Acting on behalf of company prior to its incorporation
Incorporation of a company may be, therefore, characterized as two-stage, the practical outcome of which is that in the period between the company´s establishment and its incorporation certain legal acts on behalf of the company have to be performed, such as conclusion of a lease agreement or purchase agreement relating to immovable to be registered in the Commercial Register as company´s registered office, or obtaining of particular trade license for activities which will form company´s scope of business activities, conclusion of an agreement on administration of shareholder´s contributions prior to company´s incorporation with a bank or branch of foreign bank as administrator, etc. For the above purposes the Act No. 513/1991 Coll. the Commercial Code, as amended (hereinafter referred to as the “Commercial Code”) enumerates persons who are entitled to act on behalf of an established but, legally speaking, not yet existing company, i.e. an entity without full legal capacity.
This article purports to briefly inform on conditions that need to be fulfilled in order for a company to be, as of its incorporation, legally bound by legal acts performed on its behalf prior to its incorporation and also on liability of persons acting on behalf of the company prior to its incorporation.
Legal Framework
The legal institute of acting on behalf of a company prior to its incorporation is regulated by the Commercial Code in Section 64, as well as in Section 60 of the Commercial Code, which governs acting of shareholders´ contributions administrator prior to company´s incorporation.
The origins of the current legal regulation incorporated into Section 64 of the Commercial Code may be found in Article 7 of the so-called First Company Law Directive (directive No. 151/68/EEC) stipulating unlimited joint liability of persons acting on behalf of company prior to its incorporation in the event that the company does not take over obligations established by such persons on behalf of the company, unless agreed otherwise. An option to “agree otherwise” has, however, not been incorporated into the Commercial Code.
Persons acting prior to company´s incorporation
Under the Commercial Code (i) the company´s founders or (ii) the company´s statutory body or members of statutory body are entitled to act on behalf of the company prior to its incorporation. Founders of the company are the persons determined by the establishment company´s documents (i.e. Articles of Incorporation/Memorandum of Foundation or Foundation Deed) as its founders. In case of partnership and limited partnership statutory body overlaps with its founders, whilst in case of other types of companies recognized under Slovak law the statutory body may differ from the company´s founders.
Legal implications with respect to acting persons
The persons acting on behalf of the company prior to its incorporation are bound by such actions jointly which, however, does not apply absolutely as the joint liability of the acting persons depends on type of the legal act performed:
Ad 1) Legal acts relating to company´s incorporation for which founders of the company or its statutory body/members of the statutory body are jointly liable. Such respective acts have already been demonstratively enumerated above in this Article. In other words, such legal acts fall within the category of acts which are necessary for registration of the company in the Commercial Register and the persons who have performed such acts on behalf of the company are jointly bound by them until their approval by the company upon its incorporation.
Ad 2) Legal acts performed by persons acting on behalf of the company prior to its incorporation with suspensive condition. In other words, in the event that the act performed by the persons on behalf of the established company does not meet the criteria under Ad 1), than such legal act may be validly performed prior to the company´s incorporation only if its effectiveness is suspended until its approval by the company upon its incorporation, i.e. may be performed only with suspensive condition. Contrary to the legal acts under Ad 1), in the event that the company does not approve the legal act with suspensive condition, then the acting persons who have performed such legal act on behalf of the company will not be legally bound by it. The above stated results from the fact that unless suspensive condition is fulfilled the respective legal act is without any legal effect vis-à-vis any contractual party.
Ad 3) Legal acts which do not meet the criteria listed under both Ad 1) and Ad 2). This concerns legal acts not relating to incorporation of the company and also not concluded with suspensive condition of subsequent approval by the company. Persons which performed such acts are liable for potential damage arising therefrom and are bound by such acts personally.
Term and other duties
The persons acting on behalf of company prior to its incorporation are obliged to draft a list of thus performed legal acts in order for such acts to be approved by the company within three (3) months as of its incorporation. The purpose of drafting of the list is to secure transparency and legal certainty of the acting persons, the company and respective creditors as well. In the event that damage has been incurred by the creditors as a result of breach of the above duty, the persons acting on behalf of the company prior to its incorporation shall be held jointly liable for such damage. A joint liability means that the company´s creditor is entitled to claim damages either from one of the acting persons, or from several acting persons or all together. Moreover, the acting persons remain personally and jointly bound by the legal acts performed by them on behalf of the company without suspensive condition of company´s subsequent approval.
Subsequently, upon company´s approval of the legal acts included in the list, the company´s statutory body/member of the statutory body is obliged to inform all participants of the respective contractual relations, into which the company has entered ex tunc as a result of its approval, on the approval without any undue delay.
In the event that the company does not approve the legal acts performed on its behalf prior to its incorporation within three (3) months as of its incorporation, the persons who have performed such acts remain bound thereby personally, except for legal acts with supensive condition of subsequent company´s approval. As of elapse of the above period the company is not entitled to approve the legal acts concluded prior to its incorporation in a manner that the company would be bound by such acts as of its incorporation, i.e. ex tunc. In such a case the company may assume such obligations only on basis of the legal institute of assumption of debt pursuant to Section 531 of the Act No. 40/1964 Coll. the Civil Code, as amended, to which, however, consent of the respective creditor is required.
Approval of legal acts performed prior to company´s incorporation
The Commercial Code anticipates that upon incorporation of the company the company´s shareholders or its respective body will approve legal acts performed prior to the company´s incorporation. The above depends on legal form of the company:
- Partnership - in case of this legal form of company the Commercial Code sets out that each of its shareholders is a statutory body, unless stipulated otherwise in Articles ofAssociation. As a result of the above, the company´s shareholders are entitled to collectively approve legal acts performed prior to the incorporation of the company, unless the Articles of Association stipulates that only certain shareholders or only one shareholder is designated as statutory body;
- Limited partnership – similar to partnership, this legal form presumes that all shareholders together are entitled to approve legal acts performed prior to the company´s incorporation, unless stipulated otherwise in the Articles of Association;
- Limited liability company - approval of legal acts performed prior to the company´s incorporation is in competence of the General Meeting. At least 2/3 majority of all shareholders is required for the approval, unless the Articles of Association requires a higher quorum;
- Joint-stock company - as the Commercial Code does not render the power to approve legal acts performed prior to the company´s incorporation to the company´s General Meeting, the Board of Directors is the organ empowered to do so.
Acting of administrator of contributions into registered capital of company
Acting of an administrator of contributions into the registered capital of the company is considered a specific case of acting on behalf of the company prior to its incorporation. As the company, as the future owner of the contributions, does not legally exist yet, it is necessary to designate a person to whom the founders´ contributions should be handed over and thus enable the founders to fulfill their contribution duty. Due to the fact that acting of the administrator of contributions is governed by specific regulation of the Commercial Code, the general regulation of the Commercial Code regarding acting on behalf of the company prior to its incorporation, as described above, shall not apply.
The legal regulation of acting of the administrator of contributions shall fully apply only to so-called capital companies, i.e. to a limited liability company and a joint-stock company. The above results from the fact that shareholders of a partnership are not obliged to contribute to the company as their liability for the company´s obligations is unlimited. In limited partnership limited shareholders are obliged to contribute to the company within a period and in an amount stipulated in the Articles of Association, however, they are not obliged to so prior to the company´s incorporation.
The administrator of contributions has to be determined in the Articles of Association[1], which determination is an inevitable prerequisite of the Articles of Association. Only one of the founders may act as the administrator of contributions. By signing of the Articles of Association the administrator of contributions contents to perform this function. In the event that none of the founders is designated as the contributions administrator, a bank or branch of a foreign bank (hereinafter referred to as the “bank”) may be authorized by the Articles of Association to act as the administrator of contributions, even though the bank is not a founder of the company. However, as the bank is not a contractual party to the Articles of Association, it is not bound thereby. Given the above, it is necessary to enter into a special agreement with the bank stipulating the bank´s obligations as the administrator of contributions prior to and following the company´s incorporation, as well as it is more than advisable to agree on the bank´s obligations in case that the company is not incorporated.
The main responsibilities of the administrator of contributions include (i) take-over of the shareholders’ contributions and administration thereof until company´s incorporation, (ii) production of written declaration on pay-up of contribution or respective part thereof by the shareholders and (iii) hand–over of the contributions to the company upon its incorporation.
(i) Take-over of the shareholders’ contributions and administration thereof until company´s incorporation. The administrator of contributions takes over the shareholders’ contribution via deposition of funds on special bank account established by the administrator of contributions for this purpose. Non-monetary contributions in form of movable asset are to be handed over directly to the administrator of contribution. On the other hand, if the contributions include immovables or an enterprise part of which is an immovable, the Commercial Code requires submitting of shareholder´s written declaration on contributing an immovable into the registered capital of the company. The shareholder´s signature on the written declaration has to be notarized and the declaration has to contain clear manifestation of shareholder´s will to transfer ownership to the immovable to the company so as to fulfill the shareholder´s contribution duty. Moreover, the shareholder´s declaration has to meet all prerequisites under the Act on Cadastre[2], as on basis of this declaration change of ownership right shall be registered by means of entry into the Cadastre of Immovables. Non-monetary contribution of the shareholder is considered paid-up as of handing over of the written declaration to the administrator of contributions. In case of other kind of non-monetary contributions the pay-up thereof is dependant on their nature, e.g. contribution in form of receivable is made through Agreement on Assignment of Receivable. It should be noted that non-monetary contributions have to be fully paid-up prior the company´s incorporation. The contributions administrator is obliged to take due care of the contributions and exert reasonable effort to preserve rights pertaining thereto so as to enable transfer of the rights to the company.
(ii) Prior to the company´s registration in the Commercial Register the administrator of contributions is obliged to produce a written declaration on pay-up of the contributions or respective part thereof by the shareholders, which declaration shall include the amount of the shareholders´ contributions and the manner of their pay-up. Subsequently, this written declaration shall form a mandatory annex of the petition for registration of the company with the Commercial Register. In the event that the administrator of contributions includes in the written declaration a higher sum than has been actually paid-up, then under respective provisions of the Commercial Code the administrator of contributions shall guarantee vis-à-vis the company for the pay-up of the contributions by the shareholder up to the amount of the difference between the sum specified in the declaration and sum of the actually paid-up contribution. The above contributions administrator´s liability ceases to exist by operation of law upon pay-up of the unpaid part of the shareholder´s contribution.
(iii) The paid-up contributions become the company´s property as of the day of its incorporation, except for non-monetary contributions in form of immovables, the ownership right to which the company acquires by entry into the Cadastre of Immovables. Upon the company´s incorporation the administrator of contributions is obliged to hand over all the contributions to the company without any undue delay. It is highly advisable to specify the above period for handing over of the contributions in detail in the Articles of Association or in the Agreement on Contributions Administration concluded with the bank as an administrator of contributions. The incorporated company´s statutory body is obliged to submit the respective petitions for registration of ownership right with the specialized registers (e.g. in case of immovables, securities, intellectual property, etc.) within fifteen (15) days as of the company´s incorporation. In the event that the company is eventually not incorporated, the contributions must be paid back to the respective founders who have handed them over to the administrator of contributions. The other founders and the administrator of contributions are jointly liable for fulfillment of the above obligation vis-à-vis the respective founder.
[1] On basis of a Foundation Deed a sole shareholder company is formed, which sole shareholder is appointed also the administrator of contributions.
[2] The Act No. 162/1995 Coll. on Cadastre of Immovables and on entry of proprietary and other rights pertaining to immovables (the Act on Cadastre), as amended.