To seal or not to seal

by Andrew Bristow and George Roins

Historically, common seals were the standard means by which a company would execute documents and they were required to be affixed to deeds. The Company Law Review Act 1988 abolished the requirement that companies have a seal and also the need for deeds to be executed under seal.

Do I throw my seal away?

No! As noted above companies no longer require seals to execute documents. However, companies must continue to use a common seal if their constitution so mandates. Additionally, documents executed under seal are sometimes more readily accepted by persons unfamiliar with the ways Australian companies can execute documents, particularly overseas clients and government agencies.

I really don’t need the seal!

If it is decided that a company does not need to have a common seal then the constitution of the company should be reviewed to ensure its use is not mandated. Additionally, references to execution by seal should be replaced with the manner in which the company will execute its documents to ensure proper and consistent procedures are adhered to by persons authorised to bind the company.

I like my old seal!

It is amazing how many times we still find documents which are executed with old and invalid common seals. With the introduction of the Australian Company Number (“ACN”) the requirements for a valid common seal changed. To be valid, a common seal must contain:

  • for a company that has its ACN in its name – the company’s name


  • otherwise – the company’s name, the expression “Australian Company Number” or “ACN” and the company’s ACN.


  • Companies quite often have special seals for use outside Australia or for special purposes such as execution of share certificates. A duplicate seal must be a copy of the common seal and display the words “duplicate seal”, “share seal” or “certificate seal”. Duplicate seals are affixed in the same way as the common seal.

    Executing a document with an invalid seal is a strict liability offence under the Corporations Act with a $1,000 penalty.

    Execution with a common seal

    The Act does not set out how a company must execute documents. It does set out acceptable ways of execution which other persons may assume to be valid.

    Section 127(2) of the Act provides that a company with a common seal may execute a document if the seal is affixed to the document and the fixing of the seal is witnessed by one of the following:

  • two directors of the company


  • a director and secretary of the company


  • for a proprietary company that has a sole director who is also the sole company secretary – that director.


  • It is normal practice that a company executes a document under seal in one of those ways and that the constitution of a company reflect these methods of execution. However, often constitutions of companies provide other authorised methods of execution which must be followed if the company is to validly execute a document under seal. Should a company choose to require its seal to be affixed other than in accordance with Section 12 (2) of the Act, then third parties will not be able to assume the document is validly executed. This may mean delays in finalising transactions until the third party is satisfied that the document is validly executed. This is particularly so with Government departments.

    Execution without a common seal

    As with execution of documents under seal, the Act does not prescribe how documents must be executed by companies without a seal. Again, the Act sets out methods which if used can be considered valid by third parties. Section 127(1) of the Act provides that a company may execute a document without using a common seal if the document is signed by:

  • two directors of the company


  • a director and secretary of the company


  • for a proprietary company that has a sole director who is also the sole company secretary – that director.


  • As noted these are not mandatory rules and a company’s constitution may provide other methods by which the company must execute documents without using the seal.

    Not quite the end of the story

    Despite attempts to simplify the way in which companies can execute documents there is more to the execution of documents than meets the eye. For example, proprietary companies are no longer required to have a company secretary and often companies are only established with a single director. However, the methods of execution set out in Sections 127(1) and 127(2) of the Act do not deal with single director companies. Third parties therefore cannot rely on the related assumptions set out in those sections.

    There are also times when the assumptions cannot be relied upon even if the documents are executed in accordance with Sections 127(1) and 127(2) of the Act. Section 128(4) of the Act states that a person is not entitled to make an assumption in relation to the execution of documents if at the time of the dealings they knew or suspected that the assumption was incorrect.

    That is, if at the time the third party entered a transaction with the company they knew or suspected that the document could not be validly executed by the company in that manner, they cannot rely on the assumptions. This could arise, for example, if the third party reviewed the company’s constitution and found that it mandated a different method of execution.

    Similarly, persons authorised to execute documents for a company or witness the affixing of a seal should all be present at the time of execution. Failure to do so where execution requires both to be present may mean the document is not validly executed.

    Conclusion

    Proper execution of documents is simple, however it can be more complicated than it needs to be. Companies should determine the manner in which they intend all documents to be executed, ensure this is stipulated in their constitution and that these procedures are adhered to. The easiest way would be to adopt the methods set out in Sections 127(1) and 127(2) of the Act.Third parties also need to check that documents are executed properly and ensure the correct form of seal is used (if any) and consider how to verify that a document has been properly executed if signed on behalf of a company by a single director.


    Findlaw

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