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A recent case in the Supreme Court of South Australia has scrutinised and cast doubt on how directors and secretaries of companies execute contracts and other documents, particularly in a digital environment. It serves as a notice to companies and advisors to review their current practices and seek legal advice, if required.

The facts of the case

In the judgment handed down on 16 July 2019 in Bendigo and Adelaide Bank Limited & Ors v Kenneth Ross Pickard & Anor [2019] SASC 123 (referred to as “Pickard”), the Court had to consider whether a loan deed entered into between the corporate borrower, individual guarantors and corporate lender was properly executed. There were a number of other issues considered in this case that are specific to the circumstances, and therefore aren’t the focus of this article.

A company is able to execute a document without the use of a common seal when it is signed by two directors, or a director and secretary, or the sole director and secretary, pursuant to section 127 of the Corporations Act 2001 (Cth) (the Act).

Based on the facts before the Court, the Honourable Justice Stanley found in Pickard the loan document in question to be invalid on the basis that the deed was not properly executed pursuant to section 127 of the Act.

The term signed is not defined in the Act. The Act also excludes the operation of section 10 of the Electronic Transactions Act 1999 (Cth) which deals with digital signatures. In order to determine whether the document was signed in accordance with section 127 of the Act when executed digitally, the Court in Pickard considered whether the affixion of the digital signature was accompanied by some kind of “personal authentication” by the individual who was said to be “signing”.

The evidence in Pickard showed that an unknown person on behalf of the plaintiff company had affixed digital signatures of the directors to a digital version of the document. Whilst there was a resolution of the directors to accept these types of loan agreements, it did not go into enough detail as to authorise the mode of execution. There was also no other document which authorised the application of the directors signatures to the electronic document in question, such as company minutes.

Following similar recent cases, the Court concluded that the directors had not effectively authorised the electronic signatures pursuant to section 127 of the Act, as they had no involvement in the production or authentication of the document. Part of the rationale for this finding was that, as section 127 of the Act contemplates a document being executed by two officers signing it:

“…there is good reason to consider there must be a single, static document rather than a situation where two electronic signatures are sequentially applied to an electronic document.”

The Court further reasoned that it was insufficient that two signatures appear on different counterparts or copies of the same document because no one counterpart or copy would be properly executed by the company under section 127(1).

Ultimately the Court in Pickard found that the loan document was invalid, and the plaintiffs were unable to enforce the bank guarantee provided by the guarantors.

The implications

There are two major practical issues raised by this judgment which apply to both companies and those transacting with companies.

First is the need to ensure that you have a proper record which authorises a digital signature being affixed to execute a document pursuant to section 127 of the Act. Whilst there was a resolution of directors in the Pickard case, it did not go far enough to authorise the application of the electronic signature on the particular document.

Second, and perhaps more concerning, is the doubt this judgment raises as to the execution of a document by directors/secretaries of the company in counterpart. It is a common clause of many contracts and deeds that the parties to the document may execute the document in counterpart. This means that, rather than sign the same physical document, the parties are able to execute multiple copies of the same document, with each document considered an original and all the documents together constituting one and the same.

This judgment raises considerable doubt as to whether two directors (or director and secretary) will have validly executed a document pursuant to section 127 if they have signed different copies of the same document. In the judgment, the Court specifically stated that two signatures on different counterparts will be insufficient for the purposes of section 127 of the Act. Also now in doubt is whether a document is validly executed in situations where a document is signed by one director and emailed to another director for signing.

It should be noted that this restriction is limited to the execution of the same copy of a document by directors of the same company (pursuant to section 127 of the Act), and does not apply to documents executed in counterpart by different parties (i.e. party A can sign one document and party B can sign another copy of the same document, provided the directors of each party sign the same copy).

Take stock

As was the case in Pickard, the consequences of a document being incorrectly or improperly executed can be dire.

In light of this case, it is recommended that companies, or any entities dealing with a company, undertake an audit of documents that have been signed by a company to ensure that any execution by the directors (and secretaries) have been in accordance with section 127 of the Act, and that proper records of authorisation for electronic signatures are on file.

If you have any questions as a result of this judgment, or on completion of your audit, we recommend that you obtain professional legal advice. Please call a member of our business advisory team should you have any questions or concerns.