Electronic execution by companies under section 127: Bendigo and Adelaide Bank Ltd v Pickard | Practical Law

Electronic execution by companies under section 127: Bendigo and Adelaide Bank Ltd v Pickard | Practical Law

Bendigo and Adelaide Bank Ltd v Pickard [2019] SASC 123 continues a recent judicial openness to electronic execution under section 127 of the Corporations Act 2001 (Cth), provided there is some appropriate evidence of personal authentication of the signatory.

Electronic execution by companies under section 127: Bendigo and Adelaide Bank Ltd v Pickard

by Practical Law Corporate
Law stated as at 25 Jul 2019Australia
Bendigo and Adelaide Bank Ltd v Pickard [2019] SASC 123 continues a recent judicial openness to electronic execution under section 127 of the Corporations Act 2001 (Cth), provided there is some appropriate evidence of personal authentication of the signatory.

Speedread

Bendigo and Adelaide Bank Ltd v Pickard [2019] SASC 123 continues the recent judicial openness to electronic execution under section 127 of the Corporations Act 2001 (Cth). While execution by the lender company under section 127 in this instance was found to be invalid, the court showed approval for the view that electronic execution under section 127 is possible, provided proper authorisation is given, following recent authority in the Victorian Supreme Court.

Electronic execution by companies under section 127: Bendigo and Adelaide Bank Ltd v Pickard

In Bendigo and Adelaide Bank Ltd v Pickard [2019] SASC 123, the South Australian Supreme Court considered:

Bendigo and Adelaide Bank's current run of litigation

This case is one of a number of recent proceedings that have resulted from loans made to investors in managed investment schemes operated by Great Southern Finance Pty Ltd (GSF) (or associated entities). The loans in these matters, and associated guarantees, were:
  • To fund the purchase of scheme interests, which became the security for the loans. The loans were funded by either GSF or a preferred lender, ABL Nominees Pty Ltd (ABLN).
  • Typically entered into by GSF personnel on behalf of the investors and guarantors under a power of attorney.
The managed investment schemes failed in 2009 and resulted in mass default on the loan book. The resulting litigation has generated a number of decisions relating to the valid execution, assignment and ratification of loans and deeds. The evidence in these cases has indicated similar problems in the way the instruments were executed, resulting in a number of the instruments being found to be unenforceable. Two of these decisions, both given by Croft J in the Victorian Supreme Court, are heavily cited in this case as precedent for determining the validity of electronic signing under section 127 of the CA 2001, in particular the requirement of personal authentication where electronic facsimile signatures are used.

Facts of the Pickard matter

The plaintiffs, including ABLN (together, the Bank), claimed that the defendants (the Pickards) had personally guaranteed a loan made by ABLN to a company of which the Pickards were directors (the Company).

The Loan Deed

The loan was made under a deed (the Loan Deed) signed by GSF, purportedly on behalf of the Pickards as directors of the Company and each in their personal capacity as guarantors. Following the failure of the managed investment scheme, and the Company entering into liquidation, the Bank claimed against the Pickards as guarantors.

The Application

The Bank argued that the Loan Deed had been validly signed by GSF on the Pickards' behalf under a power of attorney granted in the loan application (the Application). The court found that the Application:
  • Was a deed.
  • Had been validly executed by the Pickards both as directors of the borrower Company and as personal guarantors.
  • Authorised GSF to enter into the loan and guarantees.
The court also found that GSF would not have been acting ultra vires or in breach of a fiduciary duty to execute the Loan Deed on behalf of the Company or the guarantors.

The Mortgage and Amendment Deed

The Pickards also validly executed a "Mortgage and Amendment Deed" after the schemes started to fail, which the Bank argued ratified the execution of the Loan Deed on behalf of the Company and the guarantors.
Despite this, the guarantees were found not to be enforceable.

Why the guarantees were not enforceable

There were three reasons the guarantees were not enforceable:
  • The electronic execution of the Loan Deed by GSF did not comply with section 127(1) of the CA 2001.
  • The guarantees were given for no consideration. As such, they were not enforceable as contracts.
  • GSF's electronic execution on behalf of the guarantors could not be ratified because it was invalid for reasons other than a lack of authorisation.

Failure of electronic execution of the Loan Deed

The Loan Deed was "signed" electronically by officers of GSF on behalf of the Company and the Pickards personally. This electronic execution was purportedly done under section 127(1) of the CA 2001. The signing was not effective because:
  • The CA 2001 excludes the operation of section 10 of the Electronic Transactions Act 1999 (Cth), which allows signature by electronic communication without personal authentication (in appropriate circumstances).
  • The common law requirements for an effective signature (including an electronic signature) include some kind of “personal authentication of the individual ‘signing'”.
  • The officers whose names were affixed to the Loan Deed did not personally affix them or specifically authorise that their signatures be affixed to the Loan Deed. They were affixed by a "person unknown" and the board resolution which the Bank argued authorised the signature "did not go so far as authorising the placement of signatures on loan deeds" but "were limited to formally accepting various loan and finance applications".
The court's finding that the GSF directors' electronic signature was not effective under section 127 because it was not specifically authenticated supports two inferences:
  • That the electronic execution of deeds by companies under section 127(1) is possible.
  • That officers hoping to sign electronically under section 127 should ensure they can provide evidence of their specific authorisation to execute that deed.
Stanley J went on to also express support for the view that:
  • Section 127 requires 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.

Displacement of deed requirements for company execution under section 127

The law is still not completely settled in relation to electronic execution under section 127(1) of the CA 2001. Courts at least appear to be increasingly willing to accept the use of electronic signatures when company officers sign documents, albeit that a requirement for appropriate evidence of personal authentication of the signatories is required. This case applied Bendigo and Adelaide Bank Ltd & Anor v DY Logistics Pty Ltd [2018] VSC 558 in reaching a similar position.
However, in the current case, Stanley J also appeared to accept Bendigo and Adelaide Bank Ltd v Laszczuk [2018] VSC 388 as authority that the execution of deeds under section 127 of the CA 2001 displaced the other formal requirements for the execution of deeds, including extinguishing or modifying the common law requirement for them to be executed on paper. This could indicate a shift towards this approach, although the basis of the approach is not entirely clear, given the prevailing view to date that the common law paper requirement has not been clearly modified by the CA 2001 (see, for example, Bendigo and Adelaide Bank Limited v Russo [2019] NSWSC 661 at [90]-[95]).

Ratification of the Loan Deed

The Bank argued that the Pickards had ratified their personal guarantees in two documents that they expressly signed as guarantors after GSF's purported execution of the Loan Deed. One of these, a "Mortgage and Amendment Deed" sought to vary the security under the loan.
The court was unconvinced by this submission, noting that ratification involves retrospective conferral of authority on an agent to do something that the agent has done without the requisite authority, rather than transforming something that had not been done into something else. Stanley J noted that it is impossible to ratify an act that was void at its inception, except where it is only void because it is unauthorised. In this instance, the Loan Deed was invalid because of a failure to properly execute it, so there was no act to be ratified and the ratification argument failed accordingly.