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The Scope of Authorities of Directors Under Iran Company Law

Are You Aware of the Powers and Duties of Company Directors in Iran?

Directors play not only a significant role in managing the companies, but they act on behalf of the companies. Iranian legal system has adopted two different approaches to the debating topic of authority of the directors in the Commercial Code and the Amendment Bill to the Commercial Code. Here, these two approaches will be discussed briefly. 

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What Is the Commercial Code’s Approach?

Commercial Code (1932) is the most important legislation in the business sector. However, the statute does not cover the stock companies as these sort of companies are exempted from the Code according to the amendment bill. Nonetheless, the Commercial Code needs to be updated to get harmonized with the developments in the commerce but its provisions still governs the commercial relationships including some sort of companies such as limited liability or joint liability companies.

1.1. Corporate Capacity

In accordance with article 588 of the Commercial Code, “a company may have all the rights and obligations granted by law to natural persons, except rights and obligations peculiar to humans by their very nature, such as the rights and obligations resulting from paternity and other similar rights or obligations”.

In doctrine, some commentators believe that corporations benefit from a broad legal capacity. However, the courts and also the company registrar office do not believe the same, as they construe the cornerstone of the corporations on a contractual basis. They have taken a very narrow contractual approach towards the companies. Since that, any action of the companies which has not been manifestly addressed in the article of association is an unauthorised act, and therefore is void.

1.2. Acts beyond the powers of directors (Ultra vires acts)

Article 589 alongside Article 105 of the Commercial Code regulate the procedure of making decisions for legal persons. The latter only applies to limited liability companies, and private stock companies are not covered by the aforesaid articles.

Accordingly, the authorized people in non-stock companies are only the ones who are empowered by the Article of Association. Any unauthorized act is not valid unless subsequently the stakeholders put their approvals  on it. In fact, the responsibility of the directors to the shareholders is similar to the responsibility of the agents to their principals. The agent is not entitled to cross the borders of the authority which either the principal has explicitly given him, or the authority which has been implicitly incorporated into their terms by traditions, usage, and surrounding circumstances based on Article 667 of the Iran Civil Code.

Yet, this is not applicable to stock companies, as these sorts of companies have their particular regime and regulations. In accordance with Article 51 of the Commercial Code, the relationship of the directors and shareholders is similar to agents and principals. Any action beyond the sphere of the directors’ authority is considered as invalid. This provision is in line with Article 589 of the Commercial Code and also Article 247 of the Civil Code. Obviously, such actions are not referenceable to the companies and their shareholders unless they have been approved by the shareholders through a resolution of the general meeting of stakeholders in accordance with the particular provision of the article of association.

What Is the Amendment Bill’s Approach?

Under Article 299, the Amendment Bill to the Commercial Code substituted with the provisions of Article 21 to 94 of the Commercial Code. The bill applies to the government companies based on Article 300 of the Commercial Code. It contains no specific provision on the legal capacity of the legal persons and companies, and it is only applicable to the stock companies. 

With regard to the legal capacity of the stock companies, we can refer to Article 8 of the Bill which provides that it is mandatory to expressly mention the subject matter of the company in the Article of Association. The term “expressly” is not mentioned and required under the Commercial Code. This shows that a narrow interpretation should be taken into consideration when someone is interpreting the subject matter and actions of a stock company. 

The Amendment Bill contains two articles regarding the sphere of the directors’ powers. First, we can mention Art 118 of the Bill. This article provides that basically the directors have full authority to manage the company. Yet,  there are two exceptions which limit their powers. Article 118 expressly provides that: 

“Except for matters which, in accordance with the provisions of this Act, fall under the exclusive jurisdiction of general meetings of the company, the directors of the company shall have all necessary authorities for the management of the company provided, however, that their resolutions and acts are intra vires. The imposition of any limitation on the powers of the directors by the articles of association or by resolutions of a general meeting are valid in respect of relations between the directors and the shareholders but are considered as null and void vis-à-vis third parties”.

What Can Be Concluded?

It is inferred from Articles 17, 118 and 135 of the Amendment Bill and also Article 7 of the Company  Registration that directors and their decisions are the key parts of the stock companies. Thus, the decisions are valid and credible to the bona fide third parties. Consequently, the aforementioned approach is not in line with the Commercial Code, but is adopted by the majority of the commentators, courts and judges.

Have a legal question about forming a company or the director’s scope of authorities in Iran? For further information and legal advice, you can easily contact me through LegaMart.

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