Corporate Housekeeping: Does the Signature of One Director Constitute Authority to Bind a Company?
The question whether the signature of one officer of a company suffices to bind the company is a frequent one, the present brief article outlines the position concerning the ability of an officer to bind a company with regard to a particular transaction.
The validity of transactions concluded on behalf of a company is regulated by CAP.113 Section 33A of the Cyprus Companies Law. In that respect, the following general principles apply:
- Regardless of whether a particular officer did not have actual authority to bind a company with respect to a particular transaction, if he/she had apparent authority to do so, vis-à-vis a third party, the company is still bound under the terms of the transaction. Noting, however, that in such a case, the specific person will most probably be liable to the company for acting in excess of his/her actual authority.
- Apparent authority exists when a third party can reasonably assume that the specific officer had been granted actual authority by the company. This may be established in several ways, including the following:
(a) According to section 33A of the Cyprus Companies Law, any officer (director or secretary) of the company is deemed to have apparent authority to bind the company notwithstanding any limitation to his/her authority in the articles of association of the company or otherwise, unless the specific action of the person is beyond his/her capacity as provided by the law.
(b) If in a normal business environment the specific officer in the particular position in a company would reasonably be expected to have the authority to carry out the particular action vis-à-vis the third party in question.
(c) If the company in the specific circumstances represented that the specific officer had authority to carry out the particular transaction.
- In view of the grey areas that may arise in cases in 2(b) and 2(c) above and, in order to avoid the need for the third party to have to argue whether, under the circumstances, it was reasonable to assume that the specific officer had actual authority to bind the company, it is advisable that for any transaction, a third party should request to see the actual document/s authorising the officer to execute the transaction on behalf of the company, that is, to establish that there is actual authority.
- Irrespective of the above, from the point of view of good corporate housekeeping, and for the purpose of protecting the officer who has entered into the transaction on behalf of the company, it is advisable that the officer request an authorising resolution be passed by the company establishing his/her actual authority to enter into a particular transaction. By having an authorising resolution, the officer avoids the risk of the company arguing later that the officer was not actually authorised by the company.
Frequently, and understandably, business owners are focused on the operation and running of their businesses to the extent that corporate housekeeping is neglected and officers, and transactions/agreements are not authorised, resolutions are not passed and companies are generally not operating in accordance with their Memorandum & Articles of Association. Unfortunately, the consequences of improper or non-existent corporate housekeeping do not become evident until business owners receive offers to sell their business or otherwise enter into transactions for the expansion of their business under which circumstances a potential buyer will conduct due diligence on the company.
Contact us for information on good corporate housekeeping in accordance with the Cyprus Companies Law and your company’s articles of association: LLC@JoannidesLLC.com.