A Practical Guide to Sections 19–22 of the Companies Act, No. 07 of 2007
When running a business, contracts are your lifeline — whether you’re signing leases, hiring staff, or partnering with suppliers. But under Sri Lankan law, a company isn’t a person — it can’t sign on its own. That means your contracts must be made through legally authorized individuals.
So how exactly does a company enter into a valid contract? Who can sign? And what happens if there’s a mistake?
Let’s dive into the legal foundation — broken down simply for entrepreneurs, directors, and small business owners like you.
⚖️ 1. How Can a Company Sign a Contract? (Section 19)
In Sri Lanka, not all contracts are the same. The Companies Act specifies three different levels of formality, depending on the type of obligation.
🧾 A. Contracts That Must Be in Writing AND Notarized:
These are usually high-value or legally sensitive transactions — like real estate transfers.
✅ The contract must be:
- In writing,
- Signed on behalf of the company by:
- Two directors, or
- One director (if there is only one), or
- Someone else specified in your articles of association, or
- A power of attorney holder (someone legally appointed by your company),
- Notarially attested (certified by a notary).
✍️ B. Contracts That Only Need to Be in Writing:
Examples might include employment agreements or vendor contracts.
✅ Can be signed:
- By anyone acting with clear (express) or assumed (implied) authority from the company.
📣 C. Oral or Informal Contracts:
These could be quick verbal agreements or deals where a written form isn’t required by law.
✅ Still legally valid if:
- Made by someone with the company’s authority, even if only oral.
✅ Key Tip for Business Owners:
Make sure anyone representing your company in a deal has the right authority — or you could risk the contract being challenged or your company being exposed to personal liability.
🔏 2. Can My Company Appoint Someone to Act on Its Behalf? (Section 20)
Absolutely. Under the law, your company can formally appoint an “attorney” — not in the legal sense, but someone legally empowered to act for the company.
✅ Here’s what to know:
- Must be done in writing and signed using the rules in Section 19.
- The attorney’s decisions and actions are legally binding on the company.
- This could be useful if you’re traveling, operating in multiple cities, or need someone to represent you in a legal matter.
🧠 Bonus:
The attorney’s power is treated like a normal power of attorney — and it ends if the company is removed from the register (similar to a natural person’s death ending power of attorney rights).
👥 3. What If Someone Acts Without Proper Authority? (Section 21)
This is where the law protects third parties dealing with your business.
Let’s say:
- One of your managers signs a deal with a supplier.
- Later, you claim, “He wasn’t authorized to sign that.”
The law says — if the supplier had no reason to doubt the authority, you’re still bound by that contract.
✅ Companies CANNOT claim:
- “Our articles weren’t followed.”
- “That director wasn’t officially appointed.”
- “That document wasn’t real.”
- “That employee didn’t have permission.”
Unless the person dealing with your company knew or should have known that something was wrong.
Even if there’s forgery or fraud, your company could still be held responsible if the outsider had no idea about the wrongdoing.
📂 4. Do Outsiders Need to Know the Company’s Articles or Documents? (Section 22)
No. Just because your articles or documents are filed with the Registrar doesn’t mean outsiders are expected to know them.
✅ Example:
If your articles limit who can sign contracts, but you don’t tell your partners, they’re not legally responsible for not following them.
This protects outside parties and makes doing business with companies smoother.
🚨 Practical Takeaways for Business Owners
Here’s how you can protect your business and ensure smooth operations:
✅ 1. Authorize Clearly
Ensure that directors, managers, and staff know what they can and cannot sign.
✅ 2. Use Power of Attorney When Needed
If you’re not always available, consider legally appointing someone to act for the company in key areas.
✅ 3. Train Your Team
Teach your team to check authority before signing contracts, especially high-value or long-term deals.
✅ 4. Don’t Rely on Outsiders Reading Your Articles
If you have internal restrictions (like only the board can sign leases), make sure you enforce them, because outsiders may not know or be bound by them.
💬 Final Thoughts
Contracts are the foundation of your business — and understanding how they work under Sri Lankan company law helps you avoid legal risk and stay compliant.
Whether you’re a seasoned CEO or running a small startup, keeping your company’s authority structure tight and transparent is a major step toward smart, lawful business growth.
