Opened up in lockdown
Digitisation of Australian companies’ execution of documents and holding of meetings facilitated for 6 months.
On 5 May 2020, the Australian Commonwealth Treasurer issued a determination to assist Australian companies to keep operating by relaxing – for 6 months – particular rules about meetings and document signatures that are not compatible with public health measures for social distancing during the COVID-19 pandemic.
The changes around document signatures are particularly important for financiers. This is because due execution of finance and security documents is crucial for enforceability and should not be open to challenge.
Under the Australian Corporations Act, a counterparty dealing with a company may generally assume that a document has been duly executed by the company if the document is signed by:
- 2 directors of the company;
- a director and a company secretary of the company; or
- for a proprietary company with a sole director who is also the sole company secretary – that director.
Debate surrounds the extent to which electronic methods can be used to fulfil these requirements under the current law. The Treasurer’s determination allows a party to a contract (like a financier) to assume that a document has been duly executed by a company if the required signatory (see above) either:
- signs a copy or a counterpart of the document in physical form; or
- communicates electronically in a way which reliably identifies the person and indicates the person’s intention that the document is agreed.
The physical document or electronic communication must include the entire contents of the document but need not include the signature of another person signing the physical document or electronic communication.
A company has two directors, one of whom is also the company secretary. One director lives in Melbourne, the other in Brisbane. The COVID-19 restrictions mean that these two individuals cannot be at the same place at the same time, nor is there time for the same physical document to be signed by one director in one capital city and then couriered to the other capital city for signing by the other director. The Treasurer’s determination means that a financier requiring a loan or security document to be executed by the company can assume that it is duly executed if:
- the director in Brisbane signs a copy of the document that is in a physical form, including the entire contents of the document, but without the signature of the director in Melbourne, and scans the document into portable document format (PDF) and emails that PDF to the financier; and
- the director in Melbourne correspondingly signs a copy of the same document that is in a physical form, including the entire contents of the document, but without the signature of the director in Brisbane, and scans that document into PDF format and emails that PDF to the financier.
Alternatively, the director in Brisbane could email the PDF signed by her to the director in Melbourne, who could print out that scanned document and countersign it, and then scan and email the PDF (containing digitised images of both directors’ signatures) to the financier. However, the determination does not require this to be done.
This example shows how the Treasurer’s determination appears to have addressed the vexed issue of ‘split execution’ for the next 6 months. Absent the determination, the case law, and the commentators, are divided on whether a counterparty like a financier can rely on the due execution assumption where one director of a company signs one physical copy of a document and another director/secretary of that company signs another physical copy of that document.
Clearly the financier must still satisfy itself that the signatures are genuine.
Suppose the facts are the same as in example 1, but instead of signing a physical copy of the document, scanning it to PDF and emailing it to the financier, each director uses a cloud-based signature platform (eg DocuSign) to ‘sign’ an electronic version of that document (they could both ‘sign’ the same electronic document or separate electronic documents). That document is (or those documents are) then emailed to the financier. So long as the technology that is used reliably identifies each director and indicates their intention about the contents of the document (and any reputable cloud-based signature platform should do this), the counterparty can make the due execution assumption about the execution by the company of the electronic version of the document. Again, systems need to be in place to address the risk of fraud. The cloud-based signature platforms include procedures to mitigate against that risk.
The Treasurer’s determination deals with how companies can sign documents and the assumptions that can be made by a party (like a financier) contracting with a company. It does not cover individuals signing documents in their personal capacity. As a result, financiers will still have to apply their usual risk assessments when contracting with individuals in their personal capacity.
The Treasurer’s determination has the effect that companies that must, or wish to, hold a meeting may use technology rather than face-to-face in person meetings. In this regard, the determination specifically addresses quorum requirements, taking votes by means of a poll (votes by a show of hands are not permitted when relying on the determination), appointment of proxies and the giving of notices of meeting.
The Treasurer’s determination was made in response to the COVID-19 pandemic and applies on a temporary basis until 6 November 2020. The new document signing rules assist financiers to assume that finance and security documents have been duly executed by their corporate clients in more instances than before. The changes allowing for virtual meetings have been well-received by our clients, providing certainty and cost-effective solutions.
For further information, please contact the author or a member of our Banking & Finance team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.