What is a proxy and when do you use it?

Quick overview

A power of attorney is a broad authorization for a proxy to act for a business in the operation of a business establishment or branch. It can only be granted by an entrepreneur registered in the commercial register and only a natural person can be a proxy. A proxy can enter into business contracts, take out loans or act for the company without a separate power of attorney, but cannot transfer the proxy to another person. He can only alienate or encumber real estate if the proxy expressly states so.

The most important thing to look out for with a power of attorney is:

• whether it is granted by an authorized businessman,
• to whom exactly it is granted,
• whether the proxy will act alone or together with another person,
• whether the proxy should also have authority over real estate,
• how the proxy will be registered and subsequently deleted from the Commercial Register.

Are you unsure whether a power of attorney, a traditional power of attorney or another representation setup is more appropriate for your business? We can help you choose a safe solution and prepare documents to fit your operation and risks.

A power of attorney is a special case of granting a power of attorney. Its importance for you as a businessman lies mainly in the fact that it facilitates negotiations concerning the operation of the company or one of its branches. You do not then have to (or the statutory body does not have to) take all legal actions regarding the operation in question, and there is no need to repeatedly issue special powers of attorney.

Your business partners are also in the clear. They can rely on the fact that a proxy, registered in the commercial register, is authorised to act for you and there is no need to produce a power of attorney.

In practice, proxies are mainly encountered in companies where the managing directors are unwilling or unable to sign every contract in person. This is often due to company expansion, multiple branches, a foreign executive or the need for the chief operating officer or other key person to be able to deal quickly with banks, suppliers and business partners.

You can authorize a proxy to perform all legal acts that occur in the operation of the branch (or business establishment), including those for which a special power of attorney is otherwise required. In the case of a business establishment with one or more branches, or where the company consists of several business establishments, a power of attorney may be granted only for a particular branch or establishment.

Basic conditions for granting a power of attorney:

• A proxy may only be granted by a businessman registered in the commercial register. No other entity can grant a proxy.
• Only a natural person can be granted a proxy; a legal person cannot be a proxy.

Scope of the proxy and its limitations

As already mentioned above, a proxy is entitled to all legal acts occurring in the operation of a business establishment or a branch on the basis of a proxy. Thus, in addition to ordinary commercial contracts, the proxy may enter into promissory notes, take out loans or sell the assets of the branch.

An important limitation is that the power of attorney does not include the power to alienate or encumber immovable property. However, the power of attorney may be extended to include such acts (or such power may be limited by fixing a certain amount of the price of the property or by setting other conditions). However, if this is not stated in the power of attorney, then the proxy is not authorised to do such acts.

From our experience: the company wanted its chief operating officer as proxy to be able to deal with current contracts, financing of operations and negotiations with the bank. However, the draft proxy did not clearly state whether he could also act in relation to real estate. We therefore recommended that the authorisation should be expressly modified and that the managing director should also set up internal approval of significant transactions. This ensured that it was clear externally what the proxy could sign and that control over major decisions remained internally.

Furthermore, the proxy may not take actions on behalf of the statutory body that concern so-called status matters of the entrepreneur, such as convening a general meeting.

The Civil Code does not provide for any other limitations on the proxy than those mentioned above. If you would like to limit the proxy to, for example, the amount up to which he can take loans or perform other legal acts on your behalf, then such a proxy cannot be entered in the Commercial Register. However, such a move would be resolvable as a representation under a power of attorney.

A proxy cannot transfer the proxy to someone else or grant another proxy.

If you want to restrict the proxy, for example by a financial limit, approval of certain contracts or internal approval of the managing director, it is advisable to set up internal rules, an employment or management contract or a separate power of attorney in addition to the proxy. We will prepare a solution for you that is understandable for the commercial register, the proxy and your business partners.

The performance of proxy activities

A proxy must perform his or her duties personally and with due care, which requires an active approach to the performance of duties, with the understanding that a lack of knowledge necessary to carry out legal actions or a lack of time is not an excusable reason for not exercising due care. The procurator therefore assumes a relatively heavy responsibility which he should take into account. Part of this care is automatically presumed to include loyalty, which requires the proxy to act solely in the interests of the business and not to mix his or her actions as a proxy with his or her own interests (or those of others).

Form of proxy

The granting of a proxy is based on an agreement between the proxy and the entrepreneur that the proxy will represent the entrepreneur by way of proxy in legal proceedings in connection with the operation of the entrepreneur’s business. No written form is required for this agreement (as opposed to the granting of the proxy itself).

Ideally, the entrepreneur should conclude an unnamed contract with the proxy for the representation of the entrepreneur by proxy, in which the parties also agree on the manner of exercising the proxy and, inter alia, whether the contract will be for a consideration or whether the proxy will exercise his/her activity free of charge. And if the contract will be remunerative, the amount of the proxy’s remuneration.

How to grant a proxy

The power of attorney itself must always be granted in writing. In the case of a limited liability company, the approval of the granting and revocation of a proxy falls within the competence of the general meeting (unless the articles of association provide otherwise).

In the case of other companies, this is not provided for, but the approval and revocation of a proxy may be entrusted to the general meeting or other body by the company’s articles of association. Therefore, it is always necessary to first check the constituent documents, within whose competence the approval of the granting of a proxy falls.

If nothing else is stated, the granting of a proxy falls within the competence of the entrepreneur’s statutory body or directly within the competence of the entrepreneur if he is a natural person.

Checklist: What to check before granting a proxy

Before signing a proxy, check the following points in particular:

• whether the entrepreneur is registered in the commercial register,
• whether the proxy has been granted by the company’s governing body,
• whether the memorandum or articles of association contain special rules,
• whether the proxy is to act alone or together with another person,
• whether the proxy should also have authority over immovable property,
• what the proxy’s signature will look like,
• how the proxy is entered in the commercial register.

Content and model of the power of attorney

Various models for granting a power of attorney can be found on the internet, however, it is advisable to consult a lawyer about the specific form as the form may vary according to the scope of the power. The power of attorney must explicitly state that it is a proxy. The scope of the proxy’s authority does not need to be expressly stated, as long as the statutory scope is respected.

Do you need a proxy prepared or reviewed? Send us a draft or a description of the situation and our attorneys will verify that the document actually corresponds to what the proxy is supposed to do for the company. We will also alert you to risks that common internet templates often do not address.

Entering the proxy in the commercial register

The grant of a proxy to a proxy must be entered in the commercial register, however, unlike the previous legislation, the entry is only declaratory. The proxy is therefore already effective at the moment of its granting. Until the moment of registration of the proxy in the Commercial Register, the proxy must prove his/her authorisation to a third party (e.g. by submitting a document granting the proxy).

Signature of the proxy

The proxy shall sign by adding his/her signature to the name of the entrepreneur and an indication of the proxy. Should the proxy be granted for a single branch or one of several business establishments, he/she shall also add the indication designating the branch or business establishment.

The addendum may take various forms, as a rule, it is explicitly stated as “proxy”, “in procura”, “per procuram”, or the abbreviations “ppa” or “p.p.” etc.

Granting of a proxy to more than one person

Proxies may also be granted to more than one person. In such a case, three possibilities may arise as to how the proxy will be exercised:

• each proxy is entitled to represent the company independently,
• the consent of more than one proxy is required for all or some of the acts, at least two of them together,
• the representation and signing requires the consent of all proxies.

In the event that you have granted a proxy to several persons and have not specified otherwise when granting the proxy, each of them shall represent you separately.

When does a power of attorney expire?

The Civil Code does not regulate, with exceptions, the manner of termination of a proxy. However, there is no doubt that a proxy terminates first of all:

• by its revocation or termination,
• death of the proxy,
• by declaring bankruptcy on the property of the entrepreneur,
• dissolution of the entrepreneur without a legal successor,
• transfer or lease of the business establishment or branch for which it was granted.

On the death of the entrepreneur, the proxy shall not terminate unless otherwise agreed.

Whenever a proxy is terminated, you should not forget to apply for its deletion from the commercial register.

Summary

A power of attorney is a practical way for a registered entrepreneur to allow another natural person to act for him or her in the operation of a business establishment or branch. A proxy can enter into ordinary business contracts, deal with partners or deal with operational matters without a separate power of attorney, but cannot transfer the proxy to another person and cannot alienate or encumber real property without express extension. A power of attorney must be granted in writing, properly approved according to the rules of the particular company, set up a method of dealing with multiple proxies, and registered in the commercial register. It is equally important to see to its termination and subsequent deletion from the register, so that a person who is no longer supposed to represent the company does not act for it externally.