Corporate

Contract execution: a case study

The recent case Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 provides a timely reminder that, for a contract to be valid, binding and enforceable, it must be executed correctly.  Failure to execute a contract in accordance with the Corporations Act 2001 (Cth) (“Act”) may result in the contract being unenforceable and, in some circumstances, the signing party being held personally liable for damages arising from breach of warranty of authority.

Section 127 of the Act provides that, for companies with more than one director, a contract may be validly executed by:

  • being signed by two directors of the company;
  • being signed by one director and a company secretary of the company; or
  • having two directors witness the common seal of the company being affixed to the contract.

A contract may also be validly executed by being signed by an authorised agent on behalf of the company under section 126 of the Act.  

Where a contract has been executed in accordance with the Act, the other party is entitled to assume the contract has been duly executed.  This is the statutory adaptation of what is more commonly referred to as the “indoor management rule”.

In this case, Knight Frank (on behalf of Paley Properties) (“vendor”) sold a commercial property to De Chellis Homes (“purchaser”) for approximately $1.5 million.  Mr De Chellis, one of two directors of the purchaser, signed the contract of sale on behalf of the company.  The purchaser subsequently withdrew from the contract and the vendor sought to enforce it.  The issue before the Full Court of the Supreme Court of South Australia was whether an enforceable contract existed and, if not, whether the director purporting to sign the contract on behalf of the purchaser could be held personally liable to pay damages to the vendor for breach of warranty of authority.

The purchaser’s constitution provided for the board to resolve to authorise a director to execute contracts on behalf of the company; however, no such resolution was passed.  The Court noted that, even where such a resolution is passed, it would only entitle the director to execute the contract on behalf of the company under section 126 of the Act and not section 127.

The Court rejected the argument that the vendor was entitled to rely on the assumption that the contract was duly executed by the purchaser.  The purchaser made it clear that there was more than one director as he crossed out the words “Sole Director/Sole Secretary”.  However, the execution clause was not countersigned by another director or company secretary.  Further, the contract contained alternative execution clauses and the execution clause allowing the contract to be signed on behalf of the company was left blank.

Both the purchaser and its director ultimately avoided an unfavourable decision; however, the Court asserted that the outcome would likely have been different had the director chosen to execute the contract as an agent on behalf of the company.  Where an agent purports to have authority to enter a contract on behalf of a company, the agent is warranting to the other party that it has such authority.  As a result, the agent may be personally liable to pay damages arising from breach of warranty of authority.

In this case, the likely damages would have been approximately $250,000, being the difference between the purchase price and the actual sale price.  This case illustrates the pitfalls of unenforceability and personal liability associated with failing to validly execute a contract.  To avoid these risks, it is important for directors to understand whether they are signing in the name of the company or as an agent.  Contracts must be signed in accordance with the Act and, if signed as an agent, he or she must have authority to do so, usually in the form of a board resolution.

Professional Services

Government releases Financial System Inquiry final report

On 7 December 2014, the Government released the final report of the Financial System Inquiry, which will act as the “blueprint” for the financial system over the next decade.  The report makes 44 recommendations focussing on funding Australia’s economy and boosting competition.  The recommendations fall into the categories of resilience, superannuation and retirement incomes, innovation, consumer outcomes and the regulatory system.

The key recommendations for each category are summarised below.

Resilience

  • Introduce a leverage ratio as a backstop to deposit-taking institutions’ risk-weighted capital positions.
  • Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
  • Develop a reporting template for deposit-taking institution capital ratios that is transparent against the minimum Basel capital framework.

Superannuation and retirement incomes

  • Introduce the superannuation system’s objectives in legislation.
  • Ensure all employees can choose the fund into which their superannuation guarantee contributions are paid.
  • Require boards of corporate trustees of public offer superannuation funds to maintain a majority of independent directors, align the director penalty regime with managed investment schemes and strengthen conflict requirements.

Innovation

  • Clarify thresholds for the regulation of retail payments by ASIC and APRA.
  • Introduce the ePayments code.
  • Update fundraising regulations to facilitate crowdfunding and other forms of financing.
  • Clarify thresholds for when the interchange fee regulations apply and lowering of interchange fees.
  • Introduce additional prescriptive limits on surcharging to ensure customers using lower-cost payment methods cannot be over-surcharged.

Consumer outcomes

  • Improve guidance processes, including tools and calculators, and disclosure for general insurance, particularly in relation to home insurance.
  • Introduce a proactive product intervention power for regulators where there is a risk of significant consumer detriment.
  • Remove any regulatory barriers to innovative product disclosure and communication with consumers.

The regulatory system

  • Increase regulator accountability and create a Financial Regulator Assessment Board to advise government on how financial regulators have implemented their mandates.
  • Strengthen ASIC’s regulatory powers and introduce an industry funding model.
  • Review the state of competition in the financial sector every 3 years.

The Commonwealth will consult with public and industry stakeholders on these recommendations before making any decisions as to their implementation.  

Submissions will close on 31 March 2015 and can be made here.

To view the full report, click here.

Disallowance of FOFA regulations

On 19 November 2014, the Senate passed a disallowance motion effectively repealing the Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Cth) from that date.

ASIC has decided to take a practical, measured and facilitative approach to administering this law until 1 July 2015.

Since the disallowance, the Government has reached an agreement with the Opposition to reinstate those aspects of the Regulation that were broadly consented to, including:

  • grandfathering of conflicted remuneration where an adviser moves licensees;
  • expansion of training and education provisions; and
  • stamping fee and brokerage conflicted remunerations exemptions.

The Government is currently considering further amendments and potential negotiations to address aspects of the legislation that have not been consented to.

Trusts and Taxation

NSW Court of Appeal confirms trustees will not be granted power to vary trust deed

The NSW Court of Appeal in Re Dion Investments Pty Ltd [2014] NSWCA 367 recently denied an application by the trustee of a 40-year-old family trust under section 81(1) of the Trustee Act 1925 (NSW).  The application included a claim that would empower the trustee to revoke, add to or vary the terms of the trust deed.

The decision confirms the position in NSW, being that where a trust deed’s terms omit a power to amend the trust deed, that omission is permanent and a trustee cannot obtain that power from a court.  The Court considered whether the power to vary a trust deed is a “transaction” for the purposes of section 81(1), which allows a court to make orders giving effect to certain “advantageous transactions” involving a trust.

While the Court allowed the application in respect of five other specific powers, which the trustee sought to have confirmed under section 81(1), it clarified that a power to vary a trust deed was not a “transaction”.  Section 81(1) was said to have a slightly broader application than its Victorian equivalent, section 63(1) of the Trustee Act 1958 (Vic).  As such, it is likely that a Victorian court could not, under section 63(1) or otherwise, grant a trustee the comprehensive power to vary the terms of a trust.

This decision highlights the importance of implementing a trust deed that is flexible enough to adapt to evolving tax laws while ensuring the beneficiaries are protected.

To view the full decision, click here.

High Court overturns MBI decision - GST and the Sale of Leased Properties

We previously reported on the October 2013 Full Federal Court decision in MBI Properties Pty Limited v Commissioner of Taxation [2013] FCAFC 112.  In that case, the Full Federal Court ruled that the purchaser of leased premises was not subject to an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) for supplies made in relation to those premises.

The Commissioner appealed that decision to the High Court in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 seeking a determination on the questions of:

  1. whether MBI made a taxable supply to the lessee after it purchased the property; and
  2. if it did make a supply, how that supply would be calculated for the purposes of Division 135.

The High Court unanimously overturned the Full Federal Court’s decision.

When the matter was initially before the Full Federal Court, MBI argued that the supply was made by the vendor at the time the lease was entered.  On appeal, the High Court rejected this argument and characterised “lease agreements” as involving two supplies; the first upon entering the contract, and the second upon performance.  MBI made this second supply simply by observing its obligation to provide the lessee with quiet enjoyment of the property during the lease term.  As to the issue of calculation, the High Court held that the rent paid to MBI after completion of the purchase was consideration for MBI’s continued observance supply, not merely for the initial grant of the lease by the vendor, as argued by MBI.

This decision confirms that purchasers of leased property will be treated as making taxable supplies from the time of completion of the purchase, while tenants will be able to claim input tax credits on the rent paid.

To view the decision, click here.

To view our previous article, click here.

Information and Communications Technology

Queensland court denies Ventyx claim for additional software license fees

On 6 February 2015, the Queensland Supreme Court in Glencore Queensland Limited v Ventyx Pty Ltd [2015] QSC 14 denied a claim for additional license fees brought by IT firm, Ventyx Pty Ltd (“Ventyx”), under its license agreement with mining company, Glencore Queensland Limited (“Glencore”).

Ventyx initially entered the agreement with mining company, Xstrata, which was bought out by Glencore in May 2013.

The Court made a declaration that Glencore employees and contractors should not be included in an employee count which formed the basis for the calculation of fees payable to Ventyx under the license agreement for the Ellipse toolset.

When Glencore submitted its employee count for the 2014 financial year, Ventyx claimed it was inaccurate as it omitted employees of companies that were Xstrata “affiliates”.

McMurdo J took the view that, rather than being an Xstrata affiliate, the Xstrata Copper Division, which entered the agreement with Ventyx, had ceased to exist when the merger with Glencore took place.  While the group of companies that had constituted the Copper Division remained a group after the merger, Xstrata was no longer involved in the management of that group.

On this basis, McMurdo J concluded that as at 31 March 2014 when Glencore submitted its employee count, its pre-merger entities were not Xstrata affiliates, so its employees did not have to be included in the count.  The ultimate relief sought by Ventyx in the form of a declaration to that effect was denied.

To view the full decision, click here.

Charities

NSW Land and Environment Court decision on PBI’s for state tax purposes: Community Housing Limited v Clarence Valley Council [2014] NSWLEC 193

This case reminds charities to consider the availability of both federal and state tax concessions.

The NSW Land and Environment Court recently dismissed proceedings issued by Community Housing Limited (“CHL”) against Clarence Valley Council (“Council”).  CHL had commenced proceedings on the grounds that, pursuant to section 556(1)(h) of the Local Government Act 1993 (NSW), land that it owned was exempt from rates because it was a public benevolent institution (“PBI”) or a public charity.  Section 556(1)(h) exempts land belonging to and occupied by a PBI or public charity from all rates other than water supply special rates and sewerage special rates.  The Council had issued CHL with rates notices in relation to its property.

Regarding CHL’s classification as a PBI or a public charity, the Court held that the company’s objects (as set out in its constitution) did not amount to a charitable purpose, nor could they be categorised as incidental or ancillary to a charitable purpose.

CHL’s constitution stated that one of its objects was to “…provide training, vocational and related education, and skills development to improve employment opportunities”.  The Court applied the “all or nothing rule” and held that CHL did not qualify as a PBI or a public charity as there is no such thing as a partly charitable association.

The Court stated that the words “training” and “vocational” do not have any charitable meaning on their own and, further, did not acquire any from the context in which they were used.  Likewise, the words “related education and skills development” did not qualify the clause as an independent charitable purpose for the advancement of education.  As such, the proceedings were dismissed and CHL was ordered to pay the Council’s costs.

The decision highlights the importance of appropriately drafted objects, particularly for companies and other organisations seeking classification as a PBI or a public charity for state and federal purposes.

To view the full decision, click here.