The split ends of split execution
A volatile history
A company can validly execute a counterpart of a document under s 127(1) of the Corporations Act (Act). But the situation isn’t so clear where a company requires multiple signatories to bind it, and those signatories ‘split’ their signatures over separate documents. The practical effect of this has been to slow down and sometimes significantly delay deals because of the requirement that a party’s signatories physically meet for signing or that the original document travel between them for separate signing.
What’s with this ambiguity around ‘split executions’ and what is the position now?
Under sections 127(1) and 129(5) of the Act a person may assume a document has been validly executed by a company where it appears to have been signed by two of its directors or a director and any company secretary. For a proprietary company that has a sole director who is also the sole company secretary, just that director’s signature is sufficient.
Where different parties sign separate but identical copies of a document, the document is said to be signed in ‘counterpart’. This usually happens when the parties to the document are in different places and unable to physically sign the same document. While strictly not necessary, it is usual and prudent to evidence the parties’ agreement to accept execution by exchange of counterparts by including a specific clause in the document.
’Split execution’ refers to a situation where multiple individuals for a single party execute separate copies of a contract, for example where two directors of a company each sign separate copies of it. Historically there was doubt as to the enforceability of split executions, with most lawyers insisting on multiple signatories for a single party executing a single, static document.
When Covid-19 hit in early 2020 legislators introduced temporary measures explicitly confirming the enforceability of split executions by providing that a person signing under section 127(1) may sign a copy or counterpart of a document. These temporary measures expired on 21 March. And unfortunately debate on a Bill that would otherwise have had the effect of extending the temporary measures beyond 21 March has been adjourned until 3 August 2021. As such, the law has reverted back to its pre-Covid-19 position, i.e. once again we have doubt as to whether split execution satisfies the requirements of s127(1).
So, for the time being, companies should avoid signing by split execution. This is frustrating given the progress that was made on this front in 2020, we just hope that legislators follow through with the long overdue reforms.
This post is current at the date of publication. It is general in nature, does not constitute legal advice and should not be relied upon as legal advice. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this post.