal – Updating Ostensible Authority’
Law L and J Pascoe, ‘Financiers and Corporate Borrowers: Protection Versus Liability’
(2000) 11 Australian Journal of Corporate Law 219
Leigh LH, ‘Objects, Power and Ultra Vires’ (1970) 33 Modern Law Review 81
Lindgren KE, ‘The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in
Turquand’s Case’ (1973) 9 Melbourne University Law Review 192
Lindgren KE, ‘The Negative Corporate Seal Rule and Exceptions Thereto’ (1974) 9
Melbourne University Law Review 411
Lindgren KE, ‘History of the Rule in Royal British Bank v Turquand’ (1975) 2 Monash
University Law Review 13
Lipton P, ‘The Inquiry Exception to the Rule in Turquand’s Case: Past or Present?’
Lipton P, ‘Holding Out That a Person is an Officer of a Company’ (1991) 1 Company and
Lipton P, ‘The Statutory Assumptions in s164(3) of the Corporations Law’ (1998) 50
Australian Company Secretary 260
Lipton P, ‘The Unauthorised Use of the Company Seal: Alarm Bells for Banks’ (1995) 3
Current Commercial Law 105
Lodge M, ‘Barnes v Addy: The Requirements of Knowledge’ (1995) 23 Australian
Business Law Review 25
Loxton D, ‘One Step Forward, One Step Back: the Effect of Corporate Law Reform on
Procedures in Dealing with Companies Borrowing or Giving Guarantees’ (1999) 10
Journal of Banking and Finance Law and Practice 24
Ma K, ‘Stranger Liability: A Question of Conscience, Property or Standards’ (1994) 10
Queensland University of Technology Law Journal 35
Montrose JL, ‘Apparent Authority of Agents of the Company’ (1934) 50 Law Quarterly
Review 469
Morrison D, ‘The Indoor Management Rule – A Review’ (1994) 4 Australian Journal of
Company Law 264
Morrison D, ‘The Continued Role of the Common Law Indoor Management Rule Due
Inquiry Exception’ (1996) 12 Queensland University of Technology Law Journal 28
Morrison D, ‘Recent Company Law Developments – the Indoor Management Rule’
(1997) 18 Queensland Lawyer 11
Mourell M, ‘Northside’ (1991) 19 Australian Business Law Review 36
Oakley A, ‘Liability of a Stranger as Constructive Trustee’ in M Cope (ed) Equity : Issues
and Trends : The Importance and Pervasiveness of Equitable Doctrines and
Principles in Modern Private, Commercial and Public Law (1995) Leichhardt:
Federation Press in association with the Centre for Commercial and Property Law,
Queensland University of Technology
O’Connor P, ‘Happy Partners or Strange Bedfellows: The Blending of Remedial and
Institutional Features in the Evolving Constructive Trust’ (1996) 30 Melbourne
University Law Review 735
Obadina D, ‘Irregular, Intra Vires Corporate Transactions and the Protection of Third
Parties in the UK and the Commonwealth – The Case For Reform: Part 1’ (1997) 18
Company Lawyer 45
Bibliography 189
Obadina D, ‘Irregular, Intra-vires Corporate Transactions and the Protection of Third

Parties in the UK and the Commonwealth – The Case for Reform: Part 2’ (1997) 18
The Company Lawyer 76
O’Donovan J, ‘Corporate Benefit in Relation to Guarantees and Third Party Mortgages’
(1996) 24 Australian Business Law Review 126
Pascoe J, ‘Equitable Remedies in Cases of Misapplied Company Funds: Recent
Developments’ (1996) 14 Company and Securities Law Journal 393
Paterson JM, ‘Limits on a Lender’s Right to Repayment on Demand: Construction,
Implication and Good Faith?’ (1998) 26 Australian Business Law Review 258
Pennington R, ‘Reform of the Ultra Vires Rule’ (1987) 8 Company Lawyer 103
Ramsay I, G Stapledon and K Fong, ‘Affixing of the Company Seal and the Effect of the
Statutory Assumption in the Corporations Law’ (1999) 10 Journal of Banking and
Finance Law and Practice 38
Rickett CEF, ‘Banks and Knowing Receipt’ [1999] New Zealand Law Journal 40
Robertson D, ‘The Lender-Borrower Relationship and the Subordination of Lenders’
Claims – Part III’ (1991) 2 Journal of Banking and Finance Law and Practice 219
Ryan P, ‘Impact of the Second Corporate Law Simplification Bill on Financiers’
Dealings with Companies’ (1997) 13 Australian Banking Law Bulletin 19
Sievers S, ‘Farewell to the Sleeping Director – The Modern Judicial and Legislative
Approach to Directors’ Duties of Care, Skill and Diligence – Further Developments’
(1993) 21 Australian Business Law Review 111
Sievers S, ‘Directors’ Duty of Care: What is the New Standard’ (1997) 15 Company and
Sikkema HK, ‘Ultra Vires – Like Phoenix Arisen From its Ashes (and ready to pounce)?
A Bird’s Eye View of the New Legislation’ (1985) 3 Company and Securities Law
Journal 16
Sneddon M, ‘Protection of Financiers From Ultra Vires and Related Defences’ (1992) 66
Law Institute Journal 70
Sneddon M, ‘When Can a Lender Assume That Loan or Guarantee Documents Have
Been Properly Executed by the Appropriate Officers of the Company?’ (1993) 21
Australian Business Law Review 368
Stevenson J, ‘The Ultra Vires Doctrine – Is it Dead?’ paper presented at BLEC
Workshop, Bankers Under Siege, Melbourne, June 1991
Story J, ‘Authority of Corporate Justice: The Northside Case and Section 164’, Paper
presented at QLS Securities Intensive VII Seminar, Coolum, October 1993, 35–64.
Stumbles J, ‘Corporate Benefit and the Guarantee’ in G Burton (ed) Directions in
Finance Law (1989) Sydney: Butterworths
Sutherland I, ‘Efron Tie-A Brief Revisit’ (1979) 53 Law Institute Journal 279
Thompson A, ‘Company Law Doctrines and Authority to Contract’ (1956) 11 University
of Toronto Law Journal 248
Watson B, ‘Corporate Collapses – Time to Reintroduce the Ultra Vires Rule?’ (1990) 8
Company and Securities Law Journal 240
Wilkin J, ‘Ultra Vires is Alive and Well and Living in Australia’ (1984) 58 Law Institute
Journal 256
Wheeldon G, ‘The A–Z of the Corporations Act’ paper presented at ICAA & QLS sem-
inar, Brisbane, February 1991
Whincop M, ‘Nexuses of Contracts, the Authority of Corporate Agents, and Doctrinal
Indeterminacy: From Formalism to Law and Economics’ (1997) 20 University of New
South Wales Law Journal 274
Woodward S, ‘Ultra Vires Oversimplified: Changes to Company Powers Under the
Second Corporations Law Simplification Bill’ (1997) 15 Company and Securities
Law Journal 162
Monographs and texts
Bland M, Knowledge, Constructive Notice and Unconscionable Conduct, LLM thesis
presented to Queensland University of Technology, Faculty of Law, 1995
Bosch H, Working Group on Corporate Practices and Conduct, Corporate Practices and
Conduct (3rd ed, 1995)
Cope M, Constructive Trusts (1992) Sydney: Law Book Company
Ford HAJ, Principles of Company Law (2nd ed, 1978) Sydney: Butterworths
Ford HAJ, Cumulative Supplement 1985 to the Third Edition of Principles of Company
Law (1985) Sydney: Butterworths
Ford HAJ, Outline of Companies and Securities Law (1988) Sydney: Butterworths
Ford HAJ, Principles of Company Law (5th ed, 1990) Sydney: Butterworths
Ford, HAJ, Supplement to the Third Edition of Principles of Company Law (3rd ed,
1984) Sydney: Butterworths.
Ford HAJ and PR Austin, Principles of Company Law (7th ed, 1995) Sydney:
Butterworths
Ford HAJ, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law (10th ed,
2001) Sydney: Butterworths
Gower, LCB, Modern Company Law (2nd ed 1957) London: Stevens
Halsbury’s Laws of England, London: Butterworths
LBC, Laws of Australia
Lipton P and A Herzberg, Understanding Company Law (10th ed, 2001) Sydney: Law
Book Company
Lipton P, The Authority of Agents and Officers to Act for a Company: Legal Principles
(1996) Melbourne: Centre for Corporate Law and Securities Regulation
Paterson W and H Ednie, Australian Company Law (2nd ed, 1971) Sydney: Butterworths
Parkinson JE, Corporate Power and Responsibilities: Issues in the Theory of Company
Law (1993) Oxford: Clarendon Press
Bibliography 191
Ramsay I, The New Corporations Law (1998) Sydney: CCH

Robson K, Annotated Corporations Law (2nd ed, 1997) Sydney: Law Book Company
Whincop M, Old Forms and New Content: An Economic Genealogy of English and
Australian Corporate Law (2000) Ashgate
Woodward S, H Bird and S Sievers, Corporations Law in Principle (5th ed, 2001)
Sydney: Law Book Company
Reports, Government Documents
ASIC Media Release 236, 29 May, 2000
Committee on the Financial Aspects of Corporate Governance (chaired by Sir Adrian
Cadbury), Report (1992)
CLERP Paper No 3, Directors’ Duties and Corporate Governance (1997) Canberra:
AGPS
CASAC, Corporate Groups: Final Report (May 2000)
CCH, Australian Corporations and Securities Commentary [∂30–000] – [∂38–500]
Explanatory Memorandum, Companies and Securities Legislation (Miscellaneous
Amendments Act 1983
United Kingdom, Report of the Committee on Company Law Amendment, (Cmnd 6659,
1945)

1010-Law Mono21

Uploaded by

Copyright:

Available Formats

1010-Law Mono21

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1010-Law Mono21

Uploaded by

Copyright:

Available Formats

CORPORATE AUTHORITY AND

DEALINGS WITH OFFICERS AND

CCH AUSTRALIA LIMITED

The Centre for Corporate Law and Securities Regulation

Phone: 61 3 8344 5281

CCH Australia Limited

Phone: 61 2 9857 1300

ISBN 0 7340 2197 6

© 2002 Larelle Chapple and Phillip Lipton

The Director of the Centre is Professor Ian Ramsay.

• Cally Jordan, International Survey of Corporate Law in Asia, Europe, North

The Centre’s contact details are:

Tel: 61 3 8344 5281

2. Actual and Apparent Authority of a Company’s Agent. . . . . . . . 4

3. The Indoor Management Rule at Common Law . . . . . . . . . . . . 18

4. Exceptions to the Rule in Turquand’s Case . . . . . . . . . . . . . . . . . 26

5. The Statutory Reformulation of the Indoor

6. The Statutory Assumptions: Section 129 . . . . . . . . . . . . . . . . . . . 71

7. The Indoor Management Rule and Forgeries . . . . . . . . . . . . . . 104

8. The Limitations to the Statutory Assumptions . . . . . . . . . . . . . 109

9. Implications for Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

10. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

List of Figures and Tables

Actual and Apparent Authority

Corporate power exercised in the absence of, or in excess of authority, is sometimes

19 (1993) 11 ACLC 952, 978.

If an agent’s apparent authority can be established, it creates an agency by estoppel.

23 See now the assumption in s 129(3), discussed in chapter 6.

Table 2.1 Acquiescence by board as the critical factor in de facto managing

37 (1999) 17 ACLC 1,665.

38 Ford, Austin and Ramsay, supra n 5, [13.390].

The Effect of Agency Principles on Enforcing Contracts

The Indoor Management Rule

4 (1856) E&B 327, 332.

contents of the public documents. (Referred to as the “doctrine of constructive

The Northside case

Brennan and Gaudron JJ represented the second approach, relying on estoppel.

18 (1990) 8 ACLC 611, 620.

1. “substantive authority” is the existence and scope of the officers’ authority to

The Significance of the Northside Case

Exceptions to the Rule in Turquand’s Case

This leads to two major propositions precluding reliance on the rule:

Figure 4.1 The common law rule and its provisos

The rule and

Direct exceptions Other common law

Good faith as a Knowledge Ultra vires & Forgery &

Meaning of Materiality of “actual Distinguishing

The Knowledge Exceptions

“Constructive knowledge” picks up a wider spectrum of “knowledge” and requires,

duty on outsiders to enquire into the possibility of internal non-compliance in entering

• reliance on the purported actual or apparent authority of those acting or purport-

4. The conflicting interests of those officers.31

This accumulation of knowledge has limits, for example, in Sixty-Fourth Throne,

This doctrine enabled a company to rely, as against an outsider, on any limitations

39 [1998] 3 VR 133, 145–6.

43 Irvine v Union Bank of Australia Ltd (1877) 2 App Cas 366.

1. The meaning of “public documents”

2. The materiality of the outsider’s actual knowledge of the public documents

3. Distinguishing procedural requirements in the public documents from substantive