Dr. Khaled H. Attia

2014

Definition

Article 505 of the Civil Code defines the company as “a contract by which two or more persons undertake jointly to enter into a business (a business is an undertaking of a pecuniary nature) by providing contributions of property or of services with the objective of sharing the profits or the losses of the business”.

But the term company has another meaning, different from that given by the Civil Code. In the legal language, it means also the legal person that is created by the contract.

In fact the company contract has a very characteristic feature that distinguishes it from other contracts, namely; that it gives life to a new legal person (a juristic person) separate from the persons of the parties to the contract.

Part 2: Companies Law

Kinds and forms of companies

Companies of Persons and Capital Companies 1

Commercial companies are divided into two major categories: companies of persons and capital companies. This distinction is not based on any difference in form or object of the company. It is mainly based on a difference in the relative importance given to the identity and personality of the members of the company in the legal organization of the company.

In the companies of persons, the identity and the personality of members are crucial. The company is based on what is called the personal consideration. Hence, the death of any member leads to the dissolution of the company. On the other hand, the interests representing the members' share in the capital of the company are not negotiable. This means that the companies of persons are, in principle, closed companies. The partnership is considered the ideal type of companies of persons.

Companies of Persons and Capital Companies 2

The capital companies are not based on the personal consideration, but rather on the capital consideration, "the intuits pecuniary". One can say that it is the association of capital and not association of persons that is central to these capital companies.

In a capital company, as a general principle, the personality of the company is completely distinct and separate from the personality of its members. The company is not affected in any way by the death or the withdrawal of any of its members. The "shares", representing the contributions to its capital by its members, are negotiable. This means that a capital company is -in principle- an open company.

In any case, one should remember that the two concepts of the personal consideration, and the capital consideration, are relative and not absolute concepts.

1- Companies of Persons A- The partnership This is the ideal type of companies of persons. In this company, all the partners are jointly and personally liable for all the debts of the company. Every member is considered a merchant.

B- The limited partnershipIn this company there are two categories of partners. There are the general partners who are personally and jointly liable for all the debts of the limited partnership. There are also the limited partners who have a limited liability for the debts of the company.

The mohassa company or, the silent partnership:This company is not registered and has no legal personality and hence cannot be considered a company having a distinct form. It has purely contractual nature. It exists when two or more persons bring together capital, or services, with view to carrying on a common activity, and sharing profits and losses. The existence of the company is not revealed vis-a-vis third parties; it is only the manager representing the company vis-a-vis third parties, who is liable for all the debts of the company

2- Companies of Capital A- The joint stock company It is the company whose capital is divided into shares of equal values and where the shareholders (at least three) are liable for the losses of the company to the extent of their contributions to the share capital.

B- The limited partnership by shares In this company there are two categories of partners. There are the general partners who are personally and jointly liable for all the debts of the limited partnership. There are also the shareholders who have a limited liability for the debts of the company.

C- The company with limited liability, This company is created by a limited number of members. This number cannot exceed fifty. The liability of the members is limited to the extent of their contribution to the capital of the company. Contributions to the capital are not represented by shares, but by interests. The transfer of these interests is restricted.

A- The Company Contract

I - The General Elements of the Company Contract 1

1- Consent: The contract must be made by the free consent of the parties. The consent must be free of any vitiating element such as mistake, fraud, or coercion. If the consent is vitiated, the contract will be considered as voidable.

2- Capacity of the Parties: The parties must be competent to contract. The capacity required here is the capacity to assume obligations. Hence, a minor, or a person of unsound mind cannot be a party to a company contract, otherwise the contract will be voidable. This is the general rule. But since a partner in partnership is considered a merchant, he must have the commercial capacity, which means that he must have attained the majority and must be of sound mind.

I - The General Elements of the Company Contract 2

3- Lawfulness of the object: The object of a company is the economic activity that the company was created to carry on. The object of the company must be lawful. If it is unlawful the company contract will be void. The object is unlawful, if it is contrary to public order, immoral, or forbidden by the law. A company is not allowed to carry on activities that are not within the scope and limits of its object. The company is not bound by any contract that is not within such limits.

4- Lawfulness of the cause: The cause of the company contract is the intention to make profits. As such it is always lawful.

II - The Specific Elements of Company 1a- Association of two or more members

The company is an association of two or more persons. Thus, there can be no company consisting of a single person is Egyptian law. Any person, individual or juristic person, can enter into a company contract.

If for any reason a company is left with only one member, it should be terminated and liquidated. However ,there is an exception to this rule:

• If for any reason the number of members of a capital company has fallen below the minimum required, the company is not immediately terminated. It is given six months in order to correct this situation and get back to the minimum required.

Finally, there is no maximum to the number of members except for the company with limited liability, where there is a maximum of fifty members.

II - The Specific Elements of Company 2b- Contributions to the capital of the company:

Each member must make a contribution to the business. The contribution may be in property (in money or in-kind) or in services.The contributions of the members may not be of the same nature or the same value. One member may make a contribution in money and another in services. But all the members may not make contributions in services only. There must be at least one contribution in money or in-kind, since the company needs capital in order to start its activities. The contribution in services, while giving the member a share in the company's profits, is not considered part of the capital of the company. Capital in the legal sense only embraces property and not mere skill or industry.Art. 508 of the Civil Code establishes a presumption according to which the contributions made by the company members are equal in value unless otherwise decided by the contract.

II - The Specific Elements of Companyc- The intention to cooperate activelyCompany contract implies necessarily the existence of a certain spirit of cooperation among the different parties to the contract (the members of the company). The members are supposed to cooperate actively and on equal terms to realize the purposes of the company, with a view to share the profits or the losses of the business. From the above, it is clear that the intention to cooperate implies the following :

1. Each member must cooperate actively with other members to achieve the purposes of the company.

2. This cooperation must take pace on equal terms.

3. This cooperation must take place with a view to share the profits or the losses of the business.

Company versus co-ownership: This intention to cooperate actively as a constitutive element of the company contract distinguishes company contract from the co-ownership. First, co-ownership does not carry with it any idea of business or active cooperation. Second, in co-ownership every co-owner owns an indivisible part of the property, while in a company the contribution in property made by the members become the property of the company and cannot be alienated by the members.

III- The Formal Elements

a- The contract should be made in writing:

Art. 507 of the Civil Code states that, "the company contract should be written, otherwise it is void. Also will be considered void any modification of the contract which is not made in the same form of the contract.

The written form is a constitutive element of the company contract, and not merely a means of evidence.

If the contract is not made in a written form, it will be considered null and void. But nullity here is of a very specific nature. The company members cannot sue for nullity against a third party. But a third party can claim nullity of the contract vis-a-vis the company members.

III- The Formal Elements

b- The contract should be published:

According to Art. 506 of the Civil Code, company is not considered a Juristic person vis-a-vis a third party unless the proceedings of publication are fulfilled. But Civil Code did not specify the proceedings of publication.

Companies Law has stated clearly in Article 17 that a company has to be published and registered in the commercial registry and acquire the juristic personality upon the lapse of 15 days from the date of registry.

B- The Theory of Nullity

The Meaning of Nullity

If any of the substantive or formal elements of the company contract is missing or contains a vitiating element, the contract will be considered null and void.

Nullity may be absolute or relative, according to the general principles of civil law.

But with regard to company contract, there is a third type of nullity that has characteristics of both the absolute and the relative nullity.

(a) The Relative Nullity.

If the consent of any party to the company contract is vitiated by mistake, fraud, or coercion, the contract will be voidable. This means that the nullity here is relative.

Only the member whose consent was vitiated has the right to sue for nullity of the contract.

The same solution should be followed in case of lack of capacity of any of the parties to the company contract. The contract will be considered voidable at the option of the incapable party.

In case of a company of persons, the voidance of the contract vis-a-vis one member will lead necessary to the nullity of the whole contract and the dissolution of the company in accordance with the theory of de facto company.

On the contrary, in a capital company voidance of the contract vis-a-vis one member does affect the existence of the company itself.

(b) Absolute Nullity I -The object is unlawful

If the object of the company is unlawful, the contract will be null and void. Nullity here is absolute. The company members as well as any third party can sue for nullity. The void company is considered as if it has never existed.

II- The company is lacking one of the specific substantive elements of the company contract

If a company was created by one single member the contract would be null and void. This will be also the case of a company in which one of the members was exempted from contributing to its capital.

The company contract will be considered null and void if it contains a leonine clause. By leonine clause it is meant any clause of the contract which excludes one member from sharing the profits or the losses of the company. Also is considered leonine any clause which one member to monopolize the totality or the quasi-totality of the profits of the business.

(c) The specific nullity In principle, nullity has retroactive effect. A void contract should be considered

as if it has never existed. But in the case of company contract the principle of retroactivity of nullity is not applied without certain limitations and exceptions. The reason for such limitations lies in the fact that the company contract creates a juristic person.

If a company is declared void after a certain time of its creation it would be very difficult to put aside all the legal effects of the existence of this juristic person. To apply strictly the principle of retroactivity in this case, will result in the total destruction of the legal relations to which the juristic person was party, and into the disruption and destabilization of the legal and economic order.

For all these reason the doctrine and the jurisprudence introduced certain limitations to the principle of retroactivity of nullity when applied to company contract, by inventing a new concept, namely the “societe de fait” or the "de-facto company".

(c) The specific nullity The theory of the "societe de fait" is based on practical considerations. The idea

is that if nullity can annihilate the legal existence of the company, it is nevertheless impossible to neglect the de facto existence of the juristic person in the past and that it has performed certain activities and made transactions with third parties. These transactions have created rights and obligations which cannot be ignored. Therefore, the company is considered as having existed in the past, from the time the contract was set up to the time the nullity was declared by the court.

It is to be noted here that the theory of the de-facto company will apply only in cases of relative nullity. In case of absolute nullity, the company will be considered null and void with retroactive effect, which means that the company will be considered as if it has never existed.

1- An independent legal person A company, as of its formation, is considered a juristic person, having its own

independent legal personality separate from the legal personality of each of its members. However, the joint stock companies, the limited liability companies and the partnerships limited by shares acquire the legal personality only after 15 days of being registered in Commercial Registry.

This means that the company has individuality, has the power to sue and to be sued in its own name, has the right to hold and alienate its own property and has the right to enter into contracts with third parties in its own name.

But since a company is a person created by law, it can only pursue its activities through natural persons acting as its agents.

A company is considered a legal person during its contractual term and until its dissolution. Even after dissolution the company will continue to have a legal personality during the liquidation period. But it is a limited legal personality, because it is recognized by the law for the sole purpose of liquidation and to the extent necessary for this liquidation.

2- Patrimony Patrimony means the mass of financial rights and obligations of a person.

Every legal person (individual or juristic person) has a patrimony. As a juristic person, a company has its own patrimony separate from the patrimony of each of its members.

Consequently, a company owns its property. The assets of a company do not belong to its members. The contributions in property made by the members become the property of the company, and part of its assets. The only interest which the members have in the assets of the company is an indirect one, through the medium of their interests or shares.

On the other hand, the personal creditors of the members are no creditors of the company and they have no recourse against the company for payment of their debts.

3- Capacity As a legal person, a company has the capacity to acquire rights and the

capacity to exercise these rights within the limits of its object. Consequently, a company has the capacity to make only the transactions for the realization of its object. It may not deviate that object.

A company has also the capacity to obligate itself, contracts or torts... etc. As for the penal responsibility, it is the general agreement that a juristic person cannot be considered liable from a penal point of view and cannot conceivably be subjected to penal punishment.

4- Name

Every company must have a commercial name that distinguishes it from other companies.

With regard to companies of persons (ex. partnerships or limited partnerships) the company's name must be composed of the name or names of one or more of the partners.

On the contrary, a joint stock company's name must be derived form its objective. The company with limited liability can have a name derived from its objective or from the name of one or more of its members.

5- Domicile As a juristic person, a company must have its own domicile, that is independent

from the domicile of any of its members.

The domicile of a company is the place where the management headquarters is located, and where it performs its legal activities.

With regard to the companies of persons, the domicile is where the manager perform his activities. With regard to joint stock companies, the domicile is where the board of directors and the general assembly of shareholders meet.

It is obvious that when locating the domicile of a company, one should consider the real management headquarters and not the one fixed by the company's contract.

The domicile of a company serve to determine the competent court when the company is sued. It is also the face where all legal notices should be addressed to the company.

6- Nationality

A company, as a juristic person has a nationality. A company is considered Egyptian when its domicile is based in Egypt.

Consequently, it can enjoy all the rights that Egyptian law grants to Egyptians, including diplomatic protection when working abroad.

I- The General Cases 1:1- Dissolution by expiration of term.If a company is formed for a fixed term, it is terminated by the expiration of that term, even if the undertaking or the venture of the company was not yet terminated, unless the contract included a clause of automatic renewal. Needless to say that the company members have the right to renew the company contract by unanimous agreement before the expiration of the original term.If the fixed term expired, but the company members continued to perform the same company's activities, the contract will be presumed renewed for a period of one year. But the renewed company will be considered a new one formed under the same contractual conditions of the expired company.

2- Termination of the undertaking or object If a company was formed for a certain determined object or undertaking, it will be dissolved by the implementation of such venture or undertaking. If after the implantation of the venture the members continued to perform the same kind of activity, the company contract will be considered renewed for a period of one year.

I- The General Cases 2:

3- Loss of the company's assetsIf a company loses all its assets or the major part of them, it should be terminated. But if the company was insured against such losses, there is no dissolution.

4- Termination by agreementA company may be at any time terminated by mutual agreement of its members, or by the majority if this is provided for by the company's contract.

I- The General Cases 3:

5- Reduction of the number of members below the minimum requiredWhere the number of members is reduced below 3 in the case of a joint stock company, and below 2 in case of other companies, the company should be dissolved. However, the law No. 159/1981 concerning capital companies has introduced an exception to this rule. According to art. 8 of this law, if the number of members of the company falls below the minimum required , the company will be dissolved, unless it proceeds within six months to the completion of such minimum.

6- Merger In case of merger by absorption the absorbed company is dissolved. In case of merger where two companies are combined into a new company, the two joining companies are dissolved.

II- The specific cases 1: 1- Death of a member.

Every company of persons is dissolved by the death of any member, unless otherwise stipulated by the contract. But usually the contract provides that on the death of a partner the company may be continued by the survivors either alone or in partnership with the heirs of the deceased partner.

2- Bankruptcy, Insolvency or Incapacity of a member

Any partnership is dissolved by the bankruptcy or insolvency of any partner. This will be also the case if partner loses his commercial capacity (ex. in case of mental disorder).

II- The specific cases 2: 3- Withdrawal of a partnerIf a company of persons is created for an undefined time, any partner can withdraw by giving notice to the other partners. In this case, company is dissolved unless the contract provides for continuation of the company by the remaining partners. But if the company was established for a fixed term, partners cannot withdraw before the expiration of such term. However, a partner may withdraw by court order, only if the withdrawing partner has reasonable causes.

4- Dissolution by court orderIf demanded by a partner, the court has power to order the dissolution of the company in the following cases:

1. If another partner commits a breach of the agreement by refusing to perform his obligations.

2. For any other reason that is considered -in the opinion of the court- as justifying the dissolution. ex; economic crises which makes it impossible for the company to continue operation without heavy losses.

E- Liquidation Liquidation of a company can be defined as "all the acts that are performed

with a view to wind up the current business operations, to collect the debts due to the company, to pay the debts due by the company, and to distribute the remaining assets".

In principle, the liquidation should take place according to the rules established by the company's contract. If the contract was silent on this issue, the rules established by art. 533-537 of the Civil Code should be applied.

A- The company retains its legal personality during the liquidation period Art. 533 of the Civil Code declares that “the dissolution of the company entails

the termination of the mandate of the managers. The company's legal personality is maintained only to the extent necessary for, and within the limits required by, the liquidation”. This means that during the Liquidation period the company will still exist as a juristic person. The reason is that without such personality it would be impossible to carry on the operations which are necessary to liquidate the company. Consequently: 1. the company retains its separate patrimony.

2. It also keeps its own domicile;

3. It can sue and be used through the liquidator;

4. The liquidator, being representative of the company, can sell immovable and immovable property of the company;

5. If the company stops paying its debts it can be declared bankrupt

B - The nomination of the liquidator

Once the company is dissolved, the authority of managers is terminated. The company is henceforth represented by the liquidator.

Usually, it is the company's contract that regulates the question of the nomination of the liquidator. If not, the members may appoint the liquidator by a majority decision.

The liquidator may be chosen among the members. If the members could not agree on the person of the liquidator, he may be appointed by the court upon request filed by any of these members.

If the company – for any reason – was declared void, it is the court that appoints the liquidator.

C- The powers of the liquidator. The liquidator is considered an agent of the company. Accordingly, his

position is not different from a manager. But his powers are different. These powers should be determined by the authority that appointed him (the members of the company or the court).

In any case, he cannot act beyond the powers entrusted in him. If he goes beyond the limits of these powers, the company is not bound by his acts.

If his powers were not explicitly determined, he may perform all acts that the liquidation requires:

1. He can sue and be sued on behalf of the company. 2. He can sell properties of the company.3. He can carry on the business necessary for the beneficial winding up of the

company.

4. He can borrow in the name and on behalf of the company, if this was necessary for the liquidation of the company

5. He can collect the debts due to the company and those due by the company.6. He can do all other acts as may be necessary to wind up the company.

Thank you for your attention

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