David Davis & Associates recently acted for the vendor of a property on the Mornington Peninsula. Still being in the midst of the pandemic, the vendor was pleased to secure a purchaser; a local company. The parties signed the contract, the cooling-off period passed, and our client thought all was done and dusted. Four days later, the purchaser pulled out. What went wrong after executing the contract?
Executing commercial and legal contracts as a company
Under Section 127 of the Corporations Act 2001 (Cth), companies have two options when it comes to executing documents.
1. When the company has a common seal
One option is to affix a common seal to the document.
A common seal is a rubber stamp containing details of the company:
- name of the company;
- Australian Company Number (ACN); and
- the words ‘common seal’.
Not every company has its own common seal as it depends on the individual company’s constitution. If a company chooses to execute a document by affixing the common seal, the fixing of the seal must be witnessed by either:
- two directors of the company;
- a director and company secretary; or
- a sole director in circumstances where there is a sole director who is also the sole secretary.
2. When there is no company seal
The other option avoids the need for a common seal.
The document simply needs to be signed by:
- two directors of the company; or
- a director and a company secretary; or
- a sole director, if the company has a sole director who is also the sole company secretary.
Consequences of improper execution of contracts
Under Section 129 of the Corporations Act, a person can assume that a document has been properly executed by a company if the company has signed the document in accordance with Section 127 (as outlined above).
If the company does not sign the contract in accordance with Section 127 (for example, if only one director signs the document when they are not a sole director and secretary) any other party cannot rely on Section 129 and assume that the company properly agreed to the document. The document therefore may be unenforceable.
Parties may also have difficulty registering a sale of land with the Land Registry via PEXA if the sale contract is not properly executed.
What went wrong in our recent case?
In our client’s case, the purchaser company had not executed the document properly.
The client’s real estate agent, who handled the signing of the contract, did not know about the requirements under Section 127 and did not notice the error.
The purchaser company realised a week after signing the contract that it had not executed the document properly. This meant that they were not bound by the contract and they could pull out of the sale. In this case, they did pull out!
Accurate and legal execution of contracts is critical
This example illustrates how important it is to check that any contracts entered into by a company are executed correctly.
We recommend engaging a solicitor throughout the process of signing any type of contract so that any defects are picked up before it is too late. Often, we can find remedies for the defect and prevent major disappointment, as long as we know about the issue in time.
COVID-19 update – electronic signatures now permitted
The process of getting company directors and/or secretaries together to sign a document may be difficult during the current pandemic. One of your directors may be interstate, unable to cross the borders, or perhaps is avoiding physical contact with others due to pre-existing health issues.
The Federal Government is aware of these issues. In response, the Treasurer made a determination on 5 May 2020 allowing companies to fulfil the requirements of Section 127 using electronic signatures.
To be valid, the signed electronic document must include the entire contents of the document, but it does not need to include the signatures of all the other parties. This means that each director can sign a separate soft copy of the document.
To sign a document electronically, parties can copy and paste a picture of their signature into the document, sign their signature using a touchscreen or use another appropriate digital signing method.
Importantly, the other side must agree to electronic signing and to the specific signing method being used.
These developments should make the signing process easier for companies.
In this instance, the two directors of the company attended the signing of the Contract of Sale of Land but advised the agent in attendance that only one director needed to sign. It appears this was done to either deliberately mislead the vendor and the agent, or by ignorance from the director.
Our tips when signing contracts as a company
If a company is signing a contract you must:
- request your lawyers or the agent do a company search to determine the names of company directors;
- in accordance with your search, have the directors sign in accordance with Section 127; and
- request the directors to sign a personal guarantee.
What is most important is that a company meets the requirements of Section 127 by having all of the necessary people sign the document on the company’s behalf.
If you are entering into a contract either with a company or on behalf of a company and would like further guidance on Section 127 or any other aspect of the contract, our experienced commercial and property team would be happy to assist you.
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