Putting pen to paper – execution under section 127

Execution of documents under section 127 of the Corporations Act 2001 (Cth) is convenient and benefits the counterparty by allowing it to rely on assumptions about due execution set out in section 129. This article considers some of the principles that apply to execution under section 127 and practical issues that may arise.

Section 127 execution

Generally the simplest way for a company to execute a document is in accordance with sections 127(1) or (2) of the Corporations Act.

Under section 127(1) a company may execute a document without using a common seal if it is signed by:

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

Section 127(2) provides that a company may also execute a document by fixing the common seal to the document and having it witnessed by one of the three combinations of officers set out above.

As many Australian companies no longer use a common seal, it is generally more common to execute under section 127(1).

Where a document appears to have been signed (or the seal affixed and witnessed) in accordance with section 127, the counterparty is entitled to rely on the statutory assumptions about due execution set out in section 129 of the Corporations Act unless it has actual knowledge, or suspects, that the assumption is incorrect. In general this means that the counterparty can assume that all relevant internal requirements of the company have been complied with and that the document is binding on the company.

Other execution options

Section 127(4) makes it clear that section 127 does not limit the ways in which a company may execute a document. For example, a company’s constitution may prescribe other methods by which a company can execute documents.

Section 126 provides for agents with express or implied authority to execute a document on behalf of a company. This is typically done by an agent authorised by board resolution or under power of attorney.

If section 126 (or other means of execution) is used, the counterparty will not be able to rely on the section 129 assumptions. The counterparty may, in some instances, be able to rely on other assumptions.1 Nonetheless, if section 127 is not being used, a counterparty may want to undertake due diligence to satisfy itself that the document has been duly executed.

Knight Frank v Paley

A 2014 South Australian Supreme Court decision usefully illustrates the difference between execution under section 127 and execution by an agent, and why it may be important for both parties to know which is being relied upon.

In Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 (Paley), the Supreme Court considered a contract with multiple execution clauses. One clause permitted execution by the purchaser company under section 127 and another by a “duly authorised officer” (ie an agent) exercising the company’s power to make contracts. The director signed the section 127 clause and had struck out the words “Sole Director/Sole Secretary” indicating that the purchaser company had another director or secretary that needed to sign. The other director ultimately did not sign the contract and the purchaser withdrew its offer.

The court found that it was clear the contract had not been executed by the company under section 127 given the absence of the second signature. Nor had the contract been executed by an agent with authority to bind the company; the purchaser’s constitution required a board resolution for a single board member to bind the company and in any event, the director had signed a form of clause inconsistent with execution as an agent.

The court then considered whether the director was personally liable for breach of an implied warranty that the director had authority to execute the contract.2 The court found that in signing the section 127 execution clause, the director was not purporting to act as an agent for the company. Instead the director was undertaking one half of the execution of the contract by the purchaser company itself, which was manifestly incomplete because the execution clause was not countersigned by a second director or secretary.

Tips for smooth execution

The following is an overview of some of the issues that may arise in executing documents. Whether a party wishes to take all possible steps to ensure due execution, whether under section 127 or otherwise, is likely to depend on the circumstances, including the consequences if the document is not enforceable and whether it is likely the other party may seek to set it aside. This will likely involve some assessment of the value or importance to the party of the document in question.

Tips for the counterparty

• Require execution in accordance with section 127 of the Corporations Act – if the agreement is executed in this way the counterparty can rely on the section 129 assumptions.
• Execution by agents (including under section 126) – if a contract is to be signed by an agent the section 129 assumptions do not apply. While certain assumptions can be made in relation to the appointment of agents of a company, these generally require the company to have made some representation of authority or held the person out to be an agent of the company.3 Accordingly, the safest course is for the counterparty to review the source of the agent’s authority.
• Inquiring as to the number and identity of company directors and secretaries – a person may only rely on the section 129 assumptions of due execution where the document appears to have been executed in accordance with section 127. Further, a person is not entitled to make the assumptions if the person knew or suspected them to be incorrect. If there is any doubt as to whether a person signing as director or secretary holds that position, the counterparty should make inquiries.
• What is the position if a person purports to sign a document as a director or secretary but does not in fact hold that office? – there is some authority to suggest that in these circumstances, the counterparty can, in some instances, rely on the section 129 assumptions.4 Nevertheless, the best practice is to make inquiries.
• Signatory incorrectly describes their position or office – it is not uncommon for a director or secretary when executing a document to sign in the wrong part of the execution clause. For example, two directors may sign on behalf of the company but one of the directors signs as company secretary. There is some authority that the counterparty can nevertheless rely on the section 129 assumptions so long as the document has still been executed by persons that entitle the section 129 assumptions to be made and this is confirmed by the information available from ASIC.5 However, the most prudent course would be for the counterparty to check the execution against an ASIC extract and if any errors are identified, require them to be corrected.
• Companies with a sole director and no secretary – the Corporations Act permits proprietary companies to have only one director and no secretary. However, a counterparty to a contract which such a company is not able to rely on the section 129 assumptions as section 127 does not specifically provide for execution by these companies. For this reason, to satisfy itself that the document has been duly executed, the counterparty will generally need to take other steps to verify the director’s authority or alternatively insist on the company also appointing a secretary so they can then execute in accordance with section 127.

Tips for officers or agents signing on behalf of a company

• Warranty of authority – when an individual signs an agreement as agent for a company they are exposing themselves to potential personal liability by warranting (whether expressly or by operation of law) that they have the authority to enter into the agreement on behalf of the principal. The agent should therefore ensure that they have clear authority before signing.
• Signing the appropriate execution clause – an individual signing on behalf of a company, either as an officer or agent, should be careful to ensure they sign the correct execution clause. For example, as outlined in Paley, had the director signed the execution clause for agents it is likely the director would have been personally liable.

Other execution issues

There are a number of other issues that often arise when executing documents.

• Special rules for deeds – many contracts can generally be signed as agreements. However, there are some documents that must be executed as deeds.
• Under section 127(3) of the Corporations Act a company may execute a document as a deed if it is expressed to be executed as a deed and it is executed in accordance with section 127(1) or 127(2). Section 127(4) clarifies that section 127 does not limit the ways in which a company may execute a deed. However, if a deed is not executed under section 127 the counterparty will not be able to rely on the section 129 assumptions.
• Further, where a company wishes to appoint an agent to execute a deed on its behalf, in general, the authority must be given in a deed.6 Accordingly, where a deed is to be executed by an agent, the agent should generally be appointed by power of attorney.
• Directors executing separate counterparts – sometimes officers of the same company may be unable to sign the same physical copy of a document (for example because they are located in different states or countries at the time of signing). Here the question arises as to whether execution in counterparts constitutes execution of the “document” in accordance with section 127. This in turn impacts on whether the counterparty is entitled to make the section 129 due execution assumptions.
• There is some authority that allows two directors (or one director and one secretary) of the same company to sign a deed on two separate documents.7 Despite this authority, there are still conflicting views amongst lawyers on the matter and many counterparties will insist on both original signatures on one document if execution is to take place under section 127. If this is not possible, the parties will need to negotiate an acceptable alternative.
• Executing as trustee of a trust – a company that is trustee of a trust and wishes to enter into an agreement as such should make it clear in the agreement that they are doing so in their capacity as trustee and that their liability under the agreement is limited to the assets of the trust. Failure to do so can, depending on the construction of the agreement, result in the company being personally liable under the agreement.8
• Virtual signing – despite recent advances in technology and the use of styluses with touchscreen devices, most commercially negotiated agreements are still executed by handwritten signatures on paper. This reflects the view that a party is not able to rely on the section 129 assumptions if an electronic signature is used. This is despite the Commonwealth and each state and territory having enacted their own electronic transactions legislation that enable electronic signatures to be used in certain circumstances.9 Under the Commonwealth Act a signature can be given by an “electronic communication” where:
  • the communication identifies the signatory and their intention in respect of the information communicated;
  • the method used is reliable; and
  • the other party consents to the signature being given by the relevant electronic communication.10

  However, certain laws are excluded from the Act or parts of it including the Corporations Act.11 Accordingly, even if the above criteria are met, an electronic signature cannot be used to satisfy the requirement that the directors or secretary sign a document in accordance with section 127 of the Corporations Act. There are a number of instances in which electronic signatures have been found to be effective for the purposes of certain documents.12 However, if a counterparty desires to be able to rely on the section 129 due execution assumptions the safest course is to insist the other party signs using pen on paper.