LK Bros Pty Ltd v Collins[2004] QSC 26

SUPREME COURT OF QUEENSLAND

[1] The applicant briefly carried on the business of retailing general merchandise from a convenience store known as ‘Night Owl’ located on Logan Road at Mount Gravatt.  There is a chain of such stores, the name and goodwill of which is owned by the second respondent, which enters into franchise agreements with particular franchisees who then conduct business at a particular store.  The first respondents are chartered accountants who were appointed by the second respondent as receivers of the applicant’s business pursuant to the terms of a mortgage debenture ‘purportedly entered into’ between the applicant and the second respondent in April 2003.

[2] The applicant seeks a declaration that it did not effectively execute, and is not bound by, the mortgage debenture pursuant to which the second respondent appointed the first respondents as receivers.  The applicant seeks a further declaration that the appointment of the first respondents was ineffective and invalid.

[3] Only one point arises for determination in the proceedings and it can be disposed of shortly.  The applicant’s contention is that it did not execute the mortgage debenture in accordance with its constitution, and that the directors of the applicant did not authorise the applicant to make the agreement constituted by the charge.

[4] The applicant has two directors and two shareholders.  They are Mr Daniel Louati and his father-in-law Mr Yasuyuki Komoto.  The applicant has six issued shares, five of which are owned by Mr Louati and one by Mr Komoto.  Mr Louati is Tunisian.  According to his affidavit he has a poor grasp of English and has difficulty in reading, writing and understanding the English language.  He sought leave to appear for his company.  The solicitors who formerly represented it withdrew, apparently because of the applicant’s inability to pay for their services.  I accept that Mr Louati’s command of English is limited.

[5] Mr Louati’s wife is Japanese.  The other director and shareholder, Mr Komoto, is Mrs Louati’s father.  He lives in Kobe in Japan and speaks no English at all.  The directors communicate, when they do, through the interpretation of Mrs Louati and/or Mrs Komoto.  The former is said to speak ‘a manageable amount of English’ while the latter speaks ‘a little English’.  It is apparent that the directors cannot communicate directly.  Communication indirectly through an interpreter is clearly difficult given Mr Louati’s inability to express himself fluently in English and by his wife’s, or mother-in-law’s, limited capacity to comprehend English. 

[6] Mr Louati signed a franchise agreement on 14 April 2003 on behalf of the applicant.  Someone has apparently signed the agreement on behalf of the second respondent though the signature is undated and was not witnessed.  Item 34 in the second schedule to the agreement provided:

‘The grant of this franchise is subject to you providing us with a fixed and floating charge over the business assets, chattels and stock located at the store … before the start date and at your cost.’

[7] Mr Komoto did not sign the agreement.  He has not seen it.  It would not matter if he had:  he could not read it.

[8] The mortgage debenture which lies at the heart of the dispute between the parties is designated ‘charge deed’ and was signed by Mr Louati on 7 April 2003.  The execution page reads:

‘This document is signed by the chargor as a deed. 

Signed by L.K. Bros Pty Ltd ACN 103 878 351 as permitted under the Corporations Act 2001 in the presence of

…………………………………….

Director

…………………………………….

Director/Secretary

7/4/03

Date of signing’

[9] Mr Louati’s signature appears twice, once above the word ‘Director’ and once above the words ‘Director/Secretary’.

[10] Mr Louati’s affidavit, prepared when solicitors acted for the applicant, recites:

‘20.I cannot recall ever signing the charge, although I am quite sure that I have never done so.  It does appear to bear my signature but I cannot explain this.  A copy of the charge was provided to me by the … respondent on 17 November 2003.  I did not hold a copy of the charge in my own records prior to this.  I was unaware of it before he gave me a copy of it.  This is the first time that I have seen it.

21.The charge does not appear to have been signed by Mr Komoto.  So far as I am aware, Mr Komoto has never signed it, or even seen it.’

[11] Despite this, during the hearing, I asked Mr Louati whether he accepted that he had signed the mortgage debenture and he agreed that the two signatures were both his.  I note that there is a very close resemblance between those signatures and Mr Louati’s signatures, which appear on the pages of his affidavit.

[12] Mr Louati asserts in his affidavit that he never discussed with Mr Komoto whether the applicant should charge its assets and undertaking in favour of the second respondent to secure its obligations under the franchise agreement.  According to Mr Louati he, ‘simply never discussed such matters with him in person, through other people or over the telephone.’  Mr Komoto last visited Australia in May 2002.  At the time when the applicant was incorporated for the purpose of negotiating and entering into the franchise agreement, Mr Louati travelled to Kobe where Mr Komoto signed, ‘a number of documents associated with the incorporation of the (applicant)’.  This appears to be the full extent of Mr Komoto’s involvement in the applicant’s affairs.

[13] By clause 4 of the charge the applicant charged in favour of the second respondent, ‘all its present and future rights in all of the charged property’ to secure, ‘the due and punctual performance, payment and/or repayment of the secured obligations.’  “Charged property” was defined to mean all of the applicant’s present and future undertakings, assets and rights in personal property, fixtures and fittings, chattels and stock.  Secured obligations were defined to mean, in effect, all monies payable at any time by the applicant to the second respondent pursuant to the franchise agreement.  By clause 19 a failure to, ‘completely and punctually pay or repay any part of the secured obligations when due’ was an event of default.  Clause 22.1 provided that upon or at any time after the occurrence of an event of default the second respondent could appoint a receiver to the charged property.

[14] The second respondent’s affidavits depose to a number of failures by the applicant to pay monies, which fall within the definition of ‘secured obligations’.  Indeed, during an earlier hearing when the applicant was represented by counsel, it was conceded that it had not made some payments when they were due.  The applicant’s venture into retailing appears to have been a complete failure.  Mr Louati told me he had no experience in business of that kind and it seems a fair conclusion that he did not adapt well to its demands.  The second respondent’s evidence would support a finding that the applicant had closed its shop and abandoned the business.  It is not necessary to make any findings to this effect or to identify with any precision the applicant’s failures to pay money due to the second respondent.  Mr Louati did not seek to resile from the applicant’s counsel’s earlier concession.

[15] The nub of the applicant’s argument is to be found in the terms of clause 55.4 of the applicant’s constitution.  That provides:

‘The company may execute a document without using the seal if the document is signed by:

(a)Two directors of the company;  or

(b)A director and a company secretary of the company;  or

(c)…

(d)…’

[16] Mr Louati was the applicant’s secretary as well as one of its two directors, but the clause clearly contemplates that two persons should sign a document on behalf of the applicant:  two directors, or one director and the secretary. Counsel for the respondents argued that the signature of the one person who held two different offices satisfied the terms of clause 55.4(b).  He relied upon a decision of Green J, The Chateau Pty Ltd v Her Majesty’s Attorney General for Tasmania [1960] Tas SR 23 in support of the proposition.  Green J had found that a signature of one who was both director and secretary of a company, put twice on a loan agreement and mortgage to secure the loan, satisfied an article which required the company’s seal to be affixed, ‘in the presence of one director and the secretary …’.   I cannot think this is right and do not accept the case as authoritative. 

[17] Mr Louati drew attention to correspondence, which passed between the second respondent’s solicitors and the applicant’s then solicitors, concerning the execution of ‘the franchise documents’.  The second respondent’s solicitors said that the documents had to be signed by two directors and that the franchisor would not sign them, ‘as it awaits the proper execution of the documents by’ the applicant.  Another letter from the applicant’s solicitors to Mr Louati suggested that Mrs Louati be appointed as a director so that she could sign the documents on behalf of the applicant to overcome the problem that Mr Komoto could not sign because he was in Japan.

[18] The applicant’s reliance upon the terms of clause 55.4 and this correspondence is misplaced.  The clause is concerned with the manner in which the applicant, as a corporation, could manifest its own assent to a contract or other transaction.  The mode of execution described is one which, if followed, has the consequence that the applicant itself executes a contract.  The clause does not preclude the applicant from being bound to the terms of a written agreement where the agreement is executed by an agent for the company.  The clause does not provide that the applicant might only bind itself to a written contract by the mode of execution described.  If it did it would conflict with a number of statutory provisions which authorise companies to make contracts in less formal ways. 

[19] Section 126(1) of the Corporations Act 2001 (Cth) provides that:

‘A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company.  The power may be exercised without using a common seal.’

[20] It may be noted in passing that the charge did not take effect as a deed because the applicant’s seal was not affixed to it, and,  although it was expressed to be a deed, it was not ‘executed in accordance with’ section 127(1) or (2) of the Corporations Act, because it was signed by only one director.  The charge was, however, effective as an agreement.  Consideration was given for it as appears from clause 3.1.

[21] Section 227 of the Property Law Act 1974 provides that:

(1) ‘Contracts … may be made or effected by any body corporate … as follows –

(a)A contract … which is made or effected by or between individuals would by law be required to be in writing, signed by the party to be charged with it or effecting the same, may be made by the corporation in writing signed by any person under its authority, expressed or implied;  and

(b)A contract … which is made or effected by or between individuals would by law be valid although made by parol only, and not reduced to writing, may be made by parol by the corporation by any person acting under its authority, express or implied.

(2)A contract … made or effected under this section shall be effective in law, and shall bind the corporation and the corporation’s successors and all other parties to the contract …’

The better view of the section is that it is permissive and does not dictate the means by which a company may make a contract.  It also appears to be the case that the word ‘parol’ where it appears for the second time in section 227(1)(b) refers to contracts made orally or in writing.  See the discussion in Property Law and Practice by Duncan and Vann paragraphs 15.450 – 15.470.

[22] Section 46(2) of the Property Law Act is to the same effect.  It provides:

‘The Board of Directors … of a corporation aggregate may, by resolution or otherwise, appoint an agent either generally or in any particular case, to execute on behalf of the corporation any agreement or other instrument not under seal in relation to any matter within the powers of the corporation.’

[23] Subject to one qualification the terms of section 126 of the Corporations Act and sections 46(2) and 227(1)(b) of the Property Law Act would allow the applicant to execute the mortgage debenture, and be bound by it, by means of Mr Louati affixing his signature to it.  The qualification is, of course, that Mr Louati was authorised by the applicant to make the agreement on its behalf. It is clear from the statutory provisions that the applicant was not limited in the manner in which it could execute the charge.  Any mode of execution which satisfied the Corporations Act or the Property Law Act would be binding on the applicant.

[24] The question for determination then becomes whether Mr Louati was authorised by the applicant, or its directors, to sign the charge on behalf of the applicant.  He deposes to the fact that he never discussed with his co-director the second respondent’s insistence that the applicant provide the mortgage debenture nor did he tell Mr Komoto that he intended to or had signed the charge.  The directors as such never turned their minds to the question of whether the applicant should give the charge. 

[25] Counsel for the respondents submit that this is of no consequence because, on the facts, the only permissible inference is that the directors delegated all of the powers of the board to Mr Louati to be exercised by him as he thought fit.  He drew attention to clause 68 of the applicant’s constitution:

‘68.1The directors … may appoint one or more of themselves to the office of managing director … for the period and on the terms … as the directors see fit.

68.3The directors may confer on a managing director any of the powers that the directors can exercise.  Any powers so conferred may be … to the exclusion of the powers of the directors.’

[26] There is no resolution of the applicant’s directors appointing Mr Louati to be its managing director.  It seems clear that the directors have not expressly addressed the point.  Nevertheless, Mr Sweeney submits that I should infer that the applicant’s directors have made Mr Louati its de facto managing director with authority to bind the applicant with authority to act as he thinks fit in the best interests of the applicant.

[27] The submission is well founded.  I accept it.  There is no doubt that a company may confer actual authority upon one or more of its directors (or other officers) to act on its behalf.  The conferral of this actual authority may be implied from the company’s conduct.  Clarke and Cripps JJA in their joint judgment in Equiticorp Finance Ltd (in liquidation) v Bank of New Zealand (1993) 32 NSWLR 50 at 132 said:

‘Actual authority arises where a principal grants, and an agent accepts, authority for the agent to perform specific tasks on behalf of the principal – in short there must be a consensual agreement between the principal and agent.  Notwithstanding the absence of an express agreement, the parties, that is, the principal and agent, may conduct themselves in such a way that it is proper to infer that the relevant authority has been conferred on the agent.  Accordingly, where the question is whether the agent has implied authority to act in a particular way the court directs its attention to the conduct of the parties in order to decide whether the inference of authority should be drawn.’

[28] The facts which their Honours regarded as important in showing that the court should imply that actual authority had been given to a director included:  (i)  that the putative agent did not find it necessary to refer to the board for approval for a course of action;  (ii)  the board never sought to interfere with his actions;  (iii) that the director in question had actual control over the companies.

[29] The following facts are established and are, indeed, uncontroversial:

(a)Mr Louati owned 5/6ths of the issued shares in the applicant.  He was thus in a position to exercise complete control over the company in general meetings.

(b)Mr Komoto could not understand the language of the jurisdiction in which the applicant carried on its business and could not read or comprehend the documents pursuant to which the applicant contracted with the second respondent.

(c)Mr Komoto could not readily communicate with his co-director.  Apart from the difficulties of language there is the fact that Mr Komoto resided in Kobe while the day to day affairs of the applicant occurred in Brisbane.

(d)By reason of the matters identified in (b) and (c) it was not practicable for Mr Komoto to be involved in the direction of the applicant’s business. 

(e)Mr Louati conducted the negotiations for the acquisition of the franchise on behalf of the applicant without reference to Mr Komoto.  Apart from the initial formalities involved in his becoming a shareholder and director Mr Komoto played no role in the conduct of the applicant’s affairs.

(f)There was a course of conduct by which Mr Louati made all the decisions for the applicant in connection with the making of the franchise agreement and the charge and the conduct of the applicant’s retail store without reference to Mr Komoto.

[30] I infer from these facts that the applicant’s directors intended that their power should be exercised by Mr Louati to the exclusion of Mr Komoto.  It follows that in putting his signature to the charge, Mr Louati had the authority of the directors and, therefore, of the applicant.  That contract was made in a manner authorised by the Corporations Act and the Property Law Act.  Accordingly, it is binding on the applicant.  The application must be dismissed with costs to be assessed on the standard basis.