Concluding contracts between single-member companies and their members
In small, single-member companies, the member is usually closely involved in the company's activities and its management, therefore often holding the office of the statutory body. Sometimes, the sole member who represents the company as its statutory body also deals with the company. For instance: as the sole member they provide funds to the company, and as a statutory body they transfer receivables, acknowledge debts or enter into purchase contracts. For a contract concluded between a single-member company represented by the sole member on one part, and that member on the other part to be valid, it is necessary to ensure that it meets all statutory requirements.
The Corporations Act explicitly allows for the existence of single-member business companies. To maintain as much contractual freedom as possible, it also allows for the sole member to enter into contractual relations with the company. However, it lays down special rules for these cases, to protect the company and third parties (in particular creditors) from acts whereby the sole member might abuse their position contrary to the company’s interest.
Contracts concluded between a sole member and the company represented by that member are subject to a rule contained in Section 13 of the Corporations Act. This provision requires that the contract be concluded in writing, with verified signatures. The same requirement also applies to unilateral legal acts by a company represented by its sole member towards such member, or vice versa, by a single member towards their company (e.g. acknowledgement of a debt or unilateral offsetting of claims).
This provision aims to prevent wrongful acts by the member and the statutory body in one person, who, in the absence of a written form with a verified signature might change the content of the contract or backdate it, arbitrarily and at any time. A failure to comply with the stipulated obligation may, in extreme cases, result in the nullity of the contract or unilateral act. Ultimately, this means that the court may declare it null, of its own motion and without a time limit. In this context, the Supreme Court also touched on the issue of the use of electronic signatures, stating that although they do not have the same effect as verified signatures, under certain circumstances, their use may not render a legal act null.
However, the above mentioned section does not apply to contracts concluded between the sole member and the company where the company (when concluding the contract) is represented by another person (usually a second statutory representative who is not the sole member), or contracts concluded in the ordinary course of business. In its recent case law (29 ICdo 43/2018), the Supreme Court also held that the rule did not apply to contracts concluded between two single-member companies represented by the same sole member.
We recommend that sole members and statutory representatives of companies carefully assess all contracts being concluded from the perspective of Section 13 of the Corporations Act. Should they find that the contract concluded between a single member alias a statutory body does not meet the legal requirements, an additional remedy is possible, with effects for the future.