Business Activities of a Cypriot Company
Upon incorporation, a company begins to operate and conduct its activities according to its objects, as set out in its memorandum of association and the rules stipulated in its articles of association. The memorandum defines a company’s legal capacity. The company’s objects extend beyond those explicitly stated and include any other purpose necessary for its functional autonomy.
It should be noted that a private limited liability company with shares may, instead of specifying a business purpose, state in its articles of association that its objective is to conduct activities as a ‘commercial company of general objects’. In such cases, the company may enter contracts, assume obligations, and carry out transactions that any natural person with legal capacity could undertake. Be that as it may, the company’s memorandum of association may still include additional restrictions or commitments (Section 4(1A) of the Companies Law, Cap. 113).
Legal Validity of Contracts Before and After the Incorporation of a Cypriot Company:
As a general rule, a Cypriot company acquires legal personality and begins transacting from the moment of its incorporation. Contracts entered on its behalf before its incorporation—whether by shareholders or authorised persons—are considered temporary and do not bind the company until the date of its registration with the Registrar of Companies. After incorporation, such contracts become legally binding on the company (Section 15A(1)). If the company is ultimately not incorporated, any obligations undertaken on its behalf remain binding solely against any individual who has undertaken them (Section 15A(2)). However, if such obligations were explicitly undertaken on the condition of the company’s incorporation, they are not enforceable (Section 15A(3)).
Legality of Contracting with a Cypriot Company (Ultra Vires Transactions)
A fundamental requirement for contracting with a Cypriot company is verifying that the contract in question falls within the company’s objects. Each contracting party must take the necessary steps to determine whether the company has the legal authority to enter the respective contract with any natural or legal person.
Legal Protection of Bona Fide Third Parties
The law protects bona fide third parties (those acting in good faith, without knowledge or suspicion that a transaction is unlawful or invalid) against an untrustworthy company officer signing on behalf of the company. Specifically, regarding the validity of transactions entered in the company’s name, section 33A of the Companies Law, Cap. 113, states:
“ The company shall be bound towards third parties by acts or transactions of its officers even if such acts or transactions do not fall within the objects of the company, unless such acts or transactions are performed in excess of the powers, which the law confers or allows to be conferred to the officers concerned.”
Furthermore, any restrictions on the powers of the officers arising from the memorandum of association, articles of association, or resolutions of the board of directors or general meeting cannot be enforced against third parties, even if they have been published (Section 33A(2)).
Additionally, the Indoor Management Rule (Turquand rule) reinforces the protection of bona fide third parties by stipulating that a person transacting with a company in good faith is entitled to assume that all necessary internal procedures have been correctly followed. They are not required to investigate whether the company’s internal governance rules have been properly adhered to. The Supreme Court of Cyprus recognised this principle in the case of SPE Pallouriotissa and Nicosia Palace Hotel Co Ltd v. Loris Heracleous (2003).
As a result, the law protects bona fide third parties in transacting with companies, ensuring that the officers’ actions bind the company, even if they exceed their powers, provided the third party acts in good faith. The Indoor Management Rule further strengthens this protection by allowing third parties to rely on the validity of transactions without investigating the company’s internal regulations.
Protection Against Bad-Faith Transactions
It should be noted that section 33A (1) para 2 does not extend protection to third parties acting in bad faith. Specifically, it provides that:
“ the company shall not be bound towards third parties in case such acts or transactions do not fall within the objects of the company, if and insofar, the company proves that the third party knew that the acts or transactions do not fall within the objects of the company or could not, in view of the circumstances, have been unaware of it.”
However, “the publication of the articles and of the memorandum does not, of itself amount to sufficient proof of knowledge on behalf of the third person“ (Section 33A(1) para 3). This distinction under Section 33A of the Companies Law ensures that the company is not bound by unauthorised transactions when the third party knew or ought to have known that they exceeded the company’s purposes.
Conclusion
The contracting process of a private Cypriot company highlights the importance of clarity regarding its objects and limitations as defined in its articles of association. While companies are empowered to enter contracts with third parties, legal safeguards exist to ensure trust and security in business transactions.
At the same time, the Indoor Management Rule provides additional protection to bona fide third parties, allowing them to rely on the validity of agreements without needing to scrutinise internal company governance. However, companies must remain vigilant, as actions exceeding their objects or entered into in bad faith will not be binding, thereby protecting both the company’s and third parties’ interests.
Author:
Semeli Epifaniou
Lawyer /Corporate Department