N1061

PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]

AGC (PACIFIC) LTD

V

WOO INTERNATIONAL PTY LTD

Waigani
Sakora AJ

13 March 1992
3 April 1992

AGENCY - Ostensible authority - Agreement entered into by managing director of company.

COMPANY LAW - Guarantee of lease agreement - Executed by a managing director and another company official - Default of principal debtor - Repossession - Liability of guarantor.

COMPANY LAW - Rule of indoor management - The rule in Turquand's case discussed - Constructive notice discussed.

COMPANY LAW - Agency - Ostensible authority - Director's duties - Companies Act Ch 146, ss 18, 36, 37, 38, 131, 138 and 139.

Facts

The appellant is a financial institution engaged in the business of financing for profit, lease agreements for the purchase of goods. On 27 August 1990, an agreement for financing the purchase of a vehicle was executed between it and another company, Southern Marine (PNG) Pty Ltd, of which Mr Lee Woo was the director. The respondent company, of which Mr Woo was the managing director, acted as guarantor of the agreement. This guarantee agreement was signed by Mr Woo and another company officer. The purchaser of the vehicle defaulted on its lease obligations under the agreement, and the appellants exercised its rights of demand, determination and repossession and subsequently sold the subject motor vehicle but suffered a loss of K2,854.91. On 7 August 1990 the appellant sent to the respondent company a demand letter for the immediate settlement of the outstanding amount pursuant to the guarantee. The respondent failed to comply. Appellant then proceeded in the District Court by way of default summons against the respondent. In its defence, the respondent did not dispute any terms of the lease agreement and the subsequent default, but it contended that, although the guarantee was executed by Mr Woo as the managing director and another of its officers, they did so without the authority of the company's board of directors. It further argued that Mr Woo, who had a personal interest in the transaction, had acted in breach of s 139 of the Companies Act Ch 146. The learned magistrate found in favour of the respondent and dismissed the action with costs.

Issues

1. Whether the learned magistrate erred in law and fact when he found and decided that the officers purporting to execute the guarantee on behalf of the respondent company had no authority to do so since they acted without the consent of the board of directors.

2. Whether the learned magistrate erred in considering that s 139 of the Companies Act had application to the matter in dispute between the parties.

Section 139 reads:

"139. Duties and liabilities

(1) For the purposes of this section, 'instrumentality or agency of the Government' means a body declared by the Minister, by notice in the National Gazette, to be an instrumentality or agency of the Government.

(2) A director must at all times act honestly and use reasonable diligence in the discharge of the duties of his office.

(3) An officer of a company must not make use of any information acquired by virtue of his position as an officer to gain, directly or indirectly, an improper advantage for himself or to cause detriment to the company.

(4) An officer who commits a breach of this section:

(a) is liable:

(i) to pay the company any profit made by him; and

(ii) to the company for any damage suffered by the company as a result of a breach; and

(b) is guilty of an offence.

Penalty: A fine not exceeding K200.00.

(5) A director who holds his office as director as a nominee of a government or of an instrumentality or agency of the government does not commit a breach of this section by disclosing to officials of the Government or of an instrumentality or agency of the Government, in the course of his official duties, information acquired by virtue for his position as a director.

(6) This section is in addition to and not in derogation of any other enactment or rule of law relating to the duty or liability of directors or officers of a company."

Held

1. Where a person dealing with a company acts in good faith and with no notice or reasonable grounds of suspicion of irregularity or impropriety, he is not affected by any actual irregularity or impropriety in a matter of internal regulation. That is, a third party dealing with a company is not bound to ensure that the internal regulations, derived, inter alia, from the articles of association, have in fact been complied with as regards the exercise and delegation of authority in the company. A third party need not go further: he need not ensure that the rules of internal management - sometimes referred to as the rules of "indoor management" have been observed. Royal British Bank v Turquand (1856) 6 E & B 327; (1856) 119 ER 886 and Sangara (Holdings) Ltd v Hamac Holdings Ltd (In Liquidation) [1973] PNGLR 504 applied.

2. Lack or absence of authority can, of course, arise during the course of employment where what the officer of the company did (or omitted to do) is something which can only be done by the general meeting or it is something that is entirely outside the powers of the company. The directors and other executives appointed by the members of the company are the people who plan the company's business and run it. The directors may then exercise the powers vested in them through a managing director or managers or agents and officials of the company (see s 18(4) of the Companies Act).

In the circumstances of this case, the managing director and the company official had implied or ostensible authority. Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd [1983] PNGLR 34 and Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630 adopted and applied.

3. Directors and managers represent the directing mind and will of the company and, hence, control what the company does.

"The state of mind of these managers is the state of mind of the company and is treated by law as such: H L Bolton (Engineering) Co Ltd v TJ Graham and Sons Ltd [1956] 3 All ER 624.... [The] Directors and other officers have obviously a greater ostensible authority than the more humble lowly employees. Ostensible authority is important in most matters involving third parties because the rule in Turquand's case relieves outsiders from inquiring into the internal management of a company ... a company will be bound by the act of a person to whom it has given apparent or ostensible authority even though that person may not have actual authority to bind the company. Thus 'responsible' officers of the company have the apparent authority to bind the company by contract."

4. Accordingly, the respondent company is liable under the guarantee agreement to indemnify the loss suffered by the appellant; any allegations under s 139 of the Companies Act are matters of concern between the company and its officers.

Cases Cited

Papua New Guinea cases cited

Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd [1983] PNGLR 34.
Sangara (Holdings) Ltd v Hamac Holdings Ltd (In Liquidation) [1973] PNGLR 504.

Other cases

Ashbury Railway Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 65.
Cotman v Brougham [1918] AC 514.
Foss v Harbottle (1843) 2 Hare 461; Ch 12 LJ 319; (1843) 67 ER 189.
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; [1964] 1 All ER 630.
H L Bolton (Engineering) Co Ltd v T J Graham and Sons Ltd [1956] 3 ALL ER 624.
Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWLR 782.
HMS Truculent [1952] P 1.
Lennard's Carrying Co v Asiatic Petroleum Co Ltd [1915] AC 705, HL.
Morris v Kanssen [1946] AC 459.
Re British Games Ltd [1938] Ch 240.
Royal British Bank v Turquand (1856) 6 E & B 327; (1856) 119 ER 886.
The Lady Gwendolene [1965] P 294, CA.

Counsel

P Yasbi, for the appellant.
A David, for the respondent.

3 April 1992

SAKORA AJ: This is an appeal against the decision of the District Court held at Port Moresby given on 28 January 1991 whereby the respondent company was held not liable for debt and, thus, the case dismissed with costs. This was a claim which arose out of a lease agreement for the purchase of a motor vehicle with the respondent acting as guarantor under the agreement.

The brief facts for the purpose of this appeal are as follows: On 27 August 1990 a lease agreement in the usual form for financing the purchase of goods was negotiated and executed between the appellant and another company, Southwind Marine (PNG) Pty Ltd, of which a Mr Leo Woo was the director. The appellant company is a financial institution engaged in the business of financing lease agreements for profit. And in the customary arrangements of this nature, the respondent company, of which Mr Woo was the managing director, executed a guarantor agreement duly evidenced by the affixing of the common seal of the company and the signing of the agreement by Mr Woo and another officer of the company.

The lessee and the principal debtor under the agreement, Southwind Marine (PNG) Pty Ltd, defaulted in its lease obligations, and the appellant exercised its rights of demand, determination and repossession. In the subsequent resale of the subject motor vehicle, the appellant incurred a loss. The total rent payable under the agreement was K15,699.12. The lessee, having already paid K11,120.21, was in arrears to the amount of K4,578.91. In the end the appellant suffered a loss in the amount of K2,854.91, as a direct result of the lessee/principal debtor's default. On 7 August 1990 the appellant sent a letter of demand to the respondent company, pursuant to the guarantee under the agreement, for immediate payment of the outstanding sum to make good the loss. And the respondent having failed to comply with the demand notice, the appellant proceeded in the District Court by default summons against the respondent.

The action was defended, the respondent having procured the services of legal representation, and both parties adducing evidence. The respondent called Mr Johnson Tan and Mr Kila Kalo, the new managing director (who had taken over from Mr Woo) and the company secretary, respectively. Their evidence related to the issue of proper authority. The appellant's evidence in affidavit form was from Mr Bernard John, the credit officer of the company, who deposed to the facts and circumstances surrounding the subject lease agreement and the subsequent legal action.

In its defence, whilst not disputing the facts of the agreement and the subsequent default by the lessee/principal debtor, the respondent contended that, although the guarantee was executed by Mr Woo as the managing director and another officer of the company, they did so without the authority of the company's board of directors. It was further contended that Mr Woo had acted in breach of the Companies Act Ch 146. Both contentions have been advanced and urged here in this appeal also.

The appellant by a Notice of Appeal dated 8 October 1991 appealed against the whole of the learned magistrate's decision, stating the grounds:

"3. The grounds relied on in support of the appeal are:

(a) that the learned Magistrate erred in law when he decided there was no authority consented by the directors of the Respondent for financial lease for equipment;

(b) that the learned Magistrate erred in law when he found that there was not sufficient evidence to prove the complaint by the Complainant/Respondent (sic);

(c) the learned Magistrate erred by failing to hold that the officers purporting to execute the guarantee on behalf of the defendant's (sic) Company had actual or alternatively ostensible authority of the Defendant;

(d) the learned Magistrate erred in failing to hold that compliance with internal requirements of the defendant company (where the plaintiff had no notice of knowledge of any failures) was irrelevant and subject to the 'indoor management rule';

(e) that the learned Magistrate erred in considering that Section 139 of the Company's Act (sic) had any application to the dispute within the parties;

(f) the decision was wrong in law and should be set aside."

To assist me in considering the appeal, I have had the benefit of written submissions from both counsel, Mr Yasbi appearing for the first time for the appellant in this appeal and Mr David having represented the respondent in the lower court, inviting me to accept his submissions there as his submissions here. I note here in passing that the appellant did not have the benefit of qualified legal representation in the court below although I hasten to add that it appears from the depositions that the authorised officer of the company who conducted the case did, with respect, produce the necessary pertinent factual background to the claim, in his affidavit evidence and written submissions, to enable the court to fully appreciate the respective rights and obligations of the parties. The fact that the learned magistrate adopted almost verbatim the submissions on law and the survey of the authorities selected by the respondent's counsel when giving the reasons for his decision may, in any case, be due in the main to the appellant not having the benefit of submissions on law made on its behalf.

The appeal can be best and more conveniently dealt with, as far as the pertinent issues that arise are concerned, by confining my consideration to two principal heads of argument: (1) the doctrines expounded by the twin principles of "ostensible authority" and "indoor management"; and (2) the s 139 argument. The two main contentions of the respondent mentioned earlier deny, or at least do not acknowledge, the existence and pertinence of any such principles to the situation under review here. What is said there is that since no authority originated and emanated from the board of directors, Mr Woo, a managing director, and another officer of the respondent company, could not bind the company to any contractual obligations. In any case, it is argued, the respondent did not benefit from the agreement, Mr Woo having a personal interest in the whole transaction. Thus, liability under the agreement as guarantor is denied. It is further argued that the actions of Mr Woo constituted a breach of s 139(2) Companies Act, which renders the guarantee unenforceable. Both arguments, by implication, deny also, or at least do not acknowledge, the principle of agency operating in situations such as the present.

To hold, as the learned magistrate did, and accede to the respondent's first contention would be to entertain something modern business law and practice, not to mention common sense, would frown upon and find difficulty in accepting. Indeed, business and commerce, in today's world of great technological advances rendering time and distance of little consequence, would grind to a virtual halt if the courts were, or seen, to accede to such notions.

It has been accepted in this jurisdiction that, where a person dealing with a company acts in good faith and with no notice or reasonable grounds for suspicion of irregularity or impropriety, he is not affected by any actual irregularity or impropriety in a matter of internal regulation: Sangara (Holdings) Ltd v Hamac Holdings Ltd (In Liquidation) [1973] PNGLR 504. This proposition is sometimes referred to as the rule in Turquand's case: Royal British Bank v Turquand (1856) 6 E and B 327; (1856) 119 ER 886. The substance of this rule is that a third party dealing with the company is not bound to ensure that the internal regulations (derived from, inter alia, the articles of association) have in fact been complied with as regards the exercise and delegation of authority in the company.

In Turquand's case, the company's articles empowered the directors to borrow such sums as were authorised by an ordinary resolution of a general meeting. The directors issued a bond to Turquand, from whom they borrowed money. The bond was under the company's seal, but no resolution was passed by the company authorising it. The company was held bound by the act of its directors.

It should be remembered that a third party has no means of knowing whether an ordinary resolution has been passed by the company. He can read the memorandum and study the vires, and inspect the registration of charges, or discover whether a special or extraordinary resolution has been passed. He can read the articles of association and obtain particulars of the directors. But he cannot know, unless he has been told, whether an ordinary resolution such as was required in the Turquand case has been passed by a general meeting. The loan there was clearly within the powers of the company. The company, therefore, had the necessary capacity. And it was also clear that the directors had the necessary authority. A third party need go no further: he need not make sure that the rules of internal management - sometimes referred to as the rules of "indoor management" - have been observed.

If the principal places secret restrictions on the apparent authority of his agent, they do not affect the third party: the third party need not take steps to ensure that there are no such restrictions, for this would make the carrying on of business a practical impossibility.

It was contended by Mr David that a third party cannot take advantage of those rules, the rules of ostensible authority and indoor management, if he has actual constructive notice that the person he is dealing with lacks authority. In my opinion, this argument is misconceived and mischievous as it attempts to misapply a proposition of law to a situation neither intended nor envisaged. The doctrine of "constructive notice", in the context of company law, says that anyone dealing with a company is deemed to have notice of the company's public documents, including the memorandum, and thus of its lawful objects. And this doctrine is invariably resorted to in support of arguments based on the doctrine of ultra vires and its general nullifying effect.

The purpose of the former doctrine was protective: protective of both investors in and creditors of a company to ensure that the company did not undertake any unauthorised activities (contrary to the objects clause), thereby misapplying their investments, and that the finances of the company were not misapplied or squandered in this way and, thereby, putting them beyond the reach of legitimate bona fide creditors. Thus, the doctrine enabled the courts to hold that outsiders who dealt with a company were deemed to know what its powers were, and also the limits to them, because they could always look at the memorandum and find out whether or not a proposed transaction was within the company's corporate objects: Cotman v Brougham [1918] AC 514. Section 16(1) of the Companies Act requires that the company's objects be lawful in the sense that they do not contravene the Act, any other act or the general law.

It does not need much reflection to realise that applying the doctrine in this way was very unsatisfactory. Business would stop in its tracks if everyone who made a contract with a company demanded to inspect the memorandum to see if the company was empowered to enter into that particular type of contract. Consequently, the practice of looking at the objects clause of the memorandum to find out what a company could do created a constant risk that a transaction with a company would turn out to be a nullity because the company was acting beyond its powers. If a transaction is a nullity, it cannot give rise to legal consequences and, therefore, cannot be relied on if the company fails to carry out its side of the bargain.

The doctrine of "constructive notice" led to the development of a system which was called technically the doctrine of ultra vires (meaning beyond power), the essence of which is to confine a company's activities or operations to its objects as stated in the objects clause and to acts or matters incidental thereto. Thus, any activity or transaction in excess or contravention of that which is expressly or impliedly authorised would be ultra vires and, therefore, of no legal validity or effect. At common law, any ultra vires contract, activity or transaction is null and void, and of no legal effect, even if it has been agreed to by all the members of the company: Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 65.

In more recent times, it became increasingly apparent, more particularly in Australia (and, by extension, Papua New Guinea through the operation of somewhat similar legislative schemes), that the combined effect of the two doctrines was to create quite unrealistic, unwieldly and unpredictable situations. Much time and trouble, not to mention money, would be saved, and better justice would be done, if the rigidity inherent in these two doctrines were removed or relaxed somewhat. The result of this in this jurisdiction has been the modifications or alterations made to the ultra vires doctrine in our legislation, whereby the doctrine no longer has the same far-reaching effects upon a company's acts and transactions as it had before. The often very lengthy objects clause is no longer mandatory (except, and understandably so, with corporations involved in mining and charitable activities). But there is no limit to the number of objects for which a company may be incorporated, thereby allowing companies to enlarge their powers and activities: see s 36 Companies Act. This in turn renders the nullifying effect of the ultra vires doctrine less likely. Section 37 Companies Act drives home the message by virtually removing the nullifying effect of the doctrine. In considering a New South Wales provision similar to our s 37 in the case of Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWLR 782, Street J said at p 795 the provision:

"... strikes down the absolute effect of the ultra vires doctrine. An ultra vires transaction is no longer a complete nullity, incapable of being recognised as a transaction at all. On the contrary, it is a transaction which, in general terms, is not invalid by reason only of the fact that the company was without the capacity or power to enter into the transaction."

The doctrine of "constructive notice" has no relevance nor application to this appeal. The respondent's principal contention is that the managing director and the other officer concerned had no authority to enter into the agreement on behalf of the company. There has been no suggestion here that executing a guarantor agreement with a financial institution such as the appellant company does not come within the specific business activities initially intended by the company to engage in, or some variety of business which the company might conceivably want to turn to in future. The doctrine of ultra vires has not been advanced as a nullifying factor, at least in its present restricted extent, for instance, where a transaction can be rendered invalid by the general law or any provision of the Companies Act.

Before I leave this point I should note that in this jurisdiction one often sees and reads notices in our newspapers placed by companies warning the general public about named former employees or officers conducting or purporting to conduct business transactions on their behalf, and at the same time publicly denying any liability for such. No such notice was produced or suggested here. It is noted, however, that there has been no suggestion here that either Mr Woo or the unnamed "another officer of the company", or both, had not been in the employ of the respondent company at the time they transacted and entered into the agreement.

Lack or absence of authority can, of course, arise during the course of employment where what the officer of the company did or omitted to do is something which either can be done only by the general meeting (of shareholders) or else is entirely outside the powers of the company. An example of the former is where the directors are authorised to borrow only up to a certain limit, borrowings above that limit requiring approval by the general meeting. An example of the latter is where the board of directors might make a loan to a director of the company or of a related company, such an action being expressly prohibited by s 131 Companies Act. In any case, Mr David does not point to any restrictions, secret or otherwise, placed by the company on Mr Woo to transact and formally enter into agreements such as the one under review here.

Mr David further argued that a third party cannot rely on the "indoor management" rule if evidence of taking of required steps, presumably on the part of an authorised officer of the company, would be available in the company's public documents. For reasons of ease, convenience and expediency of business/commercial relations, transactions and operations, not to mention the saving of time and money, as highlighted above, the respondent's argument in this respect must fail.

The legal existence (by virtue of s 18(4) Companies Act) and the running or operation of a company (limited liability) involve three distinct groups of people. First, there are the officers of the company. Generally speaking these consist of the directors, the managers or executives and the company secretary or secretaries. The general effect of the law is that anyone acting in such capacities is taken to be an officer of the company. These are the people who have the most to do with its day to day affairs. The company, by law, is treated as a natural person, and, as such, it can buy and sell. It can make contracts. It can own and dispose of property. It can sue and be sued. But unlike the natural person, a company does not breathe, or think or feel - it is the members who are the real people of the company. The directors and other executives, appointed by the members of the company, are the people who plan the company's business, ensure that money is available for such business and work out strategies for selling the company's goods and services, among other things. The directors may exercise the powers vested in them through a managing director or managers or other agents and officials of the company. 

The second group of people affected by the running of the company are the shareholders, usually referred to in this context as the members. The third group are the outsiders who deal with the company in the course of its (and their) business. Broadly speaking, the outsiders fall into two sub-groups: those who make contracts with the company in the ordinary course of business, and those who lend money to the company similarly. The way in which outsiders or "third parties" become involved in or affected by the manner in which the company runs its business affairs arises from the necessity for the company to act through human beings.

It would seem to me that the respondent's argument denies or attempts to deny the existence and independence (of executive action) of organs of corporate institutions such as managing directors. In the process, it is a denial or attempted denial of the principles of the law of agency. Mr Yasbi referred me to two cases in support of his contention that the implied or ostensible authority and indoor management rules were pertinent to and applied in this instance: Rainbow Holdings Pty Ltd v Central Province Forest Industries Pty Ltd [1983] PNGLR 34 and Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630. The former was the decision of the Supreme Court (Pratt, Bredmeyer and McDermott JJ), adopting and applying the decision of the House of Lords in the latter case in its exposition of the law of agency in contractual situations, and the accompanying rule of implied or ostensible authority. The Supreme Court was faced with the situation where liability to pay damages for breach of contract was denied on the basis that there was no binding contract between the parties because it was signed on behalf of the appellant by a person without actual, implied or ostensible authority and was not ratified by the appellant. It was held that under the circumstances it was reasonable to believe that the lawyer had authority to sign the contract, and, therefore, there was a binding contract. I adopt and apply the law as declared in these cases to this appeal.

I should note here that the authorities referred to in the respondent's submissions (and adopted by the learned magistrate in his Reasons) relate only to the s 139(2) Companies Act argument which I shall deal with presently.

The law as enunciated by the cases cited above recognises an exceptionally wide doctrine of agency and vicarious liability in instances such as the present: LCB Gower, The Principles of Modern Company Law, 3rd ed (1969). When a natural person could be bound by the acts of his agents, so could a corporation. Thus, by the very nature and composition of a corporate entity, the courts have elected to treat the acts of certain company officials as those of the company itself. From this has emerged what the late Professor Gower referred to as the "organic theory" of corporate organisation and operation. The theory was put to its succinct exposition in the epoc-making judgment of Lord Haldane in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, where a company which owned a ship was seeking to take advantage of the limitation of liability under s 502 of the Merchant Shipping Act of 1894 (UK). This limitation is available only where the injury is caused without the owner's "actual fault or privity". The loss resulted from the default of Lennard, its managing director, and in holding the company liable, Viscount Haldane LC, delivering the judgment of the House of Lords, said (pp 713-714):

"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for such purposes may be called an agent, but who is really the directing mind and will of the corporation the very ego and centre of the personality of the corporation ... . If Mr Lennard was the directing mind and will of the company then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of s 502 ... . It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself."

Lennard's case was followed in HMS Truculent [1952] P 1, where the Third Sea Lord was held to be the "directing mind" of the Admiralty and in the case of The Lady Gwendolen [1965] P 294, where it was indicated by Willmer and Winn LJJ that the person whose fault is to be taken as that of the corporation need not be a director. Winn LJ said at p 355D:

"Wherever the fault either occurs in a function or sphere of action which the owner has retained for himself or is that of a manager independent of the owner to whom the owner has surrendered all relevant powers of control, it is 'actual fault of the owner within the meaning of the section."

Professor Gower, concluding from a survey of the cases illustrating the "organic theory" in the context of the law of agency, said that the concept was capable of being used, and had been used, to extend the liability of a company beyond that flowing from normal agency principles. In the case of corporate bodies, express statutory provisions equate signature by officials of the corporation with the signature of the corporation itself. In Re British Games Ltd [1938] Ch 240, a signature in accordance with provisions of the act was a personal signature of the company. Section 18 of our Companies Regulation provides that a document relating to a corporation lodged with the Registrar under the Act or the Regulation must be signed or authenticated by:

"(a) a director or by the secretary or manager of the corporation; or

(b) ...."

Section 38(2) Companies Act provides that a document or proceeding requiring authentication by a company may be signed by an authorised officer of the company and need not be under its common seal.

The point is further illustrated by looking closely at one of the essential attributes or characteristics of a company as a corporate entity or body. And this is its capacity to sue and liability to be sued: s 18(4) Companies Act. When a wrong is done to the company, the company is the proper plaintiff to maintain, in its own name, an action for redress. Members, as such, have generally no standing to sue on behalf of the company. Similarly, if a company commits a wrong or incurs a liability in the course of its operations, it (and not the members or officials) is the proper defendant. This is sometimes referred to as the "proper plaintiff" rule or the rule in Foss v Harbottle (1843) 2 Hare 461, Ch 12 LJ 319. And the wrong obviously is the wrong (liability) committed by the officers and employees of the company. That a company is capable of suing and is liable to be sued in its corporate name is not merely an administrative convenience; it follows logically from the concept of separate legal entity and principles of agency. Thus, civil liability and criminal responsibility of the company arise from a myriad of situations through the acts and omissions of its servants and agents.

But not every act or omission or default can give rise to legal consequences or responsibilities, nor every servant or agent can commit the company or incur liability. It all depends on the circumstances surrounding the act or omission in question, the nature of the act or omission, the relative position of the agent or servant in the hierarchy of the corporation and what they are and are not empowered to do. Thus, putting it another way, not every servant of the company is a "responsible officer"; the mind of some employees is not the mind of the company.

To borrow from the authors of the CCH Reporter on the PNG company legislation (2, 212), Lord Denning likened a company to the human body with "hands" the mere servants and agents who do not represent the mind and will of the company, and with its "brain and nerve centre" who are the directors and managers. It is the directors and managers who represent the directing mind and will of the company and control what they do. The state of mind of these managers is the state of mind of the company and is treated by law as such: H L Bolton (Engineering) Co Ltd v T J Graham and Sons Ltd [1956] 3 All ER 624.

And in relation to contractual obligations arising out of the acts or actions of the employees or officers of the company, the liability arises out of the operation of the doctrine of ostensible (or apparent) authority. The learned editors of the CCH Reporter have stated (2, 220) that:

"The authority of a person to bind his company depends on what would usually be done by a person in his position. Thus, any person having dealings with an officer or other servant of the company should be confident that the type of transaction is one which would normally fall within the ordinary scope of the authority of such officer."

Directors and other officers have obviously a greater ostensible authority than the more humble lowly employees. Ostensible authority is important in most matters involving third parties because the rule in Turquand's case relieves outsiders from inquiring into the internal management of a company. H A J Ford, in his Principles of Company Law, 3rd ed (1981) says (p 518) that a company will be bound by the act of a person to whom it has given apparent or ostensible authority even though that person may not have actual authority to bind the company. Thus "responsible" officers of the company have the apparent authority to bind the company by contract. Actual authority is a matter between an officer and his company. His ostensible authority is of more significance to an outsider, a third party.

Some comments have been made already in relation to the second principle relied upon by the appellant. In considering the UK equivalent of our s 138 (validation of acts) Companies Act, the House of Lords made reference to the "indoor management" rule in its decision in Morris v Kanssen [1946] 1 All ER 586; [1946] AC 459. In that case, a director's appointment had lapsed because no meeting had been held. This director purported to appoint, quite without proper authority, another person as a director. These two people then purported to appoint a third person to the board. The court considered that the UK equivalent of s 139 did not apply because neither of the other two was a director and the secretary did not cover the case where there had been a total absence of appointment or a fraudulent usurpation of authority.

Lord Simond, in delivering the decision of the House (to which three other Law Lords concurred), referred to Halsbury's Laws, Second Ed, Vol 5, para 698, p 423, as correctly stating the rule (p 592 judgment):

"But 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."

His Lordship then continued (p 592):

"One of the fundamental maxims of the law is the maxim omnia praesumuntur rite esse acta. It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appears to be in order."

His Lordship then acknowledged that the maxim had its proper limits, saying that an ostensible agent could not bind his principal to something that the principal could not lawfully do.

In the end, I rule that the appellant has properly invoked the principles contained in Turquand's case and the "indoor management" rule. The respondent company is, thus, liable under the guarantee agreement to make good the appellant company's losses.

Because the respondent raised the point and placed reliance upon it to avoid liability, I deal with the s 139 argument. Division 2 (Part VI) of the Act, where this provision is situated, is headed "Directors and Officers", and s 139 is headed "duties and liabilities". The respondent relies on s 139(2), which reads: "A director must at all times act honestly and use reasonable diligence in the discharge of the duties of his office".

Section 139(3) makes provision against improper advantage of a director vis-a-vis the company, an "insider trading" conflict-of-interest situation. Section 139(4) then makes these prohibited acts or omissions on the part of a director "offences" attracting both civil and criminal sanctions: liability to pay the company any "unconscionable" profit made by him, pay any damage suffered by the company, and, finally, pay a fine not exceeding K200.00. Thus, breach of the duties exposes a director to both civil and criminal liability. It should be noted here, however, that there is no mention of any breach under s 139 vitiating any contracts or preventing the discharge of any obligation. Finally s 139(6) reads:

"This section is in addition to and not in derogation of any other enactment or rule of law relating to the duty or liability of directors or officers of a company".

The key features emerging from the provisions about the duties of directors (under s 139 and other provisions) form a pattern for effectiveness, ability, honesty and fairness. These are intended to complement the powers and responsibilities vested in them by law.

To use s 139 Companies Act in the way the respondent attempts here is not only mischievous but also misconceived. When contrasted against the rule in Turquand's case and the "indoor management" rule, the so-called s 139 argument is of no relevance here at all. In any case, any legitimate s 139 allegations are, or may be, matters of concerns for or of the company itself. They may exist and have legal consequences quite independent of the rights and interests of third parties (in the way we are concerned with here), and to be pursued independently if so desired. They ought not be employed as "red herring" to divert or distract attention from the real issues: the liability of a guarantor.

Finally, the respondent offered by way of a "last ditch" argument that it should not be held liable under the guarantee because the principal agreement was for the personal benefit of Mr Woo and not for the company. It was said in this respect that Mr Woo had a personal interest or stake in the lease agreement. This argument has no merit at all. The circumstances surrounding the entering into and the very nature of guarantor agreements are such that a guarantor need not have any direct and immediate benefits from the agreement(s).

I allow the appeal and set aside the decision of the learned magistrate in the District Court at Port Moresby given 28 January 1991. Consequently, I order that the respondent company pay the sum of K2,854.91 to the appellant company together with the appellant's costs of this appeal.

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Lawyer for the appellant: Henao Cunningham Priestley.
Lawyer for the respondents: Namaliu & Company.