Execution of an agreement - the final stage in an often lengthy process of detailed drafting and negotiation. Getting it wrong may result in invalidity and unenforceability.
Here we outline some of the execution formalities for companies and our top tips to help get it right.
By or on behalf?
Contracts can be made by a company or on behalf of a company. The Companies Act 2006 (the Act) makes this distinction and different formalities are required for execution in each case.
On behalf of a company
Where a deed is not required, the usual way for a company to enter into a contract is by a person authorised to contract on the company's behalf, usually (but not always) a director (see 'Authority' below). This is often referred to as a simple contract or a contract under hand and requires the signature of that authorised person, expressed to be signed on behalf of the company.
By a company
For contracts made by a company (usually, but not exclusively, deeds), additional execution requirements set out in section 44 of the Act must be observed, namely either:
- the company's seal must be affixed to the document OR
- two directors or a director and the company secretary must sign the document OR
- one director must sign the document in the presence of a witness who attests the director's signature
For valid execution of a deed:
- it must be duly executed by the company, ie the requirements set out in section 44 of the Act must be observed AND
- the document must be delivered as a deed (see 'Delivery' below)
Some documents must be executed as a deed, including transfers or leases of real estate, mortgages or charges, appointments of trustees and powers of attorney.
For a deed to take effect, it must be delivered, ie the parties must show an intention to be bound by it. For companies, there is a statutory presumption of delivery so that, unless a contrary intention is shown, it is deemed to be delivered and therefore the company is bound by it at the point at which it executes it. If the deed is being executed in advance of completion of a transaction, the deed should make it clear that it is not delivered until dated.
Signing in separate capacities
If the document is to be executed by a company using the signature of director and company secretary method, it will not be validly executed if signed by the same person in both capacities. If the only director available to sign is also the company secretary, use the director in the presence of a witness method.
Same signatories of multiple parties
If a person is signing for more than one party to the document, it must be signed in each capacity. For example, if the same director is signing for multiple group companies, he or she must sign it separately for each of those companies.
Execution in counterpart
Whilst there is no specific authority on whether each signatory of a contracting party can sign separate copies of the document (known as counterparts), if the document provides for execution by two directors or a director and the company secretary it is certainly best practice for them both to sign the same document to avoid any risk of invalid execution.
A party to a deed cannot be an attesting witness. Whilst there is no statutory requirement for a witness to be independent and disinterested, it is best practice for him/her to be so since the witness may be required to provide unbiased evidence of what was signed, by whom and when. Therefore the witness to a director's signature should not be a spouse or other relative of that director or another director of the company.
In most cases the directors will have authority (usually in the articles) to bind the company in contract. For persons dealing in good faith with the company, the Act provides certain protections whereby the power of the directors to so bind the company is deemed free of limitation. However, directors should ensure that the articles and the terms of the relevant board resolution provide them with authority to bind the company and execute the document. Particularly for major contracts, and despite the statutory protection, the other parties to the document should also check the articles and board resolutions to ensure there is no question about the power of the directors to bind the company.
There are additional formalities, requirements and issues for corporate attorneys, overseas companies, alternate directors and corporate directors. If you have any queries relating to valid execution, please get in touch with your usual Shoosmiths contact.