Legal actions of a “false” corporate body can be saved. But all of them? | In Principle

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Legal actions of a “false” corporate body can be saved. But all of them?

On 1 March 2019, an important amendment to the Civil Code comes into force, providing for the possibility of validating actions by a “false” corporate body. Up to now, such a possibility has applied only to actions by a “false” attorney-in-fact.

We have drawn attention several times on the In Principle portal to this discrepancy in the provisions. The Polish Civil Code provided for the possibility of confirming the actions of a “false” attorney-in-fact (falsus procurator), but there were no mirroring regulations relating to a person who could be described as a “false” corporate body (see “Validity of contracts when a party is not properly represented”).

Empowerment of an attorney-in-fact and a member of the management board to act

As a legal person, a company may act (e.g. undertake legal transactions) only through its management board or through representatives (e.g. attorneys-in-fact or proxies). Regardless of the consequences of failure to comply with specific requirements for submitting declarations of will (e.g. in terms of their form or the obligation to obtain the consent of a body of the legal person), the validity and effectiveness of the company’s actions is also affected by whether the person who performs the action is authorised to do so.

In case of an attorney-in-fact, it is necessary to determine whether, first, the attorney-in-fact is authorised to perform legal acts on behalf of the company at all (i.e. if he is an attorney-in-fact) and, second, what is the scope of such authorisation, and if the attorney-in-fact may act independently or only with another person.

Similarly, in relation to a management board member, it is important to determine not only if he is actually a member of the board (e.g. if his appointment has expired), but also if the body itself is properly constituted (e.g. if it is not a “rump” management board, consisting of an incorrect number of members—usually fewer than required by the company’s articles of association). Finally, it is important to determine if, according to the law or the articles of association, a member of the management board may perform a legal act (any act or a specific act) independently, or only in conjunction with another person (e.g. a second member of the management board or a proxy).

Different effects of infringements

Under current law, a defect in representation of a company may have different consequences depending on who acted for the company.

So, in the case of acting through an attorney-in-fact who is not duly authorised (because there is no power of attorney, the person is acting under a power of attorney granted in an improper form, or is acting beyond the scope of the power of attorney), the sanction for such an infringement is the “suspended invalidity” of the act. Under Art. 103(1)–(2) of the Civil Code, a legal act of such a “false” attorney-in-fact (falsus procurator) can be subsequently confirmed by the person on behalf of whom the attorney-in-fact has acted. (This will continue to be the case, as the amendment does not change this.)

For many years, there has been a dispute in the legal literature and judicial decisions on whether this principle could be properly applied in the event of an act performed on behalf of a company by a corporate body without due authorisation (e.g. a management board member whose appointment has expired, an inappropriate number of board members, etc). The Supreme Court’s views on this issue have also evolved over time.

At stake in these disputes was whether the actions of a “false” body (or a “false” representative of the body) are subject to the sanction of absolute nullity according to Art. 39 in conjunction with Art. 58 of the Civil Code, or they can be “saved” in a manner analogous to the acts of a “false” attorney-in-fact.

A new landscape…

Recently, the Parliament boosted the proponents of the latter solution by amending Art. 39 of the Civil Code (Art. 1 of the Act of 9 November 2018 Amending Certain Acts to Simplify Tax and Commercial Law for Businesses).

In the wording in force from 1 March 2019, this provision will in principle be equivalent to the rule in Art. 103 of the Civil Code for “false” attorneys-in-fact.

Therefore, we should reiterate the view already expressed on this portal that this is a good solution, especially from the perspective of the security of trade. It seems right to look for solutions which, given the unanimous will of the parties to a legal act, would allow the defect to be cured and maintain the economic effects of the transaction. There is insufficient justification to differentiate the less-severe legal effects of a defect in an act by a “false” attorney-in-fact and the much further-reaching effects of an act involving a “false” corporate body.

…with a blot

The generally positive tone of the changes is to some extent spoiled by Art. 35 of the amending act, according to which the amended Art. 39 of the Civil Code also applies to legal transactions performed on behalf of a legal person without authority or exceeding the authority before 1 March 2019, “if they were not the subject of court proceedings in civil cases which were finally concluded before the [amendment] came into force.”

A linguistic interpretation of Art. 35 of the amending act may suggest that if a given act was the subject of any final decision before entry into force of the amending act (even if the ruling or the case did not concern the question of the empowerment of a member of the management board at all), then the possibility of benefiting from the blessing of confirming an act of a “false” body under this provision is excluded.

It can be assumed that the intention of the Parliament was for the new regulation to have retroactive effect, with the exception of cases that have already been finally concluded with a possible declaration of the invalidity of an act carried out by a “false” body. This is in line with the clear intention of the drafters.

In the explanatory memorandum to the draft of the amending act, it is indicated that the amendment of this provision is aimed at removing the state of “legal uncertainty” caused by “an inconsistent line of case law” and “unambiguously enabling ratification of agreements concluded by a body of a legal person exceeding the scope of its authority,” in order to “improve the security of legal transactions, among other things by removing interpretative doubts.”

A purposive interpretation of Art. 35 of the amending act also prompts such conclusions.

Maciej A. Szewczyk, attorney-at-law, Krzysztof Libiszewski, attorney-at-law, M&A and Corporate Practice, Wardyński & Partners