Executing a document is the final step in creating a legally binding agreement. Executing a document is essentially signing the document to indicate that you, or the entity you represent, possess an intention to be legally bound by the agreement. If you have a proprietary limited company, it’s crucial to get this step right to protect your company and any interest you have either received or provided through the agreement.

If you don’t execute a document correctly, it may be fatal to the final agreement and may mean that it is not enforceable. The Corporations Act 2001 (Cth) (the Act) has specific requirements regarding how a company must execute documents in order to create legally binding agreements.

Under section 127 of the Act, a company may either execute documents under a ‘common seal’ or, if the company does not have a seal, it can execute documents without using a seal. Cambridge dictionary defines a seal as an ‘official mark on a document that shows that it is legal or has been officially approved’.

Execution with a common seal (section 127(2) of the Act)

A company can execute a document by placing its seal on the document. Placing the seal on the document must be witnessed by:

  •   two directors of the company; or
  •   a director and a company secretary of the company; or
  •   for a proprietary company that has a sole director who is also the sole secretary – that director.

Execution without a common seal (section 127(1) of the Act)

A company may execute a document without using a common seal if the document is signed by:

  • two directors of the company; or
  • a director and a company secretary of the company; or
  • for a proprietary company that has a sole director who is also the sole company secretary – that director.

Execution of documents in accordance with the company constitution

A company may also execute a document in accordance with the rules set out in the company’s constitution, as section 127 does not limit the ways in which a company may execute a document.

Assumptions people dealing with companies are entitled to make

If a company executes a document either by affixing a common seal or by signing in the manner set out by section 127(1) of the Act, people can make certain assumptions when dealing with the company.

Under section 129 of the Act, people dealing with a company can assume that:

  • the company’s constitution and provisions of the Act that apply as replaceable rules have been complied with.
  • anyone who appears, from information provided by the company to the public, to be a director or company secretary of the company is:
    • duly appointed; and
    • has authority to exercise the powers exercised by a director or company secretary of a similar company.
  • anyone who is held out by the company to be an officer or agent of the company:
    • has been duly appointed; and
    • has authority to exercise the powers customarily exercised by that kind of officer of a similar company.

Why is this important?

Example: Tendai has been searching for a new car and has finally settled on a Mazda 3. He has thoroughly researched what a second-hand Mazda 3 should cost – around $20,000. Armed with this information, Tendai heads to his local second-hand car dealer. A salesperson at the dealer offers Tendai a Mazda 3 for $22,000 and Tendai bargains with him to reduce the price to $19,000. Tendai agrees to purchase the car, signs the sale documents and hands over the cash.

A little later, the owner of the car dealership, Terry, calls Tendai and states that the deal cannot go ahead. Terry says that the salesperson did not have the authority to reduce the price from $22,000 and therefore Tendai cannot have the car.

The salesperson was held out as an officer or agent of the second-hand car dealership. Because of section 129, Tendai is entitled to assume that the salesperson had authority to reduce the price to $19,000 and is entitled to buy the car on these terms.

Conclusion

Section 127 of the Act contains specific requirements for how companies must execute documents, in order for them to be legally binding. Executing documents in the way prescribed by section 127 means that a member of the public dealing with a company can rely on the assumptions outlined in section 129.

Jill McKnight

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