Implied Authority of Company Directors

Company Litigation & Disputes Article #1

A company is a separate and distinct legal entity from the directors that operate a company.  Business litigation and disputes can arise where one or another of the directors of a company wish the company to commence legal proceedings against a third party, or to defend legal proceedings commenced against it by a third party, whereas another director of the company may not wish to take such a course of action.  This is the first of a series of articles relating to litigation and disputes in the company context.

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If there is effectively a deadlock between the directors it may be that this leads to a dispute or to commercial litigation.  The deadlock or disagreement could relate to many different issues, including the following:

  • If there is an internal dispute between directors regarding their rights and obligations, the operation of the company or the company's constitution;
  • If the directors of a company cannot agree upon whether the company should commence legal proceedings;
  • If the directors of a company cannot agree upon whether the company should defend legal proceedings;
  • If legal proceedings have been commenced, or if legal proceedings have been defended, by a company at the instigation of a director and there is a dispute as to whether the director had the requisite authority to cause the company to take that course of action; or
  • If there is a conflict of interest situation between the interests of the company and the interests of a particular director.

650x200_businessThe legal team at CBL Business Lawyers has acted in various company disputes, including disputes related to the implied authority of company directors.  In one example in the County Court of Victoria at Melbourne the director for whom we were acting caused a plaintiff company to commence proceedings for an outstanding debt and damages claimed to be owed to its business by another company.  Shortly prior to the Trial of the proceeding, the defendant company applied for an Order to prevent the proceeding from continuing.

It was contended by our opposition that the director for whom we acted did not have the requisite authority from the board of directors to cause the company to instruct solicitors to commence legal proceedings.  Not coincidentally, the director of the defendant company was also a co-director of our in the plaintiff company.  The other director would not join with our client in passing a resolution to the effect that the plaintiff company commence or continue legal proceedings against the defendant company, as the director of the defendant company was also the co-director of our client in the plaintiff company.

Our client had not been formally been appointed as the managing director of the plaintiff company, but he had ostensibly assumed that role by his conduct in relation to the operations of the company.  On the hearing of the application for an Order to prevent the proceeding from continuing, the defendant company sought an order that the proceeding be struck out on the basis that it was allegedly brought without the authority of the company.  The application was unsuccessful and the Court found, having regard to all of the relevant facts and circumstances, that our client (having performed the role of a managing director, although he was not formally appointed) had the necessary authority to cause the plaintiff company bring the legal proceeding.

There are legally complex issues and considerations involved in commercial litigation and disputes between directors of companies.  It is important to seek legal advice at the earliest possible opportunity if a dispute appears imminent.  This will place you in a better position if litigation is necessary, and will potentially allow you the opportunity to attempt to resolve the dispute via alternative dispute resolution.

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Please note that the facts and circumstances relevant to every client are different.  The above article should not be relied upon as legal advice.  Article by  published 2.6.13.  To be notified of new articles:

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