AGC (Pacific) Ltd v Woo International Pty Ltd [1992] PNGLR 100

• Jurisdiction: Papua New Guinea
• Judge: Sakora AJ
• Judgment Date: 03 April 1992
• Citation: [1992] PNGLR 100
• Court: National Court
• Year: 1992
• Judgement Number: N1061

Full Title: AGC (Pacific) Ltd v Woo International Pty Ltd [1992] PNGLR 100

National Court: Sakora AJ

Judgment Delivered: 3 April 1992

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 th 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...