The decision of the Supreme Court of New South Wales in Australia and New Zealand Banking Group Limited v Adventure Quest Paintball-Skirmish Pty Limited; Woollard v Hodgson; Hodgson v Wollard [2016] NSWSC 188 is recent authority relating to the circumstances in which third parties are entitled to make certain assumptions when dealing with companies.  The case deals with a loan agreement on which the signature of one director was forged.

Adventure Quest Paintball-Skirmish Pty Limited (Adventure Quest) entered into loan agreements with ANZ in 2004 and 2009 (2009 Loan). The 2009 Loan facility consisted of the balance of the loan made in 2004 and a further advance of $50,000.  In 1996, the directors of Adventure Quest, Mr Hodgson and Mr Woollard, had personally guaranteed an overdraft facility provided by ANZ. This personal guarantee was later used as security for the 2009 Loan.  Further security for repayment of the 2009 Loan was given to ANZ by way of a mortgage over a rural property (the Property) owned by Mr Woollard.

Adventure Quest defaulted under the terms of the 2009 Loan and in 2014, ANZ commenced recovery proceedings against Adventure Quest along with Mr Hodgson and Mr Woollard as guarantors. The relief claimed by ANZ in the recovery proceedings included leave to issue a write for possession of the Property.

Mr Woollard defended the proceedings on the basis that he had not signed any documents with respect to the 2009 Loan and so any obligations he had in prior dealings with ANZ did not extend to debts owed by virtue of the 2009 Loan agreement.

ANZ relied on the statutory assumption under section 129(5) of the Corporations Act 2001 (Cth) (the Act) with respect to its ability to rely on and enforce of the 2009 loan agreement.  Section 129(5) provides that:

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 subsection 127(1)...

Section 127(1) of the Act lists the ways in which a company can execute a document without a common seal.

Section 128 of the Act sets out the circumstances in which the assumptions contained in section 129 are able to be relied upon.  In particular, a third party is entitled to rely on the assumptions in section 129 of the Act  even if the company acts fraudulently in connection with the dealings, so long as the person making the assumption did not know or suspect that the assumption was incorrect at the time of dealings.  Section 128 also provides that a company is not entitled to assert in any proceedings that the assumptions in section 129 are incorrect.

As ANZ was entitled to rely on the statutory assumptions, Adams J held that ANZ was entitled to enforce the 1996 guarantees as well as the mortgage securing the 2009 Loan.

As a first step, the Court had to satisfy itself that there were dealings between the parties as required by section 128, in order for the assumptions in section 129 to arise. In this case, Mr Hodgson, one of the company directors, had previously been engaged in dealings with ANZ and was taken to be the agent of the company, as such ANZ was entitled to deal with Mr Hodgson in respect of the loan transactions.

Once this first step was satisfied it followed that any claim of forgery did not cause an issue. There was no dispute between the parties as to whether the signatures were forged.  Rather ANZ relied solely on the statutory assumptions under sections 127, 128 and 129 of the Corporations Act, resulting in the forgery being irrelevant.

Adams J at [26] held that the 2009 loan agreement was executed on behalf of Adventure Quest by Mr Hodgson and was purported to be executed by Mr Woollard, on its face satisfying section 127(1) of the Corporations Act. This brought into effect the assumption in section 129(5) so that ANZ was entitled to act on the basis that Adventure Quest had accepted the terms of the 2009 loan, including the provision of security by way of the existing guarantees.

The result of the statutory assumptions is that forgery can be, in certain situations, irrelevant when determining the creation of obligations of a company to a third party.

Take away

The provisions of sections 128 and 129 of the Act work to restate the indoor management rule of companies, one function of which is to protect people dealing with companies. A lender will be entitled to assume the officers of a company have complied with its internal rules. Lenders can rely on documents, which purport to be executed in compliance with section 127 of the Corporations Act, so long as the lender has had dealings with the company and the lender had no knowledge or suspicion of any forgery.

On the flip side companies need to ensure that their directors and officers comply with the internal rules of the company and that good corporate governance is effected.  ASIC now provides companies with resources for corporate governance.

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