Auditors

Legal Obligation to keep Financial Records

s286(1): A company must keep written financial records that:
(a) correctly record and explain its transactions and financial position and
performance; and
(b) would enable true and fair financial statements to be prepared and
audited.
A company must have the financial report for a financial year audited and
obtain an auditors report. S 301(1).
A small proprietary companys financial report for a financial year does not
have to be audited if the report is prepared in response to a direction by
ASIC or shareholders holding 5% of votes and that direction did not ask for
the financial report to be audited. s302 & 293.
A company limited by guarantee may have it financial report reviewed
rather than audited s301(3).
A small company limited by guarantees financial report does not need to
be audited if it is not required by ASIC or members having 5% votes to do
so. S 301(4) & 294A

Functions and Aims of Audits

An Audit Report is a professional opinion on the integrity of financial statements

based on the audit of the companys financial reports, thus aims to present a
reliable, accurate, and independent report on accounts and financial
position of a company.
Ramsay Report: Audited financial statements are an important part of the
financial information that is available to the capital markets and an important
part of effective corporate governance.
Improve reliability of financial statements, make them more credible and
increase shareholders and financial markets confidence in them
Add value to F-Statements via improving reliability, and capital markets
via enhancing credibility

Appointing an Auditor

A public company must appoint an auditor of the company at its first AGM
327(B)(a):
The directors of a public company must appoint an auditor within one
month after the day on which a company is registered unless the company
at a general meeting has appointed an auditor. S 327A.
A public company must appoint an auditor of the company to fill any
vacancy in the office of auditor at each subsequent AGM. S 327(B)(b).
ASIC may appoint auditor of public company if none is appointed. Ss 327F
Directors of a proprietary company may appoint an auditor for the
company if an auditor has not been appointed by the company in general
meeting. S 325.
s324AA: Auditor for a company may be:
(a) an individual;
(b) a firm;
(c) a company
s324AB(1): appointment of a firm as auditor of a company is taken to be an
appointment of all persons who, at the date of the appointment, are members of
the firm and registered company auditors.
An individual cannot act as auditors unless he/she is registered
as company auditor. S 324BA.

Duties of Auditors to Company

Power to Obtain Information: s310 auditor has a right of access to the

books of the company and
may require an officer
of the company to provide
information,
explanations and other assistance
Duty to Carry out an Audit: s307 Auditing requires an opinion about
whether:
the financial report is in accordance with accounting standards and is
true and fair view (a)
the auditor has been given all information, explanation and assistance
necessary for the conduct of the audit. (b)
the company has kept financial records sufficient to enable a financial
report to be prepared and audited. (c)
the company has kept other records and registers. (d)
Report on whether FR complies with acct standards and is true and fair view: If
not, the auditors report must say why. Ss 308(1),
the auditors report must quantify the effect that non-compliance has on
the financial report.
If it is not practicable to quantify the effect fully, the report must say why.
S 308(2).
The auditors report must describe any defect or irregularity in the
financial report. S 308(3)(b).
The auditors report must describe any deficiency, failure or shortcoming in
respect of availability of information, whether company has kept sufficient
financial information, and whether company kept other records and registers. S
308(3)(b)
Audit of FR for company limited by guarantee must report any matter arising
belief the FR does not comply with requirements for annual financial reports and
directors reports. Reasons for any non-compliance to be given. S 308(3AA ) &
(3AB).
WA Chip & Pulp Co Pty Ltd v Arthur Young & Co
Facts: Auditing firm failed to report drawings by finance and administration
manager from companys account to a personal account at an increasing
rate, for personal expenses, despite void of authority for such
disbursements
Held: Held auditing firm negligent, for not seeking confirmation at least of
authorisation. An account as such would arouse suspicion and would call
for an enquiry.
an auditor appointed in those circumstances was required at least
to do such an audit of the company's affairs as will enable it to form
the appropriate opinion and to have promised to exercise due skill
and care in carrying out such an audit.
That duty extends beyond that indicated and is to audit generally
the financial affairs of the company throughout the relevant period
and not merely to conduct such an audit as is necessary to
form the opinion required by the statute.
It involves a duty to pay due regard to the possibility of
fraud and to warn.
Duty to attend AGM
Auditors of listed companies must attend a companys AGM at which auditors
report is to be considered. S 250RA(1) and (2).
Reporting to ASIC

S311: Auditor must report siginificant contravention of CA to ASIC and any

attempts to interfere with the auditing process
Auditors have a duty to detect and report fraud and irregularities in the
financial reports. Ss 308(3)(a) and 311
Duty of Care
AWA Ltd v Daniels
Facts: Foreign Exchange Manager only discloses contracts showing profits, then
rolls over loss-making contracts or by paying them out through unauthorised
borrowings. Auditing firm failed to report on the full extent of the foreign
exchange managers activities making no mention of the loans and then a
partner of the firm assured wellness of the company. A lack of internal
mechanisms of supervision and recording was acknowledged by the court.
Held: Auditors held negligent in their performance of duties and thus owed
damages to plaintiff
Directors are entitled to rely on the judgment, information and
advice of the auditor
Where an auditor is acknowledged to be of a higher standard of skill
in particular matter a consequent higher duty of care arises
Duty to Third Parties
Esanda Finance Corp Ltd v Peat Marwick Hungerfords
Facts: Excell Pty Ltd provides guarantee to loans from Esanda. Esanda relied on
the unqualified audit report on the companys financial statements supplied to it
by Excel and prepared by auditing form of PMH. The financial statements did not
disclose Excels true financial position. Excel was subsequently put in
receivership. Esanda brought an action against PMH alleging that the auditors
were negligent in not complying with accounting standards which required PMH
to consider prime users, such as present and potential providers of equity and
loan capital and creditors. Issue of a duty of care to third party
Held:
Reasonable foreseeability that a member of a class including the
plaintiff might rely on the statement or advice and thereby suffer
loss has never been held sufficient to support recovery
Necessary to prove:
defendant knew or ought reasonably to have
known that the information or advice would be
communicated to the plaintiff
reliance by plaintiff on information/advice in
entering contract
thereby risk the incurring of economic loss if the
info untrue or advice unsound

Auditor independence

Fundamental to the reliability of auditors reports

an auditors opinion must be based on an objective and
disinterested assessment of whether the financial statements are
presented fairly in conformity with generally accepted accounting
principles.
Conflict of Interest
An auditor must not engage in an audit activity in relation to an audited body at
a time a conflict of interest situation exists in relation to the audited body if the
auditor is aware of the conflict of interest. situation. An auditor must take steps
where a conflict of interest situation exists to ensure that the conflict of interest
situation ceases to exist.

s324CA(1): Provides conflict of interest situation and the requirement to take

reasonable steps to cease conflict
s324CB: Provides a member comprisable for becoming aware of a conflict of
interest and not immediately taking action to resolve
s324CC: Provides a director comprisable for becoming aware of a conflict of
interest and not immediately taking action to resolve
s324CD(1): Supplies conflict of interest exists where circumstances that lead a
reasonable person to conclude that the auditor is not capable of exercising
objective and impartial judgment in relation to the conduct of the audit of the
audited body
s324CD(2): Determining whether a conflict of interest situation exists:
circumstances arising from any relationship between the auditor and audited
entity
Specific requirements for auditor independence applicable to
individual auditors, audit firms and audit companies are contained
in ss 324CE, 324CF and 324CG together with 324CH(1).
Auditor independence does not exist if certain relationships exist
between an auditor and the audited entity.
An individual auditor, audit firm or audit company must give
directors of the company a written declaration to the effect that
auditor independence requirements and any applicable code of
professional conduct in relation to the auditing have not been
contravened.
if auditor independence requirements and any applicable code of
professional conduct in relation to the auditing have been
contravened then these must be specified in the declaration. S
307C

Share Capital

s254a(1)(c) A company may issue shares fully paid

or partly paid
o s254M(1): liable to pay partly paid share
once called, excludes no liability
company

Allotment of Shares
Acceptance of the offer to purchase shares is constituted by the buyers
application
If securities are to be issued upon a certain number of applications
being received the person making the offer must not issue any shares
until that condition is satisfied. S 723(2).
Application money received from investors must be held in trust
until minimum subscription condition is fulfilled and securities are issued.
S 722.
If minimum subscription condition is not satisfied within four
months after the date of the disclosure document, then among others the
company must repay the money received from the applicants. S 724.
A disclosure document must state that no securities will be issued
on the basis of the document after the specified expiry date, which
should be no later than 13 months after the date of the disclosure
documents. Ss 711(6), 714(2) and 715(3).

Classes of Shares
Share

classes differ in terms of:

Entitlement to dividend.
Right to priority in payment of dividend
Voting rights.
Right to priority of repayment of capital on winding up.
Right to participate in a distribution of surplus assets. on winding
up.
Ordinary Shares:
Generally, receive dividends if the company has surplus profits after
payment of preference shareholders
Return on investment closely tied to fortunes of company
Generally, dividend entitlements not expressed in terms of fixed
percentage of the issue prices
Preference Shareholders:
Have preferential rights to receive dividends ahead of Ord. s/h
Have right to receive dividends at a fixed percentage of issue price
Prioritized repay of capital in wind up over ord. s/h
Rights of preferential s/hs must be set out: s254A(2), s254G(2)

Borrowing Powers of Company

Company has the power to borrow and to issue security for the loan. S 124(1)
(Legal capacity and powers of company) , 125(1) (Co. constitutions limit
to powers)
Power to borrow usually conferred on directors s198A (powers of
directors)
Security for Loan:
Debenture: Ss 283AA-283I (Provisions pertaining to debentures)
Document that acknowledges indebtedness. Debt is often secured by a
security over the property of the company.
Company may borrow and secure loan by way of debenture s 124(1)
(b)
Statutory Rights of debenture holders: Ss 313(1) &(2), 318, 283EA
Personal Security:
Company may also secure a loan by way of personal property
Personal Property Securities Act 2009
Personal security must be created by way of a security agreement.
PPSA s10.
Security interest means PPSA security interest, a charge, lien or pledge.
CA s51A
A security interest over a collateral is enforceable against a competing
security interest if it registered interest in the collateral, takes
possession and control of the collateral and has a written security
agreement. PPSA s20.
Security interest must attach to personal property to be enforceable
against the grantor. PPSA s19(1)

Transactions affecting Share Capital

Nature of shares
Borlands Trustees v. Steel Bros & Co. Ltd

A share is the interest of the shareholder in the company measured by a

sum of money for the purpose of liability in the first place, and of interest
in the second
A share is not a sum of money. . . but is an interest measured by a sum
of money and made up of various rights contained in the contract

Issuing Shares

A company has the power to issue shares. S 124(1)(a).

The power to issue shares includes the power to issue:
bonus shares (shares for whose issue no consideration is payable to
the issuing company).
preference shares (including redeemable preference shares).
partly-paid shares. S 254A(1).
A company may determine:
the terms on which its shares are issued
the rights and restrictions attaching to the shares. S 254B(1).
*Preference shares: A company can issue preference shares only if the rights
attached to the preference shares are set out in the companys constitution or
have been approved by special resolution of the company.

Variation of Class Rights

Any procedure to varying class rights attached to shares contained in
company constitution must be accorded to in varying such rights. S
246B(1).
In absence of any constitution contained procedures, rights may be varied
only by special resolution of the company and then also the members
affected by the variation. S 246B(2)(a)-(c).
Variation may also be effected with the written consent of members with
at least 75% of the votes in the class of shares being varied. S 246B(2)
(d).
The company must give written notice of the variation to members of the
class within 7 days after the variation is made. S 246B(2)(d).
If members in a class do not all agree to a variation, members with at least
10% of the votes in the class may apply to court to have the variation set
aside. S 246D(1).
An application may only be made within 1 month after the variation is
made. S 246D(2).
Variation takes effect 1 month following variation if no application is made
to set it aside or if application is made when the application is withdrawn
or when the application is finally determined. S 246D(3).
Court may set aside the variation if it is satisfied that it would unfairly
prejudice the applicants or confirm the variation if no unfair prejudice is
occassioned. S 246D(5).
if the members in a class all agree to the variation, it takes effect on the
date of the resolution or consent or date specified in the resolution.
S246E
Claims of oppression(s232) or to seek an injunction(s1324)

Share Capital Reductions

A company receives cash or its equivalent when it issued shares. Funds raised
this way constitute the companys issue capital.

The doctrine of capital maintenance stipulates that once a company receives

proper consideration for shares that it issues, it must not repay it to members
except in certain circumstances
The rule requires a company to maintain/preserve its issued share capital
in order to protect creditors but can lead to shareholders being locked in
Trevor v Whitworth
Executors of Whitworths will sell shares back to company, receive in 2
instalments. company enters liquidation between first and second.
Executors seek second instalment from liquidator
House of Lords held that the company had no power to purchase its own
shares even if the articles of association permitted such a purchase.
Reasons for Capital Reduction:
to extinguish or reduce companys liability on partly paid shares by buying
them back.
to return capital to members.
Other reasons.
s256A: Purpose of regulation of capital reductions protect interests of s/hs
and creditors
s256B: A company may reduce its share capital in a way that is not otherwise
authorised by law if:
the reduction is fair and reasonable to the companys shareholders as a
whole.
does not materially prejudice the companys ability to pay its creditors.
is approved by shareholders s256C(equal reduction= Res. at GM
selective=SR at GM with nobody impacted by red. to vote)
Fairness and Reasonableness:
the price paid for the shares by the company.
Equal treatment of shareholders according to the companys constitution.
whether the reduction is being used to facilitate or prevent a takeover bid.
Winpar Holdings Limited v Goldfield Kalgoorlie Ltd
s258A-258F: Situations in which reductions of share capital are authorised.
s254K(2) authorises capital reductions involved in the redemption of
redeemable preference shares
s257A(2) authorises reductions involved in share buy-backs.
Criminal liability of a person dishonestly involved in reduction that does not
comply with s 256B(1).s 256D(1) and 256D(4).
Directors may be personally liable if a reduction results in company
becoming insolvent. S 588G

Members Rights

S/hs Rights and Remedies

attend meetings and vote on issues affecting company (e.g. election and
dismissal of directors).
receive notice of meeting.
have shares protected against decisions of directors (e.g. to forfeit those
shares).

right to transfer share ownership, especially, Ltd companies.

receive company reports and other information.
dividends.
receive any final distribution on winding up.
participation in further issues of shares, share buybacks, mergers and
acquisitions.
ratify directors actions that otherwise amount to breach

Oppression

s232 - states that the court has jurisdiction to give relief if it is of the opinion
that:
(1) the conduct of a companys affairs; or (affairs of company defined
s53)
(2) an actual or proposed act or omission by or on behalf of a company;
or
(3) a resolution, or a proposed resolution, of members or a class of
members of a company; is either:

(i) contrary to the interests of the members as a whole; OR

(ii) oppressive to, unfairly prejudicial to, or unfairly
discriminatory against, a member or members whether in that
capacity or in any other capacity.
Test of fairness:
The content of fairness in an oppression application will depend upon the

context. One looks at whether objectively in the eyes of a

commercial bystander, there has been unfairness, namely conduct
so unfair that reasonable directors who consider the matter would
not have thought the decision fair: Morgan v 45 Flers Avenue per
Young J.
o Assessed at time oppressive conduct engaged in, with the
knowledge that wrongdoers had as to whether unfair. Judged by
standard of what is known at time of conduct.
o Not necessary to establish want of probity, actual fraud or
dishonesty to show oppression. Instead, oppression remedy
focused on effect of conduct in question on person bringing
application.
o Mere fact that a board has acted in good faith and for a proper
purpose will not save it from being found to have acted
oppressively: Wayde v NSW Rugby League
Fairness is not to be assessed in a vacuum: The content of fairness
in an oppression application will depend on the context. For example,
conduct which may be fair between competing business people may not
be fair between members of a family company: ONeill v Phillips [1999]
Most importantly, the type of company will affect whether something is
unfair and history of company (including powers given under constitution).
In Wayde, a decision was found to be fair because power granted in
constitution. In making oppression determination, may involve court
balancing competing interests.
It may be appropriate to look at the legitimate expectations of the
parties. In squeeze out situations in small companies, members have
legitimate expectations they will have involvement in company and
obtain return on investment. If sacked from job, may be oppressive
conduct as expectations are such that expectations breached.

Assessment may take courts close to examining merits of decision.

Rather than merely looking at whether proper procedure has been
followed, will not save action from being oppressive.
It is a balancing exercise between competing considerations:
standing, grounds for compliant and orders
(i) Standing
S234: Persons who can bring oppression suit are
o Current and former members who had been removed
Former member if persons removed from register of
corporation or if application relates to circumstances in
which he/she ceases to be a member
Someone who has been blocked from being a member
Smith v Fawcett
ASIC
o New members complain about preceding actions of Co.
Spagous Mining ML there shouldnt be any standing for
members who havent been affected by the wrong
John Jay Star Case under the new legislation it might be possible to tally
up a series of small maters that overall turns into oppressive conduct
Can sue on an isolated act or omission s232
(ii) Grounds for complaint
Diversion of corporate opportunity: where controller has diverted
corporate opportunity properly belonging to company, e.g. Cook v Deeks.
Most common and more easily established.
Limiting dividends: unfair restriction on dividends paid, allegation that
company has not paid dividends to shareholders or not high enough
amount. It is generally difficult to make out oppression on the basis of
limiting dividends as every SH is treated equally and members still retain
profits in the value of company.
o In deciding whether a particular limitation on a dividend is
oppression has been established, courts will have regard to:
Thomas v H W Thomas.
(i)
the history of the company,
(ii)
the extent of the companys financial need,
(iii)
the companys usual dividend policy,
(iv)
the structure of company,
(v)
economic circumstances in the industry, and
(vi)
reasonable expectations of members of the corporation:
Thomas v H W Thomas Ltd (1984)
o Facts: concerned small family company in which all
members, with exception of M, the minority SH,
accepted that company should operate in financially
conservative manner. Members generally obtained
return on investment via remuneration as employees
and the company had long had a policy of retaining
dividends. M wished to sell the assets of the company
to return a dividend, and applied to court complaining
he was locked into company and conduct of affairs was
oppressive. Sought orders for purchase of his shares
and regulating conduct of affairs in future.
o Issue: should relief have been given to this petitioner
on the basis of the new wording of s232?

Held: Court started from proposition that this was a

remedial provision directed to situations of visible
departure from standards of fair dealing which one
might fairly expect not to be considered separately.
o Where the member is adversely affected in ways other
than financially, the determination as to whether it is
unjustly so must turn on an overall assessment of
the position in the company. Fairness cannot be
assessed in a vacuum or simply from one members
point of view. It will often depend on weighing
conflicting interests of different groups within the
company.
Exclusion from management: This ground may be made out in the
case of quasi partnership companies where there has been
exclusion of SH from management of company and where there is
a legitimate expectation on part of SH that they will be involved in
management. Analysis is similar to winding up on just and equitable
grounds in a quasi partnership: Ebrahimi v Westbourne Galleries
Directors failure to act in interests of company: conduct of directors
should be measured by what is in the best interests of the company.
o Re Spargos Mining NL (1990)
o Facts: Spargos Mining was the subject of a takeover by IRL, which
gained control of Spargos' general meetings. The Spargos board
was transformed with an infusion of IRL nominees. S then entered
into series of transactions in interests of IRL but not minority SH. IRL
as nominee director was directing S to benefit itself.
o Standing: Court noted that a persons interest as a SH is sufficient
to confer standing on them to bring an action which suggests SH
can bring action for conduct before they became member as
long as they were a member at time of instituting the suit
o Murray J held that unfair action or inaction taken in the
o interests of the parent company in opposition to the interests of the
subsidiary shareholders may fall within Pt 2F.1, and directors should
remove themselves from such a conflict of interests or protect all
relevant interests.
o Conduct will be oppression if directors or members exercising
controlling power in affairs to pursue objects for own
interest to detriment of company or other shareholders.
o The holding of a GM of shareholders for the purpose of
remedying oppression does not work where the oppressor
effectively controls the voting power of such meeting. The
meeting itself worked further oppression.
o Remedy: His Honour sought to tailor the remedy and opted for an
interventionist order under s 233(1)(c), by which he replaced the
existing BoD with a board of his own choosing. He also ordered
alterations to the constitution, and ordered the new board to
conduct investigations into the past affairs of the company.
Once the relevant oppression or unfairness is found, it is the
obligation of the court to grant whatever relief is best
suited to deal with that conflict
Improper share issue: shares issued for improper purpose, e.g. to dilute
interests of other shareholders is capable of being classified as oppressive
conduct.
o

Re Dalkeith Investments Ltd (1985)

at board meetings
John J Starr (Real Estate) v Robert R Andrew (1991)
Facts: Andrew was MD of Robert R Andrew and acted as though
he owned company. Using boardroom tactics to manipulate
board to his interest, without any regard to views of minority
directors
o As general matter, board room tactics or strategy is not
sufficient to amount to oppression, but where such
tactics are used to consistently deprive minority directors
of ability to participate, it will amount to oppression.
o Court found oppression in this case because of cumulative
effect of actions taken, to deprive minority of participation rights
and effectively prevent them from taking part in management.

o
Conduct
o
o

Expropriation of the minoritys shares:

Gambotto v WCP Ltd (1995)
o If alteration will give rise to a conflict but no
expropriatory action, then it will be valid unless it is ultra vires
or oppressive. Court does not give indication of how test is
applied, except that oppression has meaning at general law
assessed by perspective of objective commercial bystander.
o If the alteration involves the expropriation of shares or
proprietary rights attaching to shares, then:
It must be for a proper purpose; and
It must not be oppressive.
Fairness : notice and fair market value
(iii) Orders
o The range of orders which may be made under s233, and are at
the courts discretion. They include:
(a) that the company be wound up;
(b) that the company's existing constitution be modified or
repealed;
(c) regulating the conduct of the company's affairs in the
future;
(d) for the purchase of any shares by any member or person
to whom a share in the company has been transmitted by will
or by operation of law;
(i) restraining a person from engaging in specified conduct
or from doing a specified act;
(j) requiring a person to do a specified act
Jenkins v Enterprise Gold Mines NL (1992)
Facts: involved redistribution issues because the
majority shareholders were getting a benefit
Once relevant oppression or unfairness is found,
it is the obligation of the court to grant whatever
relief is best suited to deal with that conduct.
Oppression was found as fact. One act of
oppression was exacerbated in that it was in fact
ratified at a GM. There is nothing in any of the
authorities which would tend to place a limit on

the grant by the court of an appropriate remedy

and powers given are extremely wide. They
include power to make orders regulating conduct
of the affairs of the company in the future.
In this case, court held original relief was
inadequate, need to give relief which would
enable earlier transactions to be fully
investigated.

Re Spargos:
o The court gave an order to remove entire board and
appoint new board in its place. To prevent IRL from
convening GM and appointing new board, the court
ordered that new board must remain in place for 12
months.
This case shows the huge flexibility of oppression
remedies under s233
Institution of Legal Proceedings On Behalf of company: The courts may
authorise an oppressed or unfairly treated member to institute proceedings
in the name and on behalf of the company. S 233(1)(g). In Re Overton
Holdings Pty Ltd (1985) WAR 224, the SCWA granted an order authorising a
member to institute legal proceedings on behalf of the company against
the managing director and his associated companies for breach of their
duties to the company.

Contracts & Authority

S124(1) - the corporation has all the legal powers of a natural person
S124(2) - a companys legal capacity to do something is not affected by
the fact that the companys interests are not, or would not be, served by
doing it
S125 constitution may limit powers and set out objects
1) Constitution may contain an express constriction however the exercise
of a power by the company is not invalid merely because it is
contrary to an express restriction or prohibition in the companys
constitution
2) Constitution may set out objects, however will not invalidate actions
contrary

1. Contracting by corporate organs and agents

The law provides 2 ways in which corporation can bind itself

o Various statutory provisions under CA
o Through agency law
S126 agent exercising a companys power to make contracts
A companys power to make, vary, ratify or discharge a contract may be
exercised by an individual acting with the companys express or implied
authority and on behalf of the company. The power may be exercised
without using a company seal
S127 execution of documents (including deeds) by the company itself
(1) 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
(2) 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) two directors of the company

(b) or a director and a company secretary of the company

2. Authority at Common law

2 key questions
o 1. Whether person said to be agent is in fact an agent
o 2. Was the person acting within the scope of their authority

(A) ACTUAL AUTHORITY

Where principal has in fact authorized the actions of the agent. Such
authority may be express or arise by implication from appointment.
Actual authority is a relationship between principal (company) and agent
created by a consensual agreement to which they alone are parties. Its
scope is to be ascertained by applying ordinary principles of construction of
contracts, including any proper implications from the express words, the
usages of trade, or the course of business between the parties Freeman
and Lockyer
Who has actual authority
o Look to the companys constitution to see who has actual
authority generally, it is the BoD
o Mahoney v East Holdings Mining Company ltd where the board
had not been properly appointed, the shareholders were able to
make a representation that the other members had actual
authority

Implied actual authority

o

Types of implied actual authority

1. Customary authority
o Authority which an agent in the trade, business or profession
or place in which the particular agent is employed would
usually or customarily possess, unless something was
expressly said by the principal to contradict it
2. Incidental authority
o Every agent has implied authority to do everything necessary
for and incidental to carrying out his/her express authority
according to the usual way in which such an authority is
executed
Customary Authority of various positions
o MD
In Hely-Hutchinson, the court said that the usual tasks of the
MD involve dealing with the day to day affairs of the
company, the supervision of the daily running of the
corporation, other managers and the operational running
of the business.
Types of transactions the MD can commit the company to is
contractors to provide services for the company but there
is no authority to make radical changes to the
o

Authority that is implied from the conduct of the principal or the

circumstances of the case

business of the company and its direction Freeman

and Lockyer
o Individual Directors
They do not have implied authority to bind the
company because individuals do not make decision only
the board as a whole does Brick & Pipe Industries Ltd case
Exception where company only has one director
o Chairperson
No greater powers than any individual director. Does not have
the power to enter into guarantee on behalf of the company
or to give indemnity
o Company Secretary
Customary Authority to enter in to administrative contracts
Hely-Hutchinson v Brayhead Ltd
Actual authority may be express or implied. It is express, when it is
given by express words, and it is implied when it is inferred from the
conduct of the parties
o Communicated acquiescence:
BoD allowed Richards to act as if he was a de facto MD
Often Richards entered contracts without the knowledge of
the board and the board usually affirmed what R had done
and this was communicated to the whole board.
Therefore, R had narrow implied customary authority that
was expanded by the boards conduct in giving a pattern of
communicated acquiescence.

(B) OSTENSIBLE AUTHORITY

Ostensible authority is about appearance (i.e. how things appear to the
outsider) so it is necessary to consider the third party and what they
believed and why they believed it
o It depends on how things appear to the outsider to the relationship
Freeman and Lockyer v Buckhurts Part Properties Ltd
Diplock LJ ostensible authority is a legal relationship between the principal
and the contract created by a representation, made by the principal to the
contractor, intended to be and in fact acted upon by the contractor, that the
agent has authority to enter on behalf of the principle
Diplock LJ THE TEST: Key elements for successive claim of ostensible
authority
A third party may enforce the contract against the company if they can
establish that:
(i) The company made a representation to the contractor that the
agent had authority to enter into a contract of the type sought to be
enforced
(ii) The representation was made by a person with actual authority
to manage the companys affairs either generally or specifically in the
particular matter at issue

(iii)The contractor relied upon the representation and was induced

to enter the contract because of it
(iv)
The company is not deprived by its constitution of the

ability to enter into the contract or the ability to delegate

authority to an agent
Representation, once acted upon operatesas an estoppel
Diplock LJ A contractor who enters into a contract with a
corporation has constructive notice of its constitution

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Pty Ltd

Take away: a person with no actual, but only ostensible authority to do
an act or to make a representation cannot make a representation which
may be relied on as giving a further agent an ostensible authority

Statutory Assumptions as to authority

The rule in Turquands case - the indoor management rule

o According to Morris v Kanssen [1946], the rule in Turquands case
allows a person to assume that: That is in order which appears to
be in order "
o a reflection that the outsider often does not know what is going on
internally and as long as it all appears to be in order
o Morris also provides A person 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.
allows a third party contracting party to allow on certain statutory
assumptions that will go through unless the person knew or
suspected that the assumption as incorrect
S128(1) a person is entitled to make the assumptions in s129 in
relation 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.
o NB// this does not require a chain of dealings but a one off dealing
with the company is enough
S129(1) A person may assume that the companys constitution (if
any) and any provisions of this act that apply to the company as
replaceable rules, have been complied with " reflecting the indoor
management rule
S129(2) 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 of a company
secretary of a similar company
NB// this paragraph reflects usual implied authority
S129(3) - A person may assume that anyone who is held out by the
company to be an officer or agent of the company;
(a) Has been duly appointed; and
(b) Has authority to exercise the powers and perform the duties
customarily exercised or performed by that kind of officer or
agent of a similar company
NB// reflects ostensible authority

Need for holding out from company suggests a need for actual
authority in rep to bind
o NB// The elements of inducement and reliance from Diplock
LJ in Freeman Lockyer is not included in this statutory
provision
S129(4) a person may assume that the officers and agents of the
company may properly perform their duties to the company
o The duties include the requirement to act for proper purposes and
not to abuse any power.
o From Sunburst Case, you can have a cumulative effect of the
assumptions. In this case there was a cumulative effect between
s129(2) and s129(4).
S129(5) 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 s127(1).
S129(6)- A person may assume that a document has been duly
executed by the company if:
(a) A companys common seal appears to have been fixed to the
document in accordance with s127(2); and
o NB// this means that it need not be the actual seal lower threshold
(b) The fixing of the common seal appears to have been witnessed in
accordance with that subsection
o

When will there be the loss of the benefit of the assumptions

Protection as lost in Turquands case when the third party contractor was
put on inquiry
If a transaction was unusual in this way then it would prevent you from the
protection of the Turquands rule and ostensible authority
S128(4) a person is not entitled to make an assumption in s129 if at
the time of the dealings they knew or suspected that the assumption
was incorrect
Suspicion a suspicion is more than mere idle wondering. It is a positive
feeling of actual apprehension or mistrust QLD Bacon v Rees

Sunburst properties Pty ltd v Agwater Pty Ltd [2005]

Grey J the onus is on the company to establish a persons subjective
knowledge or suspicion that the s129 assumptions are incorrect and this
is quite different to being put on notice this suggests that it is actual
knowledge or real suspicion, which favors the outsider.

Liability in Crime and Tort

Commonwealth Legislation:
Criminal Code: Criminal Code Act 1995:

 Body corporate may be guilty of any offence including one

that entails imprisonment. S 12.1(2) Criminal Code
Company can be fined instead of imprisoned. S 4B of Crimes
Act 1914.
Crime consists of physical element (atus reus) and fault
element (mens rea) Ss 3.1(1), 4.1 4.3, 5.1 5.6 Criminal
Code.
Crime attributed to company if agent acted within their
authority, Ss 12.2, 12.3(1)(2).
Liability may be strict/absolute, s 3.1(2) Criminal Code.
Presidential Security Services of Australia Pty Ltd v Brilley
Liability of a company for any particular breach of the criminal law will
depend, in significant part, upon the nature, elements and terms of the
offence
Process of attribution of criminal responsibility will principally be,
statutory interpretation of the provision creating the offence
Bingle will be liable if he was not seeking to perform or execute the
companys responsibility to the club and had engaged in a violent attack
on the plaintiff for reasons other than driving him off an intruder
Company may be found guilty of that offence on one of two bases, on the
grounds of vicarious responsibility(liability via agency) or on the basis that
the person who committed the actus reus and had the requisite mens
rea(intention/knowledge of wrongdoing) was the directing mind and
embodiment of the company

Takeovers