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We are excited to share the latest edition of the Law Update, beautifully and appropriately titled “Sustainable Horizons: The Saudi Arabian Vision.” Giving special honor to the Kingdom’s 2030 vision, this update focuses on a collection of both informative and inspiring articles.
For those in construction, you can learn about how the tendering environment impacts risk-pricing for contractors, the updates on the legal framework of the construction industry and how contractors can protect themselves against financial difficulties.
There is good news too from the kingdom’s banking sector, from which the practice of “Open Banking” is being pushed for! But what is open banking? We’re answering that too.
Also . . . Are there any women trail blazers in Saudi Arabia you can name? We’ll help you with that. We cover how the Middle East has been making strides in empowering women in the entrepreneurial space,most notably in STEM fields.Read the full edition
Natalia Kumar - Senior Counsel - Banking and Finance
Photograph by Ali Al Shehabi
In commercial financing transactions, generally, a formal legal opinion is sought by the lender to give them certainty on the capacity and authority of the borrower and/or any obligor as well as the enforceability of the transaction including the transaction documents. This article considers particular issues relating to capacity and authority in Bahrain.
It is common in Bahrain for directors or managers to be granted general powers under the company’s memorandum and/or articles of association. Such powers are expressed in generic terms, referring to the power to ‘do all acts and deeds for and on behalf of the company’ or to ‘manage the company and do all things necessary to achieve its objects’. While useful for the management of the day-to-day operations of the company, relying on such generic powers when borrowing money, granting security or providing a guarantee can be risky.
Generally, the law does not imply powers of a company. There is no concept of ostensible authority under the laws of Bahrain. Accordingly, explicit authority where the company has provided a certain representative (be it a manager, director or otherwise) to do that specific act for and on behalf of the company will be required. General management powers granted to the directors or managers in the company’s memorandum and/or articles of association are unlikely to be sufficient for the purposes of establishing the capacity of a company to enter into finance transactions.
Therefore, the express terms of its constitutional documents of the company would need to be considered. By way of example:
When assessing the power of individuals to sign on behalf of a company the first place to start is the constitutional documents of that entity. The appropriate power or authority should be given to the individual in the constitutional documents. For example:
If none of the above apply, a shareholders’ resolution should be obtained.
Please note that according to Article 183 of the Companies Law, in relation to joint stock companies (public and private) and limited liability companies (limited liability) “the chairman of the board is the head of the company who represents it before third parties. His signature shall be considered as a signature of the board of directors before third parties. He shall implement the decisions of the board and comply with its recommendations. The vice-chairman shall replace the chairman in the latter’s absence and have the same powers of the chairman of the board”. Accordingly, if a board of directors’ resolution is obtained from joint stock companies (public and private) and limited liability companies (limited liability) that is only signed by the chairman of the board of directors, this can be considered as a signature of the entire board of directors based on Article 183 of the Companies Law (subject to no contrary provision being contained in the constitutional documents of the company).
Whatever the case, there should be a clear chain of authority from the constitutional documents to the relevant individual.
If the company does not have the capacity and authority to enter into the transaction and transaction documents, the company would be acting outside its powers (i.e. ultra vires) and as such, its entry into the transaction and transaction documents could be challenged.
For further information please contact Rafiq Jaffer, Natalia Kumar and Gargi Agarwal.
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