This case highlights the importance of ensuring that an agreement executed by only one director of a company (even where it is the managing director) is validly executed (whether by authorisation under the constitution or in accordance with the Corporations Act 2001 (Cth)).
After ASIC became concerned that WealthSure Pty Ltd (WealthSure) may not have adequately monitored and supervised its representatives, WealthSure and ASIC entered into an enforceable undertaking dated 29 August 2013. The terms of the enforceable undertaking included that companies in the WealthSure group were not to have sole director boards and must have a majority of independent non-executive directors. Following the resignation of Mr Pawski as sole director and secretary of WealthSure, 2 independent directors, Mr Newman and Ms Humphries, were appointed.
The key question for the Court was whether a General Security and Loan Facility Agreement purportedly entered into between WealthSure and the first defendants (which included Mr Pawski) on 15 April 2015 (Loan Facility Agreement), which had been signed for WealthSure by Mr Newman alone, was validly executed.
Mr Pawski argued that he believed that Mr Newman had the authority to sign the Loan Facility Agreement alone, while Mr Newman gave evidence that he had indicated to Mr Pawski when he signed the Loan Facility Agreement that it still required the signature of Ms Humphries.
In finding that the Loan Facility Agreement was not validly executed, Master Sanderson in the Supreme Court of Western Australia found that:
- Mr Newman’s version of events was more internally consistent (although it was not necessary to prefer one version over the other to decide the outcome of the case);
- the WealthSure board had not, under its constitution, conferred on Mr Newman the power to unilaterally enter into the Loan Facility Agreement;
- Mr Newman, as managing director of WealthSure, did not have implied authority under the ‘indoor management rule’ in section 126(1) of the Corporations Act 2001(Cth) (Corporations Act). Entry into the Loan Facility Agreement was of great significance to WealthSure (it was pledging all of its assets) and was therefore not something that fell within the ‘usual scope’ of the office of managing director and was ‘far from the normal trading activity’ for WealthSure;
- the first defendants were not entitled to rely on the assumption under section 129(2) of the Corporations Act that Mr Newman had authority to enter into the Loan Facility Agreement because it was not customary for a managing director to pledge all of the company’s assets; and
- in any case, the first defendants were precluded under section 128(4) from relying on section 129(2) because Mr Pawski ‘knew or suspected that the assumption was incorrect’.
Master Sanderson also found that:
- WealthSure’s acceptance of funds did not, without further evidence, constitute ratification of the Loan Security Agreement; and
- WealthSure was not estopped by representation from asserting that it was not bound. The first defendants were on notice at all times, via their agent Mr Pawski, of the need for Ms Humphries’ signature, and there was no unconscionable conduct by WealthSure.