In a previous article we dealt with the election of the members of the Board of Directors: the rule (election by the General Assembly) and its exceptions. We also dealt with the conditions for electing and appointing members of the Board of Directors. But what happens when there are defects in the election or appointment of the members of the Board of Directors and/or the representatives of an SA?
The unenforceability of Defects
Reasons, of any nature, that make the election/appointment of the members of the Board of Directors and the representatives of the company defective are not presented against to bona fide third parties. On the contrary, such defects burden the company itself. A prerequisite: (a) the observance of the relevant publicity formalities on the part of the SA and (b) the ignorance of third parties regarding the relevant internal defect (art. 84 – which maintains the provision of article 7 e of the previous law 2190/1920 and is simply transferred systematically to the chapter on the Board; see ret., Memorandum to Law 4548/2018 on Art. 84).
With the specific legislative choice/regulation (: manifestation of the general principle of legal certainty) the (justifiably) increased trust of third parties who do business with the SA is protected; the trust they demonstrate in the content (: truth and legality) of the defective but nonetheless published company’s data. The transactional risk is therefore borne by the SA itself. This seems fair, as oversights and irregularities in the appointment of the administration can be due even to a decision (or omission) of the highest organ of the SA, the General Assembly. The protection of third parties necessarily (and rightly so) prevails.
Application conditions
Representatives: Organic Power of Attorney & Publicity
The scope of the provision covers the representatives of the SA; the persons, i.e., who have been granted (organic) authority to represent the SA and their election/appointment is submitted to the publicity formalities of the law (: art. 12 law 4548 /2018).
The concept of the representative of the SA includes the members of the company’s main representative body: the members, i.e., of the Board of Directors. In fact, regardless of the way they are elected or appointed (ie: by the General Assembly, directly by a shareholder, by the original articles of association or by a court decision). Also, the substitute members of the Board of Directors and substitute bodies (: representatives of the SA – members of the Board of Directors or third parties). Also, the liquidator (according to art. 167§ 5) and the bankruptcy trustee (who has authority to manage the corporate property).
On the other hand, they do not fall under the above concept of the representative of the SA and, therefore, under the protection of the law (art. 84) regarding the representatives of the SA. Those, i.e., who have not been granted (organic) power of representation but operate for very specific actions on the basis of a power of attorney, granted to them by the material authorities (according to art. 211 et seq. of the Civil Code). In this case, both the power of attorney and the power granted to them to act in the name and on behalf of the SA are not submitted to the public.
Bona fide third parties
The protection of bona fide third parties by law (: art. 84) concerns those who are, in fact, third parties vis-à-vis the SA. As third parties are understood, initially, those who maintain business relations with SA and trust the publicity of the Business Registry. A third party, in this sense, can also be considered a shareholder of the company, who transacts with the SA. However, if it is proved that they knew of the defectiveness of the appointment, they are not protected by the law. This happens, e.g., in the case of their active participation in the election of the defectively appointed representative.
In order for the third party to benefit from the protection of the law, they must, in addition, be in good faith. It is required, that is, that they were not aware, during the critical time of their dealings with the SA representative, of the latter’s appointment defect. Possibility of knowledge of the relevant defect (and not positive, ultimately, knowledge – even if it is due to gross negligence of the third party), does not suffice.
The company bears the burden of proof of knowledge. Subsequent knowledge or bad faith of the third party neither affects the data nor harms them.
Defect of Election/Appointment
The protection of the law for the bona fide third party is activated in cases of defect in the election or appointment of the representative of the SA. However, the law does not define what constitutes a defect. We should consider as such any legal reason that makes the appointment or, respectively, the election of a representative of the SA non-existent, invalid or voidable: any defect that can be traced, in time, to the election or appointment and/or their acceptance by the representative in question.
Legal reasons that constitute a defect are the legal incapacity of the appointed member of the Board of Directors and the existence of obstacles to their election/appointment; the defectiveness of the decision of the General Assembly on the election of the Board of Directors; the defectiveness of the declaration of the will of the shareholder in case of direct appointment of a member of the Board of Directors (Art. 79) ˙ the defectiveness of the declaration of will of the one who appoints a substitute member (art. 87 §2).
It is noted, lastly, that any error in the court decision which appoints members of the Board of Directors (art. 78 §2 in combination with art. 69 CC) – which justifies the exercise of an appeal, does not constitute a defect in the sense of the law (art. 84).
Publicity
Publicity is an additional condition for the application of the law (art. 84) and, consequently, for the protection of the bona fide third party. Specifically, the prior observance of the required formalities (declarative and not constitutive) publicity for the election or appointment of the representatives or liquidators of the SA (: “positive” publicity).
It is noted that commercial publicity, in general, takes place for the SA and the obliged persons by: (a) the registration or entry of deeds, elements or data in the Business Registry and (b) the simultaneous publication, on the website of the Business Registry, as the case may be, either in whole or in part, of the act or of the element that was registered, or with a reference to the registration of acts and elements for which an obligation of commercial publicity is foreseen (art. 17 of Law 4919/2022).
As long as the specific publicity procedure for the election or appointment of the SA representatives is observed, any defect in the appointment cannot be brought against third parties who trusted this publicity. Any publication, however, does not imply the cure of the defect that has become known.
And looking at the same issue from a different perspective: reasonably, the SA is not entitled to object against third parties for any act/fact that, although it should have been, was not published in the Business Registry (: “negative” publicity). The SA is not entitled, e.g., to object to a bona fide third party who traded with its representative who was replaced by another one- without the required publicity formalities having taken place. In this way, third parties are similarly protected from facts they are justifiably unaware of, trusting the inaction of the Business Registry.
Legal Consequences
In the event that the aforementioned conditions are cumulatively met (: observance of publicity formalities on the part of the SA and ignorance of the third parties as to the relevant internal defect), the defective appointment of a representative of the SA cannot be opposed to third party who transacted with them. In this context, the SA is bound by the acts/declarations of will (express or implied) of its defectively appointed representatives. As an exception, no binding results will be produced for the SA, in the event that “positive” knowledge of the defect on the part of third parties is proven.
It is normal for defects to intrude, sometimes, in the election or appointment of members of the Board of Directors and/or representatives of the SA. In the event that a bona fide third party transacts with them the SA is bound, as long as the (due) publicity formalities have been observed. And on the other hand: the SA cannot oppose to third parties important corporate events that were not published by law (replacement, e.g., of its representatives). Therefore, given that the responsibilities of the SA may prove to be extremely important and broad, the care that should be exercised in these matters should be correspondingly greater. As far as, however, the matters related to the commitment and representation of the SA are concerned, we will look into them in our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (December 30th, 2022).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.