Execution of documents by directors: what presumptions can a third party rely upon?

By David Dickens, Katherine Payne, Jonathon Brooking

The Supreme Court of Queensland has examined quorum busting and the assumptions that can be made when dealing with a company under the Corporations Act 2001 (Cth) (Act). The decision is Gallop Reserve Pty Ltd v Matton Developments Pty Ltd [2019] QSC 113.

A litigation funder successfully argued that its litigation funding agreement was valid and binding, and received three times the amount it advanced in insurance litigation.

Despite allegations of quorum busting in relation to the appointment of a director and ratification, the litigation funder was able to rely on statutory assumptions of due execution under the Act.

Facts

Pre-litigation

Mr Clark and Mr Kenward were directors of Matton Developments (Matton). Mr Foggo was the sole director of Gallop Reserve (Gallop).

The three men were involved in an industrial building company in the 2000s. Following that company’s liquidation and allegations of misappropriation against Mr Clark, a rift formed between the three men. There was ‘considerable animosity between Mr Clark, on one hand, and Mr Foggo and Mr Kenward, on the other’.

Matton purchased a crane in 2007 after obtaining a loan from Westpac. Mr Clark and Mr Kenward personally guaranteed the loan agreement.

In 2009, the crane was badly damaged. Matton was unable to obtain money from its insurer.

Westpac obtained default judgments against Mr Clark and Mr Kenward after Matton defaulted on the loan.

Litigation funding

Matton lacked the funding for litigation against its insurer.

Mr Kenward (on Matton’s behalf) attempted to enter a litigation funding agreement with Mr Foggo (on Gallop’s behalf), where Gallop would receive three times the amount it advanced for litigation.

Mr Clark had no knowledge of the agreement. The document was executed improperly since it was not under seal by two directors.

Appointment of Mrs Kenward as director

Mr Kenward sought to ratify the agreement. He called a directors’ meeting, which Mr Clark did not attend.

At the meeting (which did not have quorum), Mr Kenward appointed his wife as a director. Her appointment was recorded in the ASIC register.

Mr and Mrs Kenward resolved that the litigation funding agreement was ratified, and appointed Mr Kenward as attorney of Matton for all matters relating to the insurance litigation.

Assignment and priority

Westpac assigned its interest in the loan agreement to Gallop Reserve.

Gallop and Mr Kenward agreed to change the priority of debts owing to Gallop (by means of a ‘priority letter’). Following this agreement, the proceeds of litigation were to be paid out in preference to the Westpac debt.

Outcome

Matton won the insurance litigation on appeal and was awarded $3,042,000 (inclusive of costs).

Gallop advanced $1,237,056 towards the litigation, meaning it was entitled to recover $3,711,168. After the dust had settled, Gallop was owed $862,447 from the litigation funding agreement and $1,560,000 in respect of the assigned Westpac debt.

Held

• None of the resolutions passed at the directors’ meeting involved a ‘procedural irregularity’ within the meaning of section 1322(2) of the Act.
• Gallop was entitled to rely on section 129(5) of the Act that the ratification and power of attorney documents were duly executed by Matton as they appeared to be signed by two directors.
• Gallop was entitled to rely on section 129(4) of the Act that Mr Kenward was properly performing his duties.
• The priority letter was ineffective. However, Westpac’s assignment to Gallop was valid.
• Gallop acquiring rights under Westpac debt was not unconscionable.
• Gallop did not breach the Personal Property Securities Act 2009 (Cth) (PPSA) by not enforcing the Westpac debt in priority to the litigation funding debt.

Key issue 1: quorum busting

Chief Justice Holmes found that the events of the directors’ meeting were substantive irregularities. Rather than a lack of quorum, Mr Kenward attempted to install a “purported quorum”.

The motivation of the meeting was to exclude Mr Clark from participating in decisions relating to the insurance litigation. Section 1322(2) does not apply as the irregularity was more than procedural.

Mr Kenward’s deliberate concealment was designed to prevent Mr Clark from exercising his role as a director. It would not be just and equitable to declare Mrs Kenward’s appointment valid.

Key issue 2: assumptions when dealing with a company

Gallop submitted that it was entitled to make certain assumptions when dealing with Matton by virtue of sections 128 and 129 of the Act.

Sections 129(2) and (3) relate to the due appointment of a person appearing, ‘from information provided by the company that is available from ASIC’ to be director, and of anyone ‘held out by the company to be an officer’. Neither assumption was available to Gallop as the information provided to ASIC was provided by Mr Kenward, a single director without the authority of the company.

However, the other assumptions under section 129 were available. The documents ratifying the litigation funding agreement and giving Mr Kenward power of attorney appeared to be signed by two directors (subsection 5). Gallop was entitled to assume Mr Kenward, as a company officer, was properly performing his duties for Matton (subsection 4).

Accordingly, Gallop was able to enforce the agreement against Matton.

Key issue 3: exercise of rights under the PPSA

Mr Clark (as a personal guarantor to the Westpac debt) sought to have Gallop recover the Westpac debt in priority to the litigation funding debt.

One of the arguments Mr Clark raised was that Gallop was obliged to exercise its rights to recover payment from the proceeds of the litigation in a ‘commercially reasonable manner’. It was also pleaded that subordinating the Westpac debt was malice on Mr Foggo’s part towards Mr Clark.

Chief Justice Holmes found that Gallop had not exercised its rights to recover, nor had Mr Clark identified any duty or obligation imposed by the PPSA.

In simplest terms, Gallop was not at fault for declining to rely on its rights to recover the secured debt.

Takeaways

• Section 1322 of the Act will not apply to validate substantial irregularities where quorum is busted deliberately.
• Third parties can rely on section 129 assumptions when dealing with companies. Care must be taken when determining whether information is provided by the company as opposed to a single director without authority. A third party relying on an ASIC company search to verify execution is in a strong position, even if a director was not validly appointed.