Restrictions in managing authority work through into the representative authority

As per April 1, 2014 the amended Corporate Code (Book 2 Civil Code) of St. Maarten entered into force.

Restrictions of the managing authority can arise from a by-law or a corporate agreement. Individual Managing Directors exercise their powers with due observance of the resolutions of the Management Board (Article 2:8 paragraph 2 Corporate Code). Subject to restrictions arising from the law or the Articles of Association, the legal entity is represented by the Management Board. If there are multiple Managing Directors the legal entity is represented by each Managing Director insofar as not otherwise provided for in the Articles of Association (Article 2:10 paragraph 1 Corporate Code). Restrictions of the managing authority as meant in Article 2:8 paragraph 2 BW also serve to restrict the associated representative authority (Article 2:10 paragraph 2 Corporate Code).

With this latter provision the law establishes unequivocally that restrictions in managing authority work through into the representative authority. In restricting by a Board resolution the representative authority vested in principle in each Managing Director, for instance a resolution to refrain from entering into a certain transaction may come to mind.

Insofar as is not excluded by the Articles of Association a (direct or indirect) restriction of the representative authority can be set up against a counterparty who: (a) was aware of the restriction or should have been aware of it without his own examination, or (b) could have been aware of the restriction by consulting the Trade Register (Article 2:10 paragraph 3 Corporate Code).

Therefore in both cases there is an ‘external effect’ of those restrictions. However, this effect might be removed by a written statement issued or to be issued by the Management Board or a Managing Director of the legal entity to the respective third party that the legal entity will not invoke any or a certain restriction (Article 2:10 paragraph 4 Corporate Code).

With regard to ‘could have been aware’ (see under (b) above) one had in mind any restrictions which are plainly evident from the Trade Register such as a ‘multiple signatures clause’ or a provision requiring the prior consent of a corporate body before effecting a certain legal act. If this involves a restriction in an unpublished document (a by-law or a corporate agreement for instance) or an unpublished resolution of the Management Board or another body, that restriction is not considered to be a restriction covered by (b) above, not even if it can be deduced from the details which were indeed published that there is a regulation or resolution from which such restrictions could in principle ensue. For those cases the assessment under (a) above applies.

A counterparty can trust a written statement issued by the Management Board or a Managing Director that the legal entity will not invoke any or a certain restriction as meant above (Article 2:10 paragraph 4 Corporate Code). In its relation to a counterparty, the Management Board will be obliged to give a written decisive answer to the written request of a counterparty with regard to the question of whether such a restriction is involved and if so, what is its nature. Each Managing Director is entitled to issue such a statement on behalf of the Management Board (Article 2:10 paragraph 5 Corporate Code). This is because it is important for the counterparty to obtain certainty at a relatively early stage about the question of whether a known or possible restriction could create an impediment to the continuation of a transaction or intended transaction.

Should it become evident afterwards that a Managing Director issued a statement wrongly or too prematurely that there is no question of any restriction, he might be blamed for mismanagement in the relationship with the legal entity. This does not make any difference to the validity of the transaction, notwithstanding that in a case of collusion between the Managing Director and the counterparty the restrictive operation of the principle of reasonableness and fairness might be invoked (Article 6:2 Civil Code).

Karel Frielink
Attorney (Lawyer) / Partner

(20 May 2014)

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