Proxy Directorship, Procuration (Prokura)
What is this proxy all about? Another way to divert the workload via a detour?
Well, not really. It is all about having the possibility to put the management's workload and some responsibility on another person's shoulders.
What may such proxy director do?
The legal framework for such director is found in §§48 – 53 HGB. Based on this, the proxy may perform any business inside and outside of court for everyday business of the principal's trading business. The lawmaker intends with the wording „principal's trading business” that the proxy director may work on a general basis for the company.
This sounds exactly what a normal representative may do on behalf of the company. So what is all this jazz about? What's the difference?
The difference between a proxy director and a representative lies in the legal quality and scope of the representation. A representative is only allowed to perform what the specific business of the principal brings with it (§54 HGB). The proxy director on the other hand may obligate the company outside of its usual business.
How do I get a proxy director into my company?
When is the candidate legally appointed as proxy director?
Once the principal either tells the candidate or gives him a letter that she is now working as a Prokurist. The entry in the Commercial Registry is only declaratory. However this may be, the director will still have to visit a notary to apply to have this appointment registered with the Registry.
What is the scope of his representation for the company?
§49I HGB mandatorily determines the scope of representation. The proxy director acts with full legal binding for and for the account of the principal. Therefore, the company is liable for anything and all to which the proxy directors commits (§164 I BGB).
Goody goody gum drops! I do not want my proxy to do all my work. I only want him to close deals up to € 1000. How do I achieve that?
Not at all! Okay, almost not all. Since the proxy director belongs to the legal representatives, his power of attorney may not be limited to the public. There is no way to officially restrict his external representation (§50 HGB). Third persons are entitled by law to believe that the proxy may perform as he does. However, this is not the end of the story. Keep on reading!
Now this twit of a proxy director went out and acted outside of his competency and signed a contract. Argh.
Internally, it remains binding that your proxy Peter may only engage in business deals up to € 1000. In the event, Peter signs a contract over € 2000, this contract is binding for you. The defense “The proxy was only entitled to do business up to €1000!” will not persuade any German judge! You have to pay the € 2000 – as a first step. However, you are entitled to damages following the rules on acting without power of attorney (§§177 et seq. BGB). These damages can be either the full amount (e.g. for something your company cannot at all use) or partially (e.g. you could have obtained the product / service for less. So much for the concept; the rest has to be discussed for the individual case.
Though it might be a bit late, what exactly is the proxy director entitled to do by law?
To wrap it all up: the right hand of the principal. His duties are:
- to lead the correspondence,
- lead cases in court,
- oblige the company,
- granting simple powers of attorney, i.e. not installing another proxy,
- purchase, rent, lease real estate – but only with special permission §49 II HGB
- hire and generally fire employees.
Wow, that is really a lot. Are there certain tasks that he may not perform?
Sure! He might not do such activities that are those of the director or shareholder. This is especially:
- business aiming at winding up the company,
- signing balance sheets,
- grant proxy directorships,
- make applications towards the Commerical Registry,
- apply for bankruptcy,
- filing tax returns,
Having learned that procuration is strict and binding what about misuse? Seriously, do I have no protection whatsoever against wrong calls?
The law provides protection against this in the following most typical cases and more:
- Your proxy director and one or more persons secretly agree to act to harm you and / or your business. This interaction is null and void for violation of good morals pursuant to §138 BGB.
- Your proxy acts outside of his internal competence and the business partner knows this. Though the legal argumentation is in discussion, all come to the result that such interaction is illegal and not binding for the principal.
- A procuration is not or not yet or no longer registered in the Commercial Registry (§53 HGB). This situation is in discussion if it is illegal or not. It is a question if §15 I HGB is applicable, i.e. if a (missing) entry can be invoked against a third party. If this provision is applicable, then the above rules can make that business void.
When does a proxy end? I am considering to fire my director.
A proxy directorship ends:
- with change of shareholders,
- bankruptcy of company,
- cancelation of the proxy's employment contract,
- end of business,
- procurator's legal incapacity,
- sale of the company.
Gosh, my principal died. What happens to my power of attorney?
Nothing. You remain as proxy until for other reasons your power of attorney ends (§52 III HGB). The principal's death does not revoke the validity of the power of attorney
Hey, I just noticed that the goof of a principal did not inform the Commercial Registry after having kicked me out of the company. What am I to do?
Fact remains, the power of attorney is not valid anymore but it might still be held against you as long as it is still registered (§15 I HGB). The principal has to apply that the procuration is deregistered. If he does not comply then you will have to take him to court.
My colleague just informed me that I have to indicate my proxy with “ppa” next to my signature. I see no reason why I should. My procuration is registered so what the heck?
The reason is the law (§51 HGB). The proxy director's signature is complemented with the abbreviation “ppa.” – so German commercial tradition. The acronym is derived from Latin „per procura autoritate“, in English, with the power of procuration.
Scope of Procuration
There are different names for different scopes of the proxy.
Individual Procuration (Einzelprokura)
Einzelprokura is the power of attorney for a single person – allowed to act individually.
Branch Procuration (Filialprokura)
A branch procuration is the power of attorney only for a certain branch or settlement of a company (§50 III HGB). A procuration for any and all branches of a company is called “Generalprokura (general proxy)”. However, the branch names of the company must differ with an addition. An example: Hogwart Schooling GmbH is the main company and the branch in Berlin would be Hogwart Schooling GmbH – Branch Berlin. Now the branch in Hollow Meadows would be Hogwart Schooling GmbH – Branch Hollow Meadows.