Regulations and Process of Corporate Contracting after open Company in Hong Kong

After Hong Kong company formation contracts are the obvious part of corporate sector and companies enter into contract to increase their public outrage, to increase capital, and to increase the credibility, financial and social structure of company. But, like every corporate matter, contracts also need to be regulated and this is the reason that Section 121 of Cap. 622 sets out the method through which the company can get into contracts:

  • As per the Section 121(2) of Cap. 622 company must execute and make contracts in compliance with the law and under seal of it as per the script of Section 127 (3) of Cap. 622.
  • As per the Section 121(3) of Cap. 622, any person acting on behalf of the company can enter into contract with the company’s authority. But there is the required implication which says that, such contract should be in writing and in compliance with the law.
  • Not only just written contracts but oral contracts also have some authority under the Section 121(4) of Cap. 622 which states that; any person can make oral contracts on the behalf of the company, with the company’s authority.

For the matter of deeds after Hong Kong company formation there is the requirement which says that; deeds must be made under seal and must be executed by the company pursuant to the Section 121(2) of Cap. 622. Though as per the Cap. 622 common seal is no longer required but still if companies deem appropriate and wish to use common seal for the purpose of authentication and certification then they are allowed to use it. So, if company decides to use common seal then company may use this common seal for any written contracts despite of the fact that corporate contracts are not legally required to be executed as deeds.

The matter of contracts under seal in Hong Kong company registration service requires some explanation as it is somehow technical. So, if the contract is executed under seal and was executed pursuant to the Section 127 (3) of Cap. 622 then without any further litigation, company shall consider to be entered into contract directly. This is so, because common seal has some legal sanctity as signature of a natural and authoritative person would have on the contract or on any legal documentation. For the situations where company enters into contract as per the principles set out in Section 121 (3) and 121 (4) of Cap. 622 then the company shall consider to be entered into contract as principal and any agent or person signing the contract, whether in written or verbally, on behalf of the company or for company. Wherever such situation is constituted then it would be more relevant or much needed to look into the general principles of agency law to ascertain that whether the person who acted to bind the company to contract, does he or she really has the real authority and credentials to bind the company to such contract? For the situation where contract signed under seal then it would be relevant to see whether the person affixing seal on the contract, does really holds the true credibility and authority to act under the authority of company and use the seal of the company to enter into the transactions and to affix the seal of company on the document?

Now the question arises that which corporate organ or the person has the authority to enter into contracts on behalf of the company in Hong Kong company registration service. Basically, the constitution of the company decides that which corporate organ has the authority to enter into contracts on behalf of the company. If we look into general rule then usually, board of directors of the company has authority to enter into contracts on behalf of the company, for the reference one can see the Article 3 of Cap. 622H (Model Articles for private companies). As per this article, board has this authority because here board acts as the corporate organ and as the company too. It must be noted that after getting certificate of incorporation Hong Kong board acts as the company but not as the agent of the company. There is a provision which says that where the board passes resolution to enter into contract then although board acts as the proper corporate organ to carry out any contract, still it is necessary that this passed resolution is passed on to agent of the company who will then carry out the board’s resolution to enter into contract, on the basis of flow of authority from board to the agent. Contract can then be carried out following any of way set out in Section 121 of Cap. 622. On behalf of the company. Now board of director usually have number of tasks to done on the daily basis so there would be an extra burden on them if they are expected to oversee minor contracts related to purchase of office stationary, for example, to the major contracts such as joint venture or etc. So, usually major contracts are put forward before the board for the consideration and day to day transactions or contracts are managed by the agents of the company. If we need to elaborate the definition of the agent of the company then potentially speaking, agent can be any officer of the company or employee or any other person appointed as the agent of the company.

Consider the situation where person who entered into contract or transaction was not even the valid or authorised person to enter into transaction or contract on behalf of the company. So, for such situations, legal commentators say that for any such condition or scenario where the person who does not holds any authoritative or valid position to transact contracts of the company then prima facie company shall not be held liable to be bound by any such contract. For the situation where company neither granted any authority to the person nor declared any person with the authority to transact contracts on behalf of the company then as per the legal view, that person can neither bind company to transact the terms of the contract nor bind company to commence enforcement of contract. But this litigation does not stop here and there is the possibility that authority has been conferred to the agent pursuant to the provisions of company’s constitution but there may be certain technicalities which have found to be defective on account of non-compliance with certain procedural requirements of the constitution. But as there is always a hack for every corporate uncertainty or liability so same is the case here and there is the indoor management rule which can be helpful in sorting out such issues. Generally, indoor management rule emphasis on the need of the third party which would then mitigate company to enter into transaction and in failure to do so, shall enable third party dealing with company to enter into transactions against the company. While we go into the details of indoor management rule, we shall come to know that, indoor management rule enforces the third party who is dealing with the company, to compel company to enter into the decided or contracted transaction despite of some defects in the authority of the person who purportedly acts for the company.

It may arise in your mind that what basic difference is there between the indoor management rule and the agency law principle? Generally speaking there isn’t any visible and viable difference between the agency law principle and the indoor management rule and both these rules tends to maintain the balance between the two contrasting interests. In the former litigation, agent enter into contract on behalf of the company without any proper authority then the either the company on behalf of which contract is constituted or the third party with which contract is made, have to bear the consequence. While in the latter litigation third person is authorized and allowed to transact the terms of contract against the company despite of some defects in the authoritative doctrine of the agent who acted on behalf of company. This was allowed so as to enable ease of doing business and save partied from any business or corporate inconvenience, which would otherwise be at risk if person dealing with company shall have to undergo the necessity to investigate the internal proceedings of the company so as to establish the extent of authority of the concerned agent or person. It must be noted that although third parties have been given so much power and authority, but this does not mean that they abuse it for some personal gains and for the purpose of fraud to the company and it shall neither be allowed legally nor morally that innocent creditors and shareholders may suffer due to the inappropriacy on the part of the wrong doer.

Corporate Contracting through Agents

We have discussed above that agents are the most common way through which contract are made or transact in the corporate culture. But as the things get importance and vitalness they need description and proper information. So, to serve this purpose we shall, for now, generally look into the matters of corporate contracting through agents.

To assess the authority after getting certificate of incorporation Hong Kong there is the general principle of agency law which determines that whether the person who is transacting a contract on the behalf of the company, does really holds the legitimate authority or not? To make this easier, there are two categories of authorities, namely:

  • Actual authority of the agent.
  • Apparent authority of the agent.

There is the possibility that apparent and actual authority of the agents may co-exist and there can also be the authority where the authorities of one may exist and not the other or vice versa. Thus, for such situation their scope and nature shall be different. In the situation where third party tends to enforce transactions against the company then it needs to establish either actual authority of the agent or the apparent authority of the agent. Now let’s come to the discussion that what would be extent of binding in both categories. Legal commentators say that; in the case of actual authority, company shall be considered bound to the terms of contract and there shall be no question on the apparent authority of the agent. For the situation where agent does not have actual authority then proceedings to look onto apparent authority of the agent shall commence. In case, agent has the apparent authority even then company shall be bound to the terms of contract despite of the fact that there is failure on the part of agent to demonstrate actual authority.

Now let’s refer to legal position on this matter and see what legislation have for us. The court of final instance held that; where the agent possesses apparent or actual authority then such authority of the agent can neither be challenged nor be terminated merely on the ground that agent becomes of improper mind at the time of contract. For the situation where the fairness of third party is established and that third party does not know about the insaneness of the agent nor of the authority of the agent, then it shall now be the responsibility of the third party to ensure transaction of the contract by the company. But where the third party knew that agent of the company possesses unsound mind at the time of contract and concealed this reality then prima facie the deemed transaction of contract shall be voidable at the election of the company.