A company may be considered as a separate legal personality. By that it means the company is independent from its legal persons and has separate rights as well as responsibilities. Members are liable to pay only the pre-decided amount for the debts and other expenses of a company at the time of insolvency. After knowing how to establish a company in UK, the next step is to determine the extent up to which the company may utilise the authorities of its separate legal personality. And what authorities can be exercised by the company being an isolated lawful person regarding the contracts signed with third parties. This article deals with these topics.
General Information regarding Contractual Binding
A company has the authority to sign the agreements with parties that do not belong to the company. However, it is a point to ponder whether these agreements act as a binding on the company or not. To answer this, understand this fact:
According to Companies Act 2006, the 43rd Section, it is possible for a company to sign a contract either by a written contract authenticated by its common seal or via an agent that has been authorised to act on behalf of the company.
Validity of a Contract
Any contract signed between the company and any other party is authentic and acts as a binding, if it follows the following two conditions:
Additional Points to Govern the Validity of any Contract
To term any contract completely valid, three more conditions should be fulfilled. The first one is as follows:
Is unable to bind a company in a contract with a third party. In fact, any signed contract will be nullified. However, there is an exception to the case. If the third party is dealt by the agent that has not been given any authority in a clear manner, then the transaction may be ratified by the company. The company may then adopt it and bring it in to effect and make it an obligation for the third party as well.
The second point is stated as follows:
The final point that determines the completeness of validity of a contract is mentioned below:
A Company’s Capacity
After knowing that how to establish a company in UK, the extent of freedom that a company possess should also be known. The control of a company over matters and dealings may be termed as its capacity. Two documents that regulate a company’s conduct are memorandum and the articles. The Part 83 of “Corporate Capacity” presents a summary of the capacity given to a company relevant to the modern era. It may be concluded that a company has the legal right to act and accept restrictions to act beyond its capacity in many manners.
Capacity of a Company under Articles
A company’s capacity may be subjected to certain restrictions under the articles. For instance,
According to Section 31(1) of Companies Act 2006:
Capacity of a Company under Memorandum
A benefit to open a company in London or in other cities of UK is that although the articles of association restrict the capacity of a company but the provisions given by the memorandum may deal with the capacity of a company in a more lenient manner. A capacity of a company may not be restricted by the memorandum of that company. Section 35 of Companies Act 1985 is dedicated for the elaboration of this fact. The provisions of this section are as follows:
Acts outside the Bounds of Objectives
When the history is studied, it becomes prominent that any act that was beyond the scope of a company’s objectives was annulled. The contract signed between any two parties could not be implemented by either of the parties. Any benefits that were enjoyed by either of the companies as a consequence of the contract would be subjected to claims of restitution. And it would be required at times to return those benefits to bring both the parties in a state as they were before the pact was signed. Such restrictions caused difficulties for the outsiders that intended to make deals with the company. Moreover, this could lead the parties involved in the transaction to unfair infliction and results that were unanticipated.
Advantage of Annulment Rule
There was only one advantage of annulment of actions beyond the scope of company’s objectives. The members could keep a check on the activities of the directors and make sure that no objective of the company was violated. The transactions of the company could be limited to specific types of ventures.
Consequences of Annulment Rule
The consequences of the annulment rule as mentioned above were too harming. The price to be paid by the transacting parties was too high. Although this rule provided security to the members, it was too unfair to the transacting parties. The legislature played a key role providing protection to the rights of third parties. However, the statutory laws devised for this protection of third parties did not provide enough leverage to the companies. And failed to define the capacity of a company clearly. Nevertheless, according to the Section 39(1) of Companies Act 2006, it is made clear that any annulment of an act on the basis of lack of capacity under the provisions of a company’s constitution is invalid.
Benefit of Section 39(1) of Companies Act 2006
Once open a company in London or in other cities of UK, it remains an issue to maintain a balance between the rights and powers given to different legal persons of a company. A similar problem arises when a balance has to be maintained between the rights being given to the third parties and the security of members of a company.
The provision under consideration is beneficial to the third parties who intend to have agreements with corporate bodies. Moreover, it also protects the rights of members. Such as it allows the members to sue the directors violating their duties as specified by the directors via derivative action. The violation of duties may happen when the director acts beyond the bounds of the powers that have been entrusted upon him per Section 171 of Companies Act 2006. Also, such a breach may take place when the director causes loss to the company, for instance, from any transaction that is un-allowed. Fortunately, the problem of capacity of a company has been solved via the provision of Section 39(1) of Companies Act 2006. This provision also elaborates the necessity of knowing the correct interpretation of objectives for the members and other insiders of a company.
Factors determining the Contractual Binding between a Company and the Third Parties
After summarising different rules and obligations, the final elaboration of a binding contract between a company and any other party would be as follows:
For the best company formation service UK the above mentioned regulations about the contractual binding must be carefully observed. A company being a separate lawful body, has certain rights that are specific to it. Commonly referred as company’s capacity. Hence, it is a mere assumption that all the documents that govern the conduct of a company may restrict the ability of any business formation UK to work freely. Companies do have a great deal of freedom in the form of their capacities