Dealing with a dodgy director – what you can and can’t expect from the indoor management rule

In a perfect world there would be no questionable companies or doubtful directors – but history tells us this is not always the case.  Company law specialist Sarah Chia provides an insight into how the Corporations Act can help.

Dealing in good faith

When you deal in good faith with a company you can generally expect that the company has the power to do what it says.

That’s not just common sense – it’s reassuring to know that you’re backed up by the Corporations Act Part 2B.2 – once known as the “indoor management” rule.

So, if the company you’re dealing with has a crooked or fraudulent director and you didn’t know about it, you are protected – within limits.

Under the indoor management rule persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed, and are not bound to inquire whether acts of internal management have been regular.

So – what can you assume?

Section 129 of the Act allows you a few assumptions:

Firstly, you can assume that a company is abiding by its constitution.

You can also assume that the people whose names you find on the ASIC register for that company have been properly appointed, and are acting with due authority. Further, you can assume that these people perform their duties properly.

When a company sends you a document with its company seal, or one that appears to be properly signed by the people with authority to do so, you can assume that everything has been done correctly, and that the people who have authority to sign the documents also have the authority to say that they’re genuine.

But you can’t hide behind the rule

An ASIC search should be obtained to make sure that the people executing a document in their capacity as a director or company secretary appear in ASIC’s records to hold that position.

And if you know or suspect of any irregularities – and you expect the Act to save you from grief – you’re out of luck.

A person may not take advantage of any of the assumptions in section 129 where they know or suspect that the particular assumption is incorrect. These provisions are intended to make it clear that the advantages of the “indoor management” rule are only available to “innocent” parties, or parties that have no knowledge (whether actual or implied) contrary to the assumption upon which they are relying.

However, even if a party is “innocent”, there are some expectations on parties to make certain enquiries.  For example, any lender that fails to conduct a detailed search of a borrowing company’s records or to make inquiries about the identity and powers of the directors will greatly reduce its chances of being able to rely on the statutory indoor management rule at some later stage.

So do your homework, and if in doubt get some expert advice by speaking to Sarah Chia or a member of the Kain C+C team.