Conventional Limitation of the Powers of Organs with Representation Authority. Risks for the Company. Means of Protection
According to Article 70 of Companies Law No. 31/1990 (hereinafter “CL”), administrators may perform all operations required for achieving the company’s object of activity, except for the limitations shown in the constitutive act. From this wording it follows that an administrator’s actions are doubly constrained: by the necessities arising from the actual execution of the corporate object, and by any conventional limitations imposed by the shareholders.
At first glance, this seems to be the boundary up to which the company is bound by acts concluded by its organs having representation powers.
In this context, it is important to clarify what happens when acts are concluded in violation of those limits. Article 55 CL offers a different answer compared to the interpretation of Article 70 above. In relationships with bona fide third parties, the company is bound by acts of its organs even if those acts exceed the corporate object.
Moreover, any limitation imposed on the powers conferred by law onto those organs—whether by clauses inserted in the constitutive act or by resolutions of statutory bodies—is not opposable to bona fide third parties, even if those limitations have been published.
The provisions of Article 55 CL faithfully transpose the provisions of Article 9 of the First Directive of the Council of the European Communities, now replaced by Directive 2009/101/EC. The rationale behind these European provisions is to favor the protection of third parties. Thus, the law attempts, as much as possible, to restrict cause for invalidity of obligations assumed in the name of the company.
Under Article 72 CL, the obligations and liability of administrators are governed by the rules relating to mandate plus special provisions in the Companies Law. Thus, the administrator acts under a contractual mandate: rights and obligations are set by the constitutive act and shareholders’ resolutions, supplemented by applicable legal provisions motivated by public interest.
Referring to the complementary regime of the mandate contract under the new Civil Code leads us to Article 2012(3), which provides that rules concerning representation in contracts apply correspondingly, and then to Article 1309(1). According to the latter, a contract entered into by a person exceeding their authority does not produce effects between the principal and the third party.
Thus, in matters of representation and, implicitly, mandate, exceeding the scope of authority does not bind the principal (i.e. the company) to the third party under general contract law—but in cases of exceeding limits set by shareholders or convention, a special regime applies. Clearly, the special law (Law 31/1990) establishes a derogatory regime in this respect.
Any limitation of the powers granted by law to representation organs is not opposable to bona fide third parties. In terms of effects, this means that a legal act concluded by an administrator (or other organ) that violates limitations imposed by shareholders will bind the company in relation to third parties of good faith.
Hence, even if shareholders act diligently to limit the powers of administrators to protect the company from abuses or negligence, such limitations are nullified by these provisions.
In corporate matters, the need to protect third parties by ensuring certainty in their relations with the company prevails over the effectiveness of internal protection measures against abuses or negligence of representation organs.
A company thus exposed cannot repudiate acts contrary to its interests that were carried out by an administrator under the above conditions; it must face the consequences of its own fault in choosing the representative. The only remedy available is an action in liability against that representative for damages caused by breach of the conventional limits.
Case law reflects such situations, where limitations placed on administrators’ powers were ineffective against abusive or negligent acts by the administrator, absent collusion by the third party.
For example, in a limited liability company where the constitutive act required both administrators to sign jointly (double signature), violation of that rule did not justify annulment of the act performed by just one administrator. The company remained bound because, under Article 55(2) CL, any breach of conventional limitations is not opposable to a bona fide third party. It is also emphasized that it would be impractical and even excessive to require every third party contracting with a company always to verify whether the administrator’s mandate is valid in each instance.
Application of Article 55 CL was upheld even where the limitation on the administrator’s powers was inserted by an addendum to the constitutive act. The court held that regardless of whether that addendum was published or not, the limitation is not opposable to a contracting third party. The purpose of Article 55 CL is precisely to protect third-party interests in dealings with the company against internal limitations on representatives’ powers.
We must identify the boundary beyond which the company is not bound by acts of its organs, and especially the possible means of protection against deviation from the corporate interest by an administrator. Analyzing Article 55 CL in conjunction with Article 1914(3) of the Civil Code, three such scenarios emerge:
- The third party knew or should have known that the act exceeded the company’s object of activity;
- The third party acts in bad faith, knowing the limits in the constitutive act or shareholders’ resolutions;
- The act concluded exceeds the legal limits of powers vested in the respective organs.
We highlight the difference between exceeding legal powers and exceeding conventional limits imposed by shareholders. Because no one can plead ignorance of the law, the first scenario triggers an irrebuttable presumption that the third party is in bad faith, making any act beyond legal limits void against the company. In contrast, with conventional limits, the company must prove collusion of the third party to disavow the act.
One way a company can protect itself is by inserting a mandatory notice clause in all documents that any limitation of powers must be acknowledged by the contracting third party, and any transaction exceeding those limits will not bind the company. Such a clause supplies evidence of the third party’s knowledge of the limitations. Nonetheless, this protection is limited: it is unlikely that such clause would be imposed by the very administrator seeking to contract for misappropriative ends.