Recently, the Supreme Court of South Australia has cast doubt on the execution requirements under section 127 of the Corporations Act 2001 (Cth) (Act). Section 127(1) provides for valid execution of a document by two of a company’s directors, one director and one secretary, or its sole director and secretary. This eliminates the need for a seal. A document executed by a party under section 127(1) allows a person to assume that a document has been duly executed under section 129 of the Act.

The case of Bendigo and Adelaide Bank Limited v Kenneth Ross Pickard & anor [2019] SASC 123 (KRP) illustrates how execution defects can cause the legal obligations within a deed to be made unenforceable, particularly how they may arise when purporting to execute a deed under section 127 of the Act.

A deed is a form of contract where consideration is not required to be given for the obligations on the parties to be legally binding, meaning there are stricter requirements for their execution than a regular agreement. A deed is intended to be a solemn promise from both parties that they intend to be bound as opposed to a general bargain. They are often used for guarantee of loans and settlement of litigation matters for this reason.

The Act and the Relevant Loan Deed

In KRP, a loan document was signed purportedly in accordance with the above section 127 requirements. The directors of KRP did not pass a resolution that detailed that the loan deed would be signed by e-signature, only that the document would be executed. An unknown person then affixed the directors’ digital signatures to the document.

The Court found that the loan document did not meet the requirements of section 127 of the Act, since the directors were not involved in the production or authentication of the document. The loan deed was accordingly ruled to be invalid, and the guarantee unenforceable by the plaintiff.

The case calls into question whether electronic signing is a valid method of signing on behalf of a corporation at all, and whether any document that may be signed in counterparts must still have both officers of a company signing the one hard copy document.

Justice Stanley said at [70] that ‘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… it is 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).’

What about the Loan Taking Effect as a Standard Agreement?

For commercial agreements, there is a rebuttable presumption that the parties intend to enter into a legally binding relationship, and this is inferred through the parties’ conduct after signing of an agreement.

A deed that is not executed by a party can become binding as a regular commercial agreement (i.e. where there is consideration provided) in appropriate cases.

Justice Stanley considered this question and held that since the directors of the defendant:

(a) did not authorise the execution of the document as anything other than a deed; and

(b) did not provide any consideration except for the guarantees for the debt which had already incurred;

an agreement could not be made out.

Conclusions

As of KRP, it is now unclear as to whether a director signing and then emailing a scan of a document (i.e. signing the document in counterpart) is adequate for the purposes of section 127(1).

It is critically important that any deed is checked for valid execution. The ramifications of defective execution are more pronounced when the document is being executed as a deed. In general, the consequences of irregularities in signing a legal document can result in significant issues when disputes arise, as in the case of KRP.

In this regard, the following procedures should be undertaken by corporate parties to a deed:

(a) where possible, the signatures of each individual director or secretary of a company that is a party should be made on the same static document; and

(b) corporate resolutions for the entry into the documents should be drafted which resolve that the company will execute the document as a deed in accordance with section 127(1) of the Act, and authorising any electronic signatures or separate counterpart signatures as necessary.

Being sure to observe and pay attention to any signing processes is a key measure in deeds being enforceable by their parties and not being rendered invalid by a Court in future.