A company’s incorporation contract may be affected by a defect relating to the essential elements of the contract, its conditions, or the procedures imposed by law on the type of company being incorporated. However, describing every violation as leading to the «invalidity of the company» is not accurate; the legal effect varies according to the type of company, the nature of the defect, the stage at which it arose, and whether the company has completed its incorporation procedures and acquired legal personality.
Accordingly, before examining invalidity, the legal regime governing the company must first be identified. The rules applicable to general partnerships and limited partnerships are not identical to those governing joint stock companies, partnerships limited by shares, limited liability companies, or single-member companies subject to Law No. 159 of 1981.
General Rules Governing the Company Contract
The Civil Code defines a company as a contract under which two or more persons undertake to contribute to a financial venture by providing a contribution in money or work and to share the profits or losses arising from it, subject to the special provisions prescribed by the laws governing certain types of companies.
For the company contract to be valid, the general rules applicable to contracts must be satisfied, including valid consent, a lawful subject matter, and a lawful cause, in addition to the specific elements and requirements applicable to the company according to its type.
Article 507 of the Civil Code also provides that the company contract must be in writing, otherwise it shall be invalid, and the same rule applies to amendments made to the contract without complying with the form in which it was originally executed.
Does the Invalidity of the Company Contract Always Have Retroactive Effect?
No. This is one of the most important characteristics distinguishing the invalidity of a company from the ordinary invalidity of certain other contracts.
Article 507 of the Civil Code provides that the invalidity of the company contract due to lack of writing may not be invoked by the partners against third parties, and that it shall produce effects between the partners only from the time one of them requests a judgment declaring the invalidity.
This is connected with the principle established by the courts concerning the concept of the de facto company. If the company has actually carried on business before a judgment declaring its invalidity is issued, the law may recognize the effects arising from its existence during the preceding period instead of retroactively nullifying all of its transactions in a manner prejudicial to the partners and those dealing with it.
Accordingly, the statement that a judgment of invalidity «erases the legal personality from the date of incorporation» is not universally correct.
Companies Subject to Companies Law No. 159 of 1981
Law No. 159 of 1981 on Joint Stock Companies, Partnerships Limited by Shares, Limited Liability Companies, and Single-Member Companies applies to the types of companies specified by the Law and establishes a special incorporation regime that differs in certain respects from the general rules governing company contracts.
Among these rules is the requirement that the company’s incorporation contract or articles of association satisfy the form, information, and procedures required by the Law and its Executive Regulations, that the General Authority for Investment and Free Zones be notified of the establishment of the company, that the required documents be deposited, and that the prescribed registration and publication procedures be completed.
When Does the Company Acquire Legal Personality?
The acquisition of legal personality by companies subject to Law No. 159 of 1981 is linked to the registration and publication procedures regulated by the Law and its Executive Regulations.
The more important point is that, after completion of incorporation and registration, the legislator sought to protect the stability of the company and its transactions. Accordingly, once the company acquires legal personality, its existence may not be challenged on the basis of violations of the provisions relating to incorporation procedures.
This rule prevents any procedural error preceding incorporation from becoming a permanent means of threatening the company’s existence after it has entered into transactions and acquired its legal personality.
The Difference Between a Defect in Incorporation Procedures and a Defect in the Contract Itself
A distinction must be drawn between two different situations:
- Violation of incorporation procedures: Such as non-compliance with certain procedures, documents, or formalities imposed by Companies Law when establishing the company. The legal effect is governed by the special regime prescribed by Companies Law and its Executive Regulations, and once incorporation has been completed, the invalidity of the company may not be invoked merely on the basis of such violations where the incorporation procedures have become protected under the law.
- A defect affecting the essence or legality of the transaction: Such as complete absence of consent, an unlawful corporate purpose, or an agreement that violates a mandatory rule or public order. Such cases should not be confused with a mere error in an administrative incorporation procedure.
Does an Unlawful Corporate Purpose Lead to Invalidity?
The company’s purpose must be lawful and must not violate public order, morality, or mandatory legal rules. If the agreement itself is based on carrying on an activity prohibited by law, the matter does not concern a mere deficiency in incorporation documents, but rather a defect affecting the subject matter or cause of the transaction, as the case may be.
However, if the purpose itself is lawful but carrying on a particular activity requires a licence that the company has not obtained, this does not always mean that the incorporation contract itself is invalid; the consequence may instead be a prohibition on carrying on the activity, regulatory penalties, or other effects prescribed by the law governing that activity.
This distinction is important because failure to obtain a professional or regulatory licence is not automatically equivalent to the unlawfulness of the company’s incorporation contract.
Does the Omission of One Item of Information from the Incorporation Contract Always Lead to Invalidity?
Not every omission of information results in the invalidity of the company. It must first be determined whether the missing information is an essential element without which the contract cannot exist, or information that the law requires to be completed and which may be corrected within the incorporation procedures.
The Law and its Executive Regulations specify the information that must be included in the incorporation contracts and articles of association of companies subject to Law No. 159 of 1981, and the incorporation system also permits the competent authority to object to the establishment of the company in the cases specified by law and to request that the grounds for objection be remedied.
Accordingly, many procedural deficiencies may be corrected before incorporation is completed instead of treating the company as invalid merely because such deficiencies arise.
Liability of Founders for Incorporation Errors
The inability to invalidate the company after its incorporation has become established does not mean that the founders are exempt from liability for violations committed during the incorporation stage.
Law No. 159 of 1981 imposes special obligations on founders, including the duty to exercise the care of a prudent person, and also imposes liability on them for damage suffered by the company or third parties as a result of breaches of incorporation duties.
Special liabilities may also arise in relation to information, contributions, capital, or transactions carried out on behalf of the company under incorporation, depending on the nature of the facts and the applicable legal provision.
In this way, the law balances the stability of the company’s legal personality on the one hand with the accountability of those responsible for violations of incorporation procedures or duties on the other.
Does the Participation of a Person with Limited or No Legal Capacity Lead to Invalidity?
It is not correct to state generally that the participation of a minor, a person with limited legal capacity, or a person subject to guardianship automatically results in the invalidity of the entire company. The matter is governed by the rules of legal capacity, legal representation, the type of company, and the extent to which the defect affects the contract as a whole.
The effect of the defect may be limited to the transaction or contribution of the relevant partner, or may require special approval or legal representation, while in other cases it may lead to different consequences if the participation of that partner is essential to the continuation of the company.
Accordingly, legal capacity must be examined in light of the specific facts and the governing law rather than through application of a general rule of invalidity.
Does the Bankruptcy of a Partner Invalidate the Company Contract?
No. Bankruptcy is not, in itself, a general ground for invalidity of the incorporation contract of all types of companies.
The bankruptcy of a partner may affect that partner’s continuation in certain partnerships or affect their powers and ability to dispose of their assets, while the effect differs in capital companies, whose legal personality and continuity depend to a greater extent on their independence from the persons holding interests in them.
Accordingly, grouping a «bankrupt person» and a «person subject to guardianship» under a single rule that the company is invalid is legally inaccurate.
What Is the Difference Between Invalidity of the Company and Invalidity of a Decision Issued by It?
There is a fundamental distinction between challenging the incorporation of the company itself and challenging a decision issued by its board of directors or general assembly after incorporation.
Once the company acquires legal personality, it may issue a decision that violates the law or its articles of association. In such case, the dispute concerns the invalidity of the decision or transaction itself, not the invalidity of the company’s incorporation.
The Court of Cassation has confirmed this distinction, holding that the protection afforded to completed incorporation procedures differs from the rules governing the invalidity of transactions and decisions issued by the company after its establishment.
When Can the Defect Be Corrected Instead of Invalidating the Company?
This depends on the nature of the violation and the stage at which it is discovered. If the defect relates to a procedure or item of information that can be completed before incorporation is finalized, correction may be the natural legal course.
The incorporation procedures may include an objection by the Authority to the establishment of the company, specifying the grounds for objection and the steps required to remedy them, thereby allowing the founders to regularize the company’s position in accordance with the law.
However, defects affecting the legality of the agreement itself or a mandatory legal rule cannot be presumed to be correctable in the same manner and must be examined in accordance with the general rules and the special provisions governing the relevant type of company.
Effects of a Judgment Declaring the Company Invalid
The effects of a judgment declaring invalidity vary according to its cause, the type of company, and the extent to which the company carried on business before the judgment was issued.
If the company has already entered into transactions with the partners and third parties, the preceding period cannot always be disregarded and all transactions treated as though they had never existed. Recognition of the de facto company may result in the liquidation of the relationships that arose during its period of operation in accordance with rules that preserve the rights of partners, creditors, and third parties.
Personal liability of the founders or partners does not arise merely from the judgment of invalidity in all cases. Rather, the legal provision establishing liability, the type of company, the cause of invalidity, and whether the person committed a fault or violation that caused damage must be identified.
What Should Be Examined Before Filing an Action Seeking Invalidity of a Company’s Incorporation Contract?
- Type of company: Whether it is a partnership or a company subject to Law No. 159 of 1981.
- Date of incorporation and registration: And whether the company has already acquired legal personality.
- Ground of invalidity: Whether it relates to the essence of the contract or merely to an incorporation procedure.
- Possibility of correction: And whether the violation was remedied or the documents completed before incorporation was finalized.
- Commencement of business: And whether the company actually carried on activities giving rise to rights for third parties.
- Appropriate relief: Whether the dispute requires invalidation of the company, invalidation of a particular decision or transaction, dissolution or liquidation of the company, or compensation for an incorporation-related fault.
- Judicial jurisdiction: Identifying the competent court according to the type of company, the nature of the dispute, and the legal provisions governing it.
Conclusion
Invalidity of a company’s incorporation contract is not an automatic consequence of every violation occurring during incorporation. Egyptian law distinguishes between defects affecting the essential elements or legality of the contract, violations of incorporation procedures, and decisions and transactions issued by the company after its establishment.
With respect to companies subject to Law No. 159 of 1981, the stability of the company after completion of its incorporation is of particular importance; once it has acquired legal personality, its existence may not be challenged merely on the basis of violations relating to incorporation procedures. Nevertheless, there remains scope for founders’ liability, invalidity of a specific transaction or decision, or other sanctions and legal effects prescribed by law depending on the facts.
Accordingly, the first step in any dispute is not merely to ask whether the company contract is «invalid», but to identify the type of defect, the type of company, the stage at which it occurred, and the legal effect prescribed by the legislator.