Contracts & Obligations

Acting by Agents

A company can enter contracts, debts and legal commitments in the same way as an individual. It can sue or be sued. The company, of necessity, acts through individuals, such as its directors, management, and employees. In principle, the acts of senior management may be attributed to the company itself.

Contracts and legal commitments are almost invariably entered by directors, managers, employees, and others as agents on the company’s behalf. The general principles of the law of agency apply. The company is bound by acts which are within the actual, usual or apparent authority of the director or another party who acts on its behalf.

The general principles of agency law protect third parties who deal in good faith with the apparent representatives of the company. The company is usually bound to third parties who deal with the company in good faith, notwithstanding actual non-apparent limitations on the authority of the insider, with whom they deal.

The directors acting collectively as a board run and manage the business of the company under standard articles/ default constitution. They can be readily presumed to have the power to undertake the usual business of the company. However, a highly exceptional transaction, such as the sale of the company’s business, cannot be assumed to be within the powers of the directors and is likely to require shareholders’ approval.

For practical reasons, the company is likely to conduct most of its everyday dealings through a managing director, individual directors and/ or senior employees. If a managing director is appointed, a third-party outsider who deals with him can presume that he has the usual powers to enter transactions on behalf of the company, that such a person would usually have. Equally, others within the company can be presumed to have the usual powers to enter transactions on behalf of the company, that such other would usually have.


Pre-Formation Contracts

At common law, a company could not enter a contract before it was formed.  This follows from the general principle that an agent may not act on behalf of a non-existent principal.

In order to facilitate pre-incorporation contracts, the Companies Act, 1963 allowed certain pre-incorporation contracts to be ratified by the company after formation so that it thereby becomes bound by it. The 2014 Act re-enacted the provisions on pre-incorporation contracts.

Any contract or other transaction (including any application to any lawful authority) purporting to be entered into by a company prior to its formation, or by any person on behalf of the company prior to its formation, may be ratified by the company after its formation. Upon such contract or other transaction being so ratified, the company shall become bound by it and entitled to the benefit of it as if the company had been in existence at the date of such contract or other transaction and had been a party to it.


Pre-Formation Contracts

The contract must be entered into by a person for and on behalf of the proposed company.  The contract made before formation on behalf of the company must be later ratified and approved by the company.  The company is not bound to ratify the contract. Generally, a vote of the shareholders is required to ratify a pre-incorporation contract. If the company benefits under the contract or transaction, it may be liable on restitutionary principles, to pay a reasonable price.

Prior to such ratification (if any) by the company, the person who purported to act in the name or on behalf of the company, in the absence of an express agreement to the contrary, is personally bound by the contract or other transaction and shall be entitled to the benefit of it.  In the absence of later ratification, the person who purported to act in the name of, or on behalf of the company, remains bound personally by the contract or other transaction, unless the contract provides otherwise.


Formalities

There are no special formalities for company contracts. The same rules that apply to contracts by individuals apply to companies. If an agreement must be in writing or must be evidenced in writing, it may be signed by or on behalf of the company, by a person (usually a director) with authority.

Authority is ultimately granted by the board (and less commonly, by the members in general meeting). Less critical and more routine matters may be capable of being authorised by others within the company, under expressly or impliedly delegated powers.

Where a document must be executed as a deed, such as in the case of a power of attorney or the transfer of an interest in land, the common seal of the company is impressed and countersigned by two directors or by a director and secretary under the default provisions. The company seal is a device which impresses the name of the company onto paper. Where it is signed (technically counter-signed or witnessed) by two directors or a director and secretary who express themselves as such, it is presumed valid.


Registered Representatives

The board of directors may authorise any person to undertake a transaction and to bind the company. It may register a person for this purpose, although it is not usual or necessary to do so. The concept of a registered person derives from EU Directives.

Where the board of directors of a company authorises any person to bind the company (not being an entitlement to bind that is, expressly or impliedly, restricted to a particular transaction or class of transactions), the company may notify the CRO in the prescribed form of the authorisation and it shall register the authorisation.

Where the board of directors of a company revokes an authorisation of a person as a person entitled to bind the company (being an authorisation notified to the CRO in the prescribed form), the person shall, notwithstanding that revocation, continue to be regarded as a registered person unless and until the company notifies the CRO in the prescribed form of that revocation.


Agency Protections 1

In accordance with the general principles of agency, an outsider who is not aware of the improper exercise of powers and who has no reason to be aware of it is not prejudiced by it.  However in this context, as with agency generally, a third party who has actual or so-called constructive knowledge of the impropriety of the transaction may not be able to enforce it against the company.

The person who purported to enter the contract or transaction on the company’s behalf, may not, in fact, have had the requisite authority to do so.  The contract may be within the powers of the company but may be outside the powers of the particular individual.  This may be because that individual had no authority or because the authority is vested in some other body such as the shareholders or the board of directors.  The general principles of the law of agency apply.

If a contract is purportedly entered on behalf of the company in breach of authority, then the company may usually ratify it under common law principles of agency. Where a contract is outside the company’s powers, it is not generally enforceable by the company.

The matter of powers no longer arises for LTDs. Accordingly, the issue of company power’s will affect neither the company itself or outsiders, in the case of private limited companies (LTDs).  It will rarely affect outsiders who deal with other types of company, in view of the extensive protections in the 2014 Act.


Agency Protections 2

A person who has apparent authority or who is held out as an agent with ostensible authority may generally bind his principal (the company), irrespective of whether he has authority or not.  The principal, in this case, the company, may not rely on a limitation of authority which is not apparent to a third party.  See generally the section on third party’s dealings with agents.

In order that an outsider may rely on the principle of apparent agency, the following criteria must be satisfied.

  • The representation must be made to the outsider that the particular person has authority on behalf of the company.
  • The representation may be either express or implied.  If the company has acquiesced in by a course of action on previous occasions, this may constitute a sufficient implied representation.
  • The representation must come from the company itself or persons who have authority to act on the company’s behalf, for example, a Managing Director or the Board of Director.
  • The outsider must be induced by the representation to enter the contract.  He must have actually relied on it.
  • The company must have had the power to enter the transaction.  This does not now apply to LTDs, which have no limitation on their powers. The legislation in respect of other types of company protects outsiders from breaches of the company’s powers.

The acts of the board of directors acting collectively is protected by EU Regulation.  The question of a single director’s authority will depend on general principles of actual or apparent authority or holding out.   This is dependent upon the circumstances.  A single director may have authority to enter many routine and minor transactions. A managing director may have extensive authority.


Indoor Management Rule

The indoor management rule allows an outsider to assume that all requisite internal procedures have been followed. Where for example, the constitution requires certain approvals and sanctions to be undertaken (e.g. in order to borrow), then even if the outsider is actually aware of the requirement (e.g. through having seen the constitution), he is entitled to presume that the relevant procedures have been duly followed, unless there is something to indicate to the contrary.

The outsider is entitled to assume that all internal procedures necessary to be followed, have in fact been followed.  This is the so-called indoor management rule.  In the absence of this rule, an outsider could be jeopardised by technical imperfections on internal resolutions and authority.

By the indoor management rule, outsiders are not obliged to inquire into the internal workings and affairs of a company with which they deal.  They are entitled to presume that any procedures required to authorise transactions and contracts by the company have been properly followed, in the absence of an indication to the contrary.


Protections for Outsiders

The 2014 Act confirms the common-law rules in relation to the powers of individuals, such as directors and others to bind the company. The Companies Act provisions are in addition to and do not substitute for the law of agency or the indoor management rule.

The powers of the board may be exercised by persons authorised by the board, where authority in fact exists, or where it appears to exist, in accordance with the general law of agency. However, there are significant additional protections for outsiders.

The board of directors and any registered person are each deemed to have authority to exercise any of the company’s powers and to authorise others to do so. This provision applies, irrespective of any limitations in the company’s constitution on the board’s authority or the registered person’s authority.

Where the company purports to be party to a transaction, in relation to which the board exceeded limitations in its constitution and to which the below mentioned connected parties are also a party, the protections which apply for the benefit of outsiders are not applicable. Connected persons for this purpose, are

  • directors, shadow directors and persons connected with them;
  • registered persons and persons connected with them.

The 2014 Act provides that in determining whether any person has ostensible authority to exercise any of the company’s powers, no reference is to be made to the company’s constitution. For this purpose, “limitations” in the company’s constitution include limitations deriving from resolutions of the company or any agreement between members of the company or class of members.


Limits on Protections

This common-law rules combined with the newer statutory rules provide significant protections for outsiders. However, the common-law rules do not affect other consequences that follow from a breach of authority or irregularity of procedures. The person who exceeds authority may be liable to his principal. Procedural breaches may be restrained by insiders, without prejudice to the protections for outsiders.

The protections do not apply where the outsider knows that the relevant procedures have not been followed. It does not benefit parties such as insiders in their dealings with the company, who may have knowledge or the means of knowledge of the limitation.

The above common law principles benefit the outsider in the sense that the company may not rely on defects in its own authority, as against the outsider.  The outsider may nonetheless assert the invalidity if the company takes action to enforce the transaction against him. In some cases, it may be possible to show that the outsider has waived the invalidity or irregularity. Principles of restitution may apply so that legal consequences may follow, which seek to avoid unjust enrichment.

The statutory protections for outsiders do not limit the directors’ duties, including their duties to observe any limits in the company’s constitution. It does not remove their liability or that of any other person to the company in respect of breach of any such limits.


Form of Contract

The company may empower any person, either generally or in respect of specified matters, as its attorney, to execute deeds or do any other act or thing on its behalf in any place, inside or outside the State. A deed signed by such attorney on behalf of the company shall bind the company and shall have the same effect as if it was under seal or delivered as a deed (formally executed and witnessed).

Contracts which are required to be made under seal or as a deed may be made on behalf of a company in writing under the common seal of the company. A contract, which if made between natural persons, would be required to be in writing, signed by the parties against whom it is to be enforced, may be signed on behalf of the company by a person authorised, expressly or impliedly by the company.

A contract which, if made between natural persons, would be valid although made verbally and not reduced to writing, may be made verbally by a person with the company’s express or implied authority.

A contract made under the above statutory protections for outsiders shall bind the company and its successors and all other parties to it.


Company Seal

A company shall have a common seal which shall state the company’s name, engraved in legible letters. The company seal may be used only with the authority of the directors or of a committee of the directors authorised in that behalf.

An instrument to which a company’s seal is to be affixed must be signed by a director or by some other person appointed for that purpose by its directors or by a committee of the directors. It must be countersigned by a secretary or by a second director (if any) or by another person appointed for that purpose by the directors or by a committee of the directors.

If there is a “registered person” for the company, the company seal may be used by that person. The company seal may be sealed with the signature of the director, secretary or registered person and countersigned by a secretary or director. A deed to which an official seal is affixed has the same effect as if sealed with the common seal.


Seal for use Abroad

The company, if authorised by its constitution, may have an official seal, for use abroad. This is to resemble the common seal with the addition on its face of the name of every place abroad where it is to be used.

A company having an official seal for use abroad may by writing under its common seal, authorise any person for that purpose, as an agent to affix the official seal to any deed or another document to which the company is a party in that place abroad. The authority of the agent shall as regards third parties, continue during the period, if any, mentioned in the instrument conferring the authority.

If no period is mentioned, then it continues until notice of revocation of the agent’s authority has been given to the third party who deals with the agent. The person affixing an official seal shall, by writing under hand, certify in the deed or another instrument to which the seal is affixed, the day and date on which and the place at which it has been affixed.


Failure to state Name

An officer of the company who uses or authorises the use of a seal on which the company name is not engraved, issues any business letter or notice for official publication or signs or authorises to be signed on behalf of a company, any bill of exchange, cheque etc. in which its name is not mentioned or issues any invoice, receipt or letter of credit on which its name is not mentioned, is guilty of an offence.

The officer or person is liable personally to the holder of the holder of the bill of exchange, promissory note, cheque or order for money unless it is duly paid by the company or it appears to the court that no injustice is done by imposing liability on the company.

A bill of exchange or promissory note shall not be deemed to have been made, accepted or endorsed on behalf of a company unless made, accepted or endorsed in the name of or by or on behalf or on account of, the company by a person acting under its authority.


References and Sources

Primary References

 

Companies Act 2014 (Irish Statute Book) S.38-48

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.7    Courtney

Keane on Company Law 5th Ed. (2016)  Ch.12 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law