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Corporate Liability for Actions of Unauthorised People – A Recent Case Study

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By: Lee Filkin, Lawyer, MST Lawyers

A recent New South Wales Court of Appeal decision in 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd [2023] NSWCA 72 has highlighted the importance of rectifying inaccurate data in your company’s public record within the Australian Securities and Investments Commission (ASIC) register and not allow unauthorised persons to hold out that they have authority to bind your company.

Background

In this case, an individual named Scott Chan fraudulently portrayed himself as the agent of a company. This company (183 Eastwood) owned a property on which a sizable residential development was planned (Property). It was also the trustee of a unit trust, which was used as a vehicle for unitholders to invest in the development of the Property (Unit Trust).

Mr Chan controlled a company that owned a minority interest in the Unit Trust, but he was not an officeholder of 183 Eastwood itself. Despite this, Mr Chan submitted two Form 484 (Changes to company details) documents in January 2018, which notified ASIC that he was the sole director, secretary and shareholder of 183 Eastwood. He had no authority to do this, but ASIC’s registers were updated to reflect these incorrect details.

One month later, the true officeholders became aware of Mr Chan’s changes to the ASIC record, as well as the fact that Mr Chan had obtained a $4 million mortgage over the Property. They did not take any action to correct the ASIC register at this time.

Without the knowledge or authority of 183 Eastwood’s true officeholders, Mr Chan had also been negotiating with Dragon Property Development & Investment Pty Ltd (Dragon), purportedly on behalf of 183 Eastwood and, in April 2018, reached an agreement that 183 Eastwood would transfer 19 units in the Unit Trust to Dragon for a purchase price of $1,672,000 (Agreement).

Dragon transferred the purchase price for the units to an account operated by Mr Chan. The units were never transferred to Dragon and Mr Chan misappropriated the funds.

It was not until June 2018 that 183 Eastwood corrected the ASIC record. 116 days had elapsed since the true officeholders had been notified of Mr Chan’s fraud.

Key issue

Dragon terminated the agreement for failure to transfer title to the units and commenced proceedings against 183 Eastwood and Mr Chan. However, Mr Chan went bankrupt and Dragon was therefore unable to continue the proceedings against him.

The key question to be determined was whether Mr Chan acted as 183 Eastwood’s agent and whether it was therefore liable for his dealings, or if Dragon should bear the loss caused by Mr Chan’s fraud.

Decision at first instance

At first instance, it was held that 183 Eastwood was responsible for Mr Chan’s actions due to its failure to promptly correct the register. The primary judge held that:

  • 183 Eastwood held Mr Chan out as having authority to bind 183 Eastwood to contracts such as the Agreement with Dragon;
  •  Mr Chan had ostensible authority (meaning it appeared to others that he had authority) arising from 183 Eastwood’s failure to correct the ASIC register, as by this inaction 183 Eastwood allowed Mr Chan to use the false register to mislead Dragon; and
  • Dragon relied on the false information in the ASIC register in deciding to enter into the agreement and it suffered loss in this reliance quantified as the purchase price under the Agreement.

183 Eastwood was ordered to pay $1,672,000 to Dragon as well as Dragon’s legal costs.

Decision on appeal

  • On appeal to the New South Wales Court of Appeal, the primary judge’s decision was upheld. It was considered crucial that:
  • the true officeholders were aware for a prolonged period that “there was false information recorded on a register that was available to be accessed by members of the public and that there had been authorised dealings involving the company’s assets”; and yet

they “did nothing…to correct that register and thus allowed the false state of affairs to remain on the ASIC record.”.

The Court of Appeal noted that:

“there was a duty (or reasonable expectation) that the officeholders would correct the register (being a duty owed to that class of persons who it would be reasonable to expect could consult the register to confirm that they were dealing with an authorised officeholder of the company)”.

One of the Court of Appeal’s main focuses in considering the appeal was the primary judge’s findings regarding ostensible authority. A company will be bound by an agent’s actions via ostensible authority where:

  • a representation is made that the agent possesses a company’s authority to enter into a contract (this representation can be made via words, conduct or even silence or inaction, such as was the case in 183 Eastwood’s failure to correct the ASIC register);
  • the representation is made by someone who genuinely has the authority to manage the company’s business, either generally or within the context of the contract in question (such as the true officeholders of the company); and
  • the other party was influenced by this representation to enter into the contract (such as Dragon relying on the incorrect ASIC register in entering into the Agreement).

It was irrelevant that 183 Eastwood’s true officeholders were not aware of Dragon or its interests, nor that Dragon with negotiating with Mr Chan, only that the officeholders were aware of the inaccurate ASIC register and yet failed to correct this.

Key Takeaways

This case serves as a cautionary tale urging officeholders to ensure the accuracy of their company’s ASIC register.

Upon discovering incorrect details in your company’s public ASIC records, it is imperative to take immediate corrective measures to amend the register as soon as possible. Failing to do so could lead to potential liability for the actions of a fraudster.

If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with the author, Lee Filkin of the MST Dispute Resolution and Litigation team or members of MST’s corporate team.