Sections 19 and 20 of the Companies Act 1997 protect the person on the other side of the table. They are the statutory version of what used to be called the indoor management rule.
Section 19 — what a company cannot say
(a) this Act or the constitution has not been complied with; or
(b) a person named as a director in the most recent notice received by the Registrar under section 137 is not a director, has not been duly appointed, or does not have authority to exercise a power a director of such a company customarily has; or
(c) a person held out by the company as a director, employee or agent has not been duly appointed, or lacks authority a person in that position customarily has; or
(d) a person held out as having authority to exercise a power that such a person does not customarily have, does not have that authority; or
(e) a document issued on behalf of the company by a director, employee or agent with actual or usual authority to issue it is not valid or not genuine.
Subsection (1) applies even though a person within paragraphs (b) to (e) acts fraudulently or forges a document that appears to have been signed on behalf of the company — unless the person dealing with the company has actual knowledge of the fraud or forgery.
This is a striking allocation of risk. If a company’s own officer forges a document, the loss falls on the company, not on the innocent counterparty. The company chose the officer; the outsider did not.
The exception: knowledge
… unless the person has, or ought to have, by virtue of his position with or relationship to the company, knowledge of the matters referred to in the relevant paragraph.
Note how narrow this is. The knowledge must arise by virtue of the person’s position with or relationship to the company — not from general curiosity or from the public register. So the protection is weakest for:
- Directors and senior employees of the company, who know how it is run;
- Related companies and their officers, particularly within a group;
- Shareholders closely involved in management; and
- Anyone told the facts — a bank that has read the constitution and knows a borrowing limit cannot rely on section 19 to ignore it.
Section 19(1) binds “a company, or a guarantor of an obligation of a company”. A director who has guaranteed the company’s overdraft therefore cannot resist the guarantee by pointing to an internal irregularity in the borrowing the company itself could not raise.
Section 20 — no constructive notice
A person is not affected by, or deemed to have notice or knowledge of, the contents of the constitution of, or any other document relating to, a company merely because the constitution or document is (a) registered on the register; or (b) available for inspection at an office of the company.
The old doctrine of constructive notice deemed everyone to have read whatever was filed at the companies office. Section 20 abolishes it. Combined with section 18 — under which an act is not invalid merely because the company lacked capacity or power — the outsider no longer needs to investigate the company’s internal affairs at all.
| Need not check | Should still check |
|---|---|
| Whether the constitution permits the transaction — ss 18, 20 | That the company exists and its exact name — a search of the register |
| Whether internal approvals were obtained — s 19(1)(a) | Whether the person you are dealing with is named in the section 137 notice as a director |
| Whether the director was validly appointed — s 19(1)(b) | Whether the transaction is a major transaction needing a special resolution under s 110 |
| Whether a signature is genuine — s 19(2) | Whether a director is interested, which can make the transaction voidable under s 119 |
| Whether the seal or execution formalities were right — s 19(1)(e) | Whether property is subject to a registered charge |
Where sections 19 and 20 will not help you
- Voidable interested transactions. Under section 119, a transaction in which a director was interested and which was not properly disclosed may be avoided by the company within the statutory period. Section 120 then protects only a person who acquired property in good faith, for valuable consideration and without knowledge of the circumstances.
- Major transactions. Section 110 requires a special resolution for a transaction involving assets or liabilities worth more than half the value of the company’s assets. A counterparty who knows the size of the deal relative to the company is on notice.
- Actual knowledge of fraud or forgery. Section 19(2) protects only those without it.
- Position-based knowledge. If you sit on both sides of the deal, the closing words of section 19(1) will usually defeat you.
Practical steps before contracting with a company
- Search the register and confirm the exact registered name and number, the registered office and the directors shown in the latest section 137 notice.
- Contract in the company’s correct name. Section 26 requires a company’s full name to be clearly stated in specified documents; getting it wrong invites argument about who the contracting party is.
- Use section 155. It sets out how a company enters into contracts and who may sign.
- Ask for a directors’ certificate. Section 438 provides for directors’ certificates, and for larger transactions a board resolution and a solvency certificate are ordinary practice.
- Search for charges under Part XIII and under the Personal Property Security Act 2011 before taking security or buying assets.
- For a pre-incorporation deal, read sections 157 to 160 — the position is quite different before the company exists.
Sources
- Companies Act 1997 — ss 17–20, 26, 110, 119, 120, 137, 155–160, 438
- Personal Property Security Act 2011
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.