What happens if the company manager signs a contract without the partners' knowledge?

In limited liability companies, the company director is responsible for the management and representation of the company. Signing contracts on behalf of the company, conducting banking transactions, buying and selling goods or services, employing personnel, signing loan agreements, or undertaking transactions that incur debt for the company are often within the director's responsibilities.

However, one of the problems frequently encountered in practice is the company director signing important contracts on behalf of the company without informing the other partners. High-value contracts, long-term lease agreements, loan and guarantee agreements, transfer of company assets, transactions with related parties, commitments that heavily burden the company with debt, or agreements that directly affect the company's operations can cause serious disputes among the partners.

The most frequently asked question at this point is: If a company director signs a contract without the knowledge of the partners, will that contract be valid? The answer to this question depends on the specific case. The director's authority to represent the company, the trade registry records, the company's articles of association, the authority to sign, the nature of the contract, the good faith of the other party, and whether the transaction is in the company's best interest should all be considered together.

What is the representation authority of a Limited Company Director?

The director of a limited liability company is the person authorized to manage and represent the company. If the director is listed as authorized in the commercial registry, they can conduct transactions with third parties on behalf of the company. Therefore, contracts signed by the director are, as a rule, binding on the company.

However, the scope of the director's representation authority is crucial. Does he/she represent the company alone, or is a double signature required? Is his/her authority limited to specific branches or types of transactions? Does he/she still hold the director's position? How does the form of representation appear in the commercial registry records? These questions must be examined carefully.

Not every contract signed without the knowledge of the partners is automatically void. If the director has the authority to represent the company in external relations, the contract may be binding on the company. However, this does not absolve the director of responsibility to the partners and the company in internal relations.

Is a contract signed without the partners' knowledge valid?

If the company director is authorized to represent the company, any contract they sign without the knowledge of the partners may, as a rule, be valid against third parties. This is because, in commercial life, third parties typically conduct transactions with the director who is listed in the commercial registry as authorized to represent the company.

For example, if a director, who is listed in the commercial registry as the sole representative of the company, signs a contract for the purchase of goods on behalf of the company, the other party can often rely on this contract. The fact that the other partners are unaware of the contract does not automatically render it invalid.

However, there are exceptions to this general rule. The validity of a contract may also be questioned if the director lacks the authority, if their signing authority has expired, if the double signature rule has not been followed, if the contract was made with a forged signature, if the other party acted in bad faith, or if the transaction was clearly done to the detriment of the company and in a collusive manner.

Can a lack of internal company approval be invoked against a third party?

Some transactions within the company may require the approval of the board of partners or the permission of other partners. For example, the company agreement may state that "approval of the board of partners is required for contracts exceeding a certain amount." Or, a protocol may have been drawn up between the partners agreeing that the company director cannot perform certain transactions alone.

However, whether these limitations within the internal relationship can be invoked against third parties must be carefully considered. If the limitation is not reflected in the commercial register and the other party is acting in good faith, the company may remain bound by the contract.

In this situation, the company may not be able to escape the contract; however, the director may be held liable to the company and its partners for exceeding the limits of his/her authority within the company.

Does a contract bind the company if the manager is unauthorized?

If the person signing the contract is not the company director, if their directorship has ended, or if they do not have the authority to represent the company according to the commercial registry, then the issue of unauthorized representation arises.

For example, if a person was previously a company director but their directorship has ended and this has been recorded in the commercial registry, their subsequent signing of contracts on behalf of the company may not be binding on the company. Similarly, in a company represented by two signatures, if a contract is made with the signature of only one director, it should be examined whether the representation authority was used properly.

In such cases, the other party to the contract is obligated to verify the trade registry records and signing authority. The company's liability is also assessed separately in transactions carried out by a person not authorized to represent the company.

Why is the distinction between single and double signatures important?

In limited companies, the form of representation is recorded in the trade registry. The director may be authorized to represent the company alone. However, in some companies, the joint signature of two directors may be required. This is known in practice as the double signature rule.

If a company is represented by two signatures, it may become debatable whether a contract signed solely by a director is binding on the company. Therefore, trade registry records and signature circulars should be checked before the contract is signed.

This issue is also important from the perspective of the company partners. If the company director is given unlimited single-signature authority, the director can carry out many transactions without the knowledge of the partners. If this creates a trust issue among the partners, limiting the representation authority or switching to a dual-signature system may be considered.

What happens if a manager signs a contract that is against the company's interests?

Even if the contract signed by the director binds the company in external relations, the director may be held liable if the contract is contrary to the company's interests. The director is obliged to act in accordance with the duties of loyalty and diligence while managing the company.

For example, the manager;

If the company has purchased expensive goods that it doesn't need,

if the company has been burdened with debt beyond its ability to pay,

If they have signed a service contract that is far above market value,

If he/she has conducted transactions with companies owned by relatives that resulted in losses for the company,

If the company transferred its assets at a low price,

if it has involved the company in long-term contracts with heavy obligations,

If they have secretly transferred company resources to certain individuals without the knowledge of other partners,

You may be liable to the company for these actions.

In this case, the company or its partners can examine the director's actions and the damages incurred by the company, and pursue legal remedies such as compensation, dismissal, restriction of authority, or other legal avenues.

What happens if the manager signs a contract for a relative or their own company?

Any transactions made by a company director in their own interest or the interest of their relatives should be examined with particular care. For example, the director may have entered into a contract on behalf of the limited company with another company in which they are a partner. Or they may have signed a high-value contract in favor of their sibling, spouse, relative, or an related company.

Such transactions create a conflict of interest. Was the transaction truly in the company's best interest? Is it in line with market conditions? Is it detrimental to the company? Did the manager gain personal benefit? These questions must be investigated.

If the director has caused the company financial harm due to a contract with a related party, the director may be held liable and a claim for damages may arise. Furthermore, if the transaction involved forged documents, deception, or false records, a criminal law aspect may also be considered.

Contracts that plunge the company into heavy debt

Among the contracts signed without the knowledge of the partners, the riskiest are those that burden the company with heavy debt. Long-term loan agreements, high-priced supply agreements, contracts containing penalty clauses, guarantee and surety agreements, real estate lease agreements, or commitments tying up the company's assets can directly affect the company's future.

Even if the director has representation authority in such contracts, their internal company liability is assessed separately. If the director acted without evaluating the company's solvency, cash flow, business needs, and risks, they may have caused the company harm.

What can be done if a guarantee or surety has been given on behalf of a company?

If a director provides guarantees, sureties, pledges, mortgages, or collateral on behalf of the company without the knowledge of the partners, this can have serious legal consequences. Such transactions can directly expose the company to debt risk.

Transactions should be carefully examined, especially if the director secures the company for their own debt, the debt of relatives, or the debt of related companies. Securing transactions that do not serve the company's interest can lead to discussions about the director's liability and, in some cases, invalidity.

In this case, the contract, guarantee document, bank records, trade registry authorization, and the other party's good faith should all be considered together.

Is the Approval of the Partners Required for the Transfer of Company Assets?

The company director has the authority to manage the company's assets. However, the transfer of significant company assets, particularly the sale of assets affecting the company's operations, can cause serious problems among the partners.

For example, the sale of a company's only real estate, the transfer of its main production machine, the divestment of its vehicle fleet, or the transfer of its brand may exceed the scope of ordinary transactions. In such transactions, the company's articles of association, the decisions of the board of partners, and the company's interests must be considered together.

If a director abuses their authority by transferring company assets below their actual value, the company may be sued for compensation for the resulting losses.

What should the partners do?

When it is discovered that the company director has signed a contract without the knowledge of the partners, the first thing to do is to examine the contract and the director's authority. Instead of acting in panic, the following questions should be answered:

Was the person who signed the contract the company director at the time of signing?

Was the director authorized to represent the company alone?

Was a double signature required?

Is the contract related to the company's field of activity?

Is the contract in the company's best interest?

Is the contract high-value or unusual?

Is the other side acting in good faith?

Does the company agreement require the approval of the board of partners for this transaction?

Did the director gain personal benefit?

Has the company suffered a loss?

It is incorrect to conclude that the contract is invalid or that the director is necessarily liable without determining the answers to these questions.

The Commercial Registry and Signature Circular should be checked

In contracts signed without the knowledge of the partners, the first documents to be examined are the trade registry records and signature circulars. The director's authority to represent the company, the manner of representation, and the start and end dates of that authority can be determined from these documents.

If the director was not authorized on the date of signing, or if the authorization was not valid, the legality of the contract as binding on the company may be questioned.

Therefore, partners should regularly check the company's current trade registry records and ensure that their directorial authority corresponds to the true intentions of the company.

A written explanation can be requested from the manager

If the company director has signed an important contract without the knowledge of the partners, the partners may request a written explanation from the director. This explanation should include questions about why the contract was signed, its benefits to the company, its cost, payment schedule, risks, and the nature of the relationship with the counterparty.

If the director avoids making a statement or sharing documents, this may constitute a violation of the right to information and be significant in terms of the director's accountability.

The Right to Access Information and Inspection Can Be Exercised

Shareholders in a limited liability company have the right to obtain and inspect information about the company's affairs. A shareholder may request a copy of the contract signed by the director, payment documents, invoices and accounting records, bank statements, and relevant correspondence.

If the director refuses to provide these documents, the partner may resort to a written application and a notarized warning. If the information is still not provided, a request may be made to the court to grant the right to access and inspect the information.

A notarized warning can be sent

If it is suspected that the director has acted without the knowledge of the partners and against the company's interests, it may be beneficial to send a notarized warning to the company, the director, and in some cases, the other party to the contract.

In the warning;

that the contract was known,

The director should explain his/her authority and the basis of the action

If the contract is deemed to be against the company's interests, it is not accepted

If the company incurs losses, the manager will be held liable

documents need to be submitted,

legal action will be taken if necessary

It can be stated.

A notarized warning serves as important evidence in future legal proceedings.

Can the Director's Authority Be Restricted?

If partners consider it risky for the company director to act alone, they may consider limiting the power of representation or switching to a dual signature system. However, the commercial registry aspect must be carefully considered to ensure that the limitations on power of representation are valid against third parties.

Statements within the company such as "the manager cannot handle this transaction alone" may not always be effective against third parties. Therefore, if a change in the representation system is desired, the resolution of the board of partners, registration with the trade registry, and publication procedures must be carried out correctly.

Can the Director be Dismissed?

If the director signs contracts that cause the company financial harm without the knowledge of the partners, their dismissal may be considered. In a limited liability company, the director can be dismissed or their powers restricted by a decision of the board of partners, if the conditions are met.

If a director's actions pose a serious risk of harm to the company and jeopardize its operations, their directorship may need to be terminated promptly or other measures may need to be taken.

If the director is also a company partner, removing them from the directorship does not terminate their partnership. However, it does remove their authority to manage and represent the company.

Can a compensation lawsuit be filed against the principal?

If the company has suffered losses due to a contract signed by the director without the knowledge of the partners, a compensation lawsuit can be filed against the director. The following points must be proven in this lawsuit:

The director acted in a manner contrary to the law or the company's interests,

The company suffered losses as a result of this transaction

A connection was found between the damage and the manager's behavior

The manager acted negligently.

For example, if a manager signs a service contract for a price far exceeding market value, and the company overpays as a result, the manager can be held liable for the damages. Similarly, if a manager provides a benefit to a company owned by a relative, to the detriment of the company, liability for damages may arise.

Can the contract be cancelled or declared invalid?

A contract signed without the knowledge of all partners cannot be revoked. If the director is authorized to represent the company and the other party acts in good faith, the contract may be binding on the company. In this case, the company's primary recourse is often a liability lawsuit against the director.

However, if the director is unauthorized, the double signature requirement has been violated, the contract was made with a forged signature, the other party acted in bad faith, there is collusion, or the transaction is clearly unlawful, a lawsuit may be filed to declare the contract invalid, void, or canceled.

Therefore, any claim of cancellation or invalidity of the contract must be carefully established based on the specific circumstances of the case.

What happens if the other party acts maliciously?

The claim of good faith may be weakened if the other party to the contract knows that the director has exceeded their internal authority, that the approval of the board of partners is required, or that the transaction is clearly contrary to the company's interests.

For example, if a manager signs a contract with a company owned by a relative at a clearly exorbitant price, to the detriment of the company, the good faith of the other party may be questioned. Similarly, if the other party knows that transactions cannot be carried out without internal company approval and still proceeds with the transaction, the validity of the contract may become debatable.

In this situation, the relationship between the other party and the manager, correspondence, price agreement, market conditions, and transaction timing are all important factors.

Is it possible to file a complaint from a criminal law perspective?

A manager signing a contract without the partners' knowledge doesn't always constitute a crime. However, in some cases, criminal law may come into play.

For example, the manager;

If he used a forged signature,

If he/she has forged documents,

If the company has transferred the money to its own benefit,

if they have abused trust,

if the company has suffered losses through fraudulent transactions,

If they have committed fraudulent acts against the company together with another person,

A criminal complaint can be evaluated.

However, not every commercial dispute should be treated as a criminal case. First, it is crucial to carefully analyze whether the incident involves commercial liability, corporate law, or a criminal offense.

Is it possible to collect evidence?

If there is a possibility that evidence relating to the contract's content, the company's losses, market value, or the signing process may be lost, then evidence gathering may be necessary. In particular, it may be required to examine company ledgers, bank statements, invoices, contract appendices, and correspondence.

The collected evidence can provide strong proof in a future compensation or invalidation lawsuit.

Which evidence is important?

If the company director signs a contract without the knowledge of the partners, the following evidence is important:

Sample contract,

Commercial registry records,

Signature circular,

Company agreement,

Decisions of the board of partners,

Bank transactions,

Invoices,

Payment receipts,

Email and WhatsApp conversations,

Commercial relationship documents with the other party,

Market price research,

Financial records showing the company's losses,

Documents demonstrating the director's personal interest,

Witness statements,

Expert reports.

This evidence is used to determine whether the contract is binding on the company, whether the director exceeded their authority, and whether the company suffered any losses.

How can these kinds of problems be prevented?

To prevent the company director from signing important contracts without the knowledge of the partners, the internal authority structure must be properly established from the outset.

Companies can take the following measures:

The power of representation can be arranged with two signatures instead of a single signature.

For transactions exceeding a certain amount, approval from the board of partners may be required.

A protocol can be established between the partners.

The director's authority limits can be put in writing.

Bank payment limits can be set.

Transactions requiring specific approvals can be written into the company's articles of association.

Legal review could be made mandatory for high-value contracts.

The director's ability to conduct transactions with related parties may be restricted.

Regular reporting requirements may be introduced.

These measures can prevent internal company disputes and managerial liability.

What is the role of a lawyer in this process?

A company director signing a contract without the knowledge of the partners is a technical matter involving aspects of company law, contract law, representation authority, director's liability, compensation, and in some cases, criminal law.

The lawyer during this process;

examines the director's representation authority

It evaluates trade registry records and signature circulars

It analyzes whether the contract is binding on the company

examines the company's articles of association and the decisions of the board of partners

determines the manager's responsibility,

The notary prepares the notice

It conducts the information gathering and review process

It takes action to remove the director from office or restrict his/her authority

files a lawsuit for compensation or invalidation

If necessary, prepare a criminal complaint

It prepares authorization/protocol arrangements to ensure the company does not face similar risks in the future.

Therefore, upon learning of such a contract, a legal review should be conducted without delay.

Conclusion

A company director signing a contract without the knowledge of the partners does not always mean the contract is invalid. If the director is authorized to represent the company in the commercial registry and the other party is acting in good faith, the contract may be binding on the company. However, this does not absolve the director of internal company liability.

If a director signs contracts that are contrary to the company's interests, are high-value, benefit related parties, place the company under heavy debt, or require the approval of the board of shareholders, the director may face liability, compensation, dismissal, restriction of authority, and in some cases, criminal law.

In such cases, the contract, trade registry records, signing authority, company articles of association, shareholders' meeting decisions, and the damage suffered by the company should be examined first. In limited companies, the representation authority given to directors should be properly regulated from the outset; written approval, double signature, and legal oversight mechanisms should be established for transactions that could place a heavy burden on the company.