Split Execution: An Issue For Deeds Indeed

The recent case of Bendigo and Adelaide Bank Ltd & Ors v Kenneth Ross Pickard & Anor [2019] SASC 123 (Pickard) may have a stifling effect on the manner in which documents can be executed under the Corporations Act 2001 (Cth) (Act). The case demonstrates that when a company signs a deed – it is best practice to reject e-signatures and to obtain signatures on a singular static document. The same principle may also be appropriate in relation to other agreements generally.

Legislative Background

Section 127 of the Act states that “[a] company may execute a document” (emphasis added) if signed by 2 directors or a director and a company secretary. Notably, the singular tense of “a document” is used. This has led to some debate about whether section 127 of the Act covers split executions. A split execution occurs when the officers of a company sign separate counterparts (duplicates) of a document, rather than signing the same document.

Judicial guidance on the issue is scarce. Several years ago, in Re CCI Holdings [2007] FCA 1823, Emmett J noted that section 127 may cover split executions, stating:

The reservation that I had is that s 127(1) may be construed as requiring a single document to be signed by the two directors or the director and secretary. In principle, however, I can see no reason why that should be, so long as the two counterparts are treated as a single instrument and that instrument is delivered as is contemplated by the Conveyancing Act 1919 (NSW)…

However, His Honour’s brief comments fell short of providing clear direction on the issue, and as obiter dictum (incidental remarks), failed to establish a legally binding precedent.

More than a decade later, Stanley J has now recently taken the opposite view in Pickard. His Honour held that:

Given that s 127(1) contemplates a document being executed by two officers signing it, there is good reason to consider there must be a single, static document rather than a situation where two electronic signatures are sequentially applied to an electronic document. As Seddon [on Deeds] has noted, 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 s 127(1)’ (emphasis added).

Stanley J found that the placement of two electronic signatures on a document one after another amounts to split execution – that is, signing two separate counterparts rather than the same document. His Honour went on to find that this falls short of section 127 requirements, which refer specifically to “a documentbeing signed. It is a stringent view, which seems at odds with the commercial practicalities of our ever-increasingly electronic world.

Case Background

A subsidiary of the Bendigo and Adelaide Bank (Bank) advanced $505,250.00 (Loan) to Kenrop Pty Ltd (Kenrop). Kenrop later defaulted on its repayments under the Loan and the Bank sought recovery of the outstanding amount from Kenrop’s directors, Kenneth and Ann Pickard (Pickards) as personal guarantors.

Interestingly, the Pickards themselves had not signed a personal guarantee in favour of the Bank. They had, however, signed a power of attorney, authorising Great Southern Finance Pty Ltd (GSF) to do so on their behalf.

Validity of the Power of Attorney

The Pickards argued that the power of attorney was invalid for various reasons. These arguments were rejected by the court. Stanley J held that the power of attorney was valid. Accordingly, GSF was properly authorised to enter into and execute a loan deed, binding Kentrop as the borrower and the Pickards as guarantors. However, the way in which GSF went on to execute the loan deed was problematic.

Was the loan deed executed correctly?

Relying on its power of attorney, GSF signed the loan deed (which incorporated the Pickards’ personal guarantee) by affixing the electronic signatures of GSF’s director and secretary to the document, purportedly in accordance with section 127 of the Act.

Section 127(3) of the Act provides that a company may execute a document as a deed where the document is expressed to be executed as a deed and signed by the company’s officers.

The Pickards contended that GSF had not complied with the Act because the company officers, in sequentially applying their electronic signatures, had not signed “a document” as required under section 127(3), but rather, had signed two duplicate versions of the same document. Further, GSF’s execution of the loan deed did not meet the common law requirements, which dictate that the deed must be on paper, parchment, or vellum. According to the Pickards, the deed therefore failed.

The Bank conceded that its electronic execution did not comply with common law position, but submitted that section 127(3) of the Act prevails as a statutory exception. The Bank went on to argue that section 127 allows two counterparts to be treated as a single document and accordingly, its electronic execution of the deed was valid.

Conclusion

Stanley J concluded that while section 127 of the Act modifies the common law requirements for a valid deed, the Act requires a single, static document to be signed. The copying and pasting of two e-signatures one after another on an electronic document will fall short of satisfying this requirement. As a result, Stanley J found that the loan deed (which contained the Pickard’s personal guarantee) was invalid.

His Honour also found that the loan deed could not take effect as a contract, for want of consideration. The Loan had been advanced by the Bank prior to GSF executing the loan deed, and “past” consideration was not good consideration. Accordingly, the Pickards were not bound under contract or deed and were free to walk away from the personal guarantee.

Although Pickard is a South Australian decision, which is not binding in Victoria, the consequences are potentially extremely significant. According to Pickard, an electronically signed deed fails to meet the common law requirements or the statutory exception under section 127 of the Act. According to this decision, an electronically signed deed will fail altogether.

Other electronically signed documents are not as susceptible, because unlike deeds, there is no requirement for them to be on paper, parchment, or vellum. While the document may be valid, there are other consequences of failing to comply with section 127 of the Act. Specifically, section 129(5) of the Act provides that “[a] person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1).” Sub-section (6) allows a similar assumption for documents executed under seal.

The consequences of the Pickard decision mean that a document signed electronically by a company (even if it complies with section 127 of the Act in all other respects) may not benefit from the “due execution” assumptions under section 129 of the Act. This may put the counterparty at serious risk.

When dealing with a deed, the Pickard decision illustrates that it is best practice to require companies to execute with “wet ink” rather than electronically. This principle may also be applicable to the execution of other documents more generally.