It has been a widely-held belief that only one director needs to sign a contract, as it was assumed that that director would have authority to contract on behalf of the company.
However, a recent High Court decision (Autumn Tree Limited v Bishop Warden Property Holdings Limited [2017] NZHC 2838) has turned that assumption on its head, somewhat. It found that any one director of a company which has more than a sole director will have very limited authority to enter into a contract on behalf of the entity.
This particular case considered the sale of a residential property by a company.
Case background
A sale agreement for the property was entered into on August 3, 2017, and was signed by Tina, who had been the sole director of, and a shareholder in, the vendor company. As it happened, earlier that day Tina had advised the other shareholders that she planned to surrender her shareholding and resign as director, and wanted Anna to take over as the director of the company.
The change of shareholding was duly registered in the Companies Office on the morning of August 3, and Anna was registered as a new director early that afternoon. However, Tina’s removal as a director was not recorded at the Companies Office until August 5. The sale agreement was signed by Tina and the purchaser on the evening of August 3, at which stage Tina was still noted in the Companies Office records as being a director, together with Anna.
The decision
The Court decided that Tina did not have actual authority from the company to enter into the agreement on her own. Even though she was still a director at the time that the sale and purchase agreement was signed, she was not the sole director, and there was no evidence that she had express authority to enter into the agreement on behalf of the company. It was clear that she had no actual authority, as the company had not passed a resolution granting her that authority.
The case centred mainly on whether the purchaser could rely on Tina having the apparent authority of the company to sign the agreement, as, under the Companies Act, a person dealing with a company is entitled to assume that the company’s internal requirements have been complied with (unless they have knowledge to the contrary).
The rule saying a person has the apparent authority to bind a company requires that the company “hold out” a person as having the requisite position or authority. The Court agreed that the fact that Tina was still recorded as a director in the Companies Office records was sufficient for both Anna and Tina to be held out as directors at that time. However, the Court did not agree that, by entering into the sale agreement, Tina was exercising the power that a director of a property holding company customarily has authority to exercise. The Court said that the authority of one director acting alone where the company has more than one director is very limited.
The upshot?
The sole director of a company will have authority to bind the company, but one of two or more directors does not normally have authority to enter into a significant property transaction on behalf of the company.
This means that a director can sign on behalf of a company where there is only one director. However, where there is more than one director, then either all directors should sign the sale and purchase agreement, or evidence should be obtained from the other directors that the director who is signing has authority to sign on behalf of the board.