Corporation Law
Corporations Act of 2001
In the Section 131 of the Corporations Act of 2001 with regards to the ‘Contracts before Registration’ clearly states that “If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: a. within the time agreed to by the parties to the contract; or b. if there is no agreed time – within a reasonable time after the contract is entered into1 ” (WIPO 2013). Initially, the company’s promoters generally are required to have contracts entered into by the firm. For instance, the promoter of a company may desire to have an efficient contract when planning to buy a property that is to be improved by the said company. If the contract is carried out before the company is integrated, it will result to issues (Austin et al 2015). However, with regards to the pre-registration contracts of company is no longer a prerequisite. This is clearly described by the need of reported cases since the introduction of requirements for company’s pre-registration contracts into legislation. It may be relevant and even more significant in time for the provision when there were no shelf firms and we did not have the technology we have today. As this is no longer the case, it is time we merely go back to the common law on the company’s conduct of pre-registration contracts. The common law would simplify things for the company, promoter, and the third party when making contracts let alone on the matters of contractual liability. In addition, the section 119 of the same acts states that “the company that comes into existence as a company’s body is corporate from the start of the day on which it is registered1”. Today, pre-incorporation contracts are no longer necessary or commonly carried out by companies unlike back then.
1 Corporations Act of 2001 s 131 para 1 and s 119
In our time, people wanting to utilise the company form for an enterprise will commonly obtain a shelf company which has already been integrated and cause it to enter the contracts. Contracts that have been carried out between the date on which the promoters of the company obtain it will raise the issues now deemed: Commonwealth Bank of Australia v Australian Solar Information Pty Ltd (1986) 11 ACLR 380; 5 ACLC 124 and the date of the integration of a shelf company (Austin et al 2015). Since pre-incorporation is frequently carried out by companies nowadays, it is clear that the idea of the pre-incorporation is now placed under the common law. The pre-incorporation under the common law, a contract is performed on the part of a non-existent firm which is not legally binding from the moment it was incorporated; or even the company could ratify it, even though the company might bind the parties personally. For instance in the case of Kelner v. Baxter1 where in the contract was purchased on the part of the proposed company. The signature was formed on the part of the proposed Gravesend Royal Alexandra Hotel Co (Ltd). Given the fact that the signatories proposed to make a binding contract without delay, it was held that the contract bind the promoters of the company that are involved personally. Furthermore, in the case of Vickery v Woods 2 where in there was a sale of contract of the land which claimed to be carried out by a non-existent firm. The promoters who have signed the contract for the company were bound by it personally. However, the signatures are performed simply because to authenticate the signature of the company and it become known that the company was not in existent, therefore there is no contract with anyone, despite the signatories intend to contract with the company3 (Carter et al 2007).
1 Kelner v Baxter (1866) LR 2 CP 174. See also Coral (UK) Ltd v Rechtman [1996] 1 Lloyd's Rep 224 at 237 per Potter J.
2. Vickery v Woods (1952) 85 CLR 336 .
3. See Newborne v Sensolid (Great Britain) Ltd [1953] 1 All ER 708; Vickery v Woods (1952) 85 CLR 336 at 343 per Dixon J (with whom Kitto J agreed), 348 per Williams J (with whom Dixon and Kitto JJ agreed); Black v Smallwood (1966) 117 CLR 52; Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506; (1975) 7 ALR 144; Lord v Trippe (1977) 14 ALR 129 at 134 per Barwick CJ, 141 per Mason ,143 per Aickin J (dissenting), HC. See also Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912, CA; Burnside Sub-branch RSSILA Inc v Burnside Memorial Bowling Club Inc (1990) 58 SASR 324 at 339 per the FC; Braymist v Wise Finance Co Ltd [2002] Ch 273 at 283 per Arden LJ, 291 per Latham LJ, 292 per Judge LJ; [2002] 3 WLR 322 at 332, 340, 341, CA. Contrast Valentine Films Pty Ltd v Trimex Pty Ltd (1996) Unreported, FCA (Merkel J) 7 March VG10/1993 (contract novated).
The section 131 and section 119 of Corporations Act of 2001 deals with the pre-registration contracts of company. We have mentioned earlier that pre-registration or pre-incorporations of the company by the promoters are no longer a requirement these days despite the condition that it is still significant to the shelf company. In this view, people began to place the concept of pre-incorporation under common law. Under the common law, the position of an individual who enters the pre-registration contracts formerly known as the pre-incorporation contracts, only to have the pre-registration contract fail, in the sense that the company is not in existent does not become incorporated and ratify (Courtney 2007).
Role of Promoters of the Company
The promoters that were mentioned in the statute were individuals that bring the company into existence and are the one that identifies the type of company that was established. However, the Corporations Act of 2001 did not explain the function and the description of a promoter. The promoter is an individual who carry out to form a company with reference to a provided project and to set it going and the one who assume the essential steps to achieve that purpose. For instance Twycross v Grant where in an action was brought by the plaintiff the Companies Act of 1867 that the plaintiff should recover the amount of money paid by him on specific share that was taken by him in the L. Company on the grounds that defendants who were promoters of the company were fraud, in excluding from the 2 contracts prospectus which were entered into by the company as promoters. It was held that Brett L.JJ and Bramwell, that the terms in the contracts were “knowingly issuing” in sec 38 mean purposely issuing a prospectus without inserting the said contracts which are prerequisite by the sec 38 to be specified, even though they are excluded that they are excluded under the bona fide belief that it is not a prerequisite to specify the contracts. It is therefore clearly stated that “every prospectus of a company, and every notice inviting persons to subscribe for shares in any joint-stock company, shall specify the dates and the names of the parties to any contract entered into by the company, or the promoters, directors, or trustees thereof, before the issue of” 1. The fiduciary duties of the promoters are to release the profits of the company to representatives of prospective investors, act in good faith and with reasonable skill, attentiveness and care, to make a complete release of any interest in any contract entered into by the company, and not to make profit at the cost of the firm. The fiduciary duties refers as a fiduciary relationship of a promoter with the company that he is forming leading into existence. The promoters should act genuine in the interest of the company and not for his own personal interest. For instance, in Erlanger v New Sombrero2 where in the fiduciary relationship of the promoter with the signatories may be or in some occasion the possibility of unfair advantage to one of them, the burden of proof lies on the signatory to describe that he has not used that advantage for his own personal interest. The phosphate mine depreciation value can be deliberated in order to make a counter-restitution in equity. Another case is Gluckstein v Barnes 3 where in the company’s promoters had obtained a property with the intention of re-selling it through the shares sale in the company. As a result the original directors made a considerable profit on which they did not release it although it has been discovered. The company became bankrupt and the investors ask for the repayment of the undisclosed profit. It was held that promoters should make a full disclosure of any interest mentioned in the contract, thus the investors are entitled to receive the money back (Palgrave n.d).
1 See Twycross v. Grant [1877] 2 CPD 469
2 See Erlanger v. New Sombrero [1878] 3 App Case
3 See Gluckstein v Barnes [1900] AC 240
The Common Law Position
The present common law position entails arbitrariness, struggle in commercial sector, and injustice. In addition, the common is not aligned with the essential needs of the commercial sector or expectation. Hence, the law with regards to the pre-incorporation contracts should be reformed. Under the common law position, the company lacks legal personality until it was registered. Another one is that the company that was not registered or was not in existent is unable to be a signatory in a contract. The liability of a pre-incorporation contract is that there is no law for a person who has entered a contract for non-existent principal will bind them to the contract personally. The common law would make it simpler for the promoter and the company is that a promoter will not be liable or binding personally on a pre-incorporation contract provided that the signatories are fully aware of the company that is not in existent at the date of the contract. Furthermore, the ratification for the company would be impossible except the company is already in existent at the date of the contract required to be ratified. The corporation referred to in the pre-incorporation contract did not succeed to ratify it the promoter will, in the nonexistence of a written immunity from the liability which was signed by the third part, will be legally responsible in damage to the third party. The only approaches in which a company may be affected by the pre-incorporation contract is through the contract being replaced by it, and by the advantage of the pre-incorporation contract failed for desire of capable parties involved a replace or an assignment is impossible. In this situation, an individual who deal with the promoters of the company should still be prepare, the company could enter into a new contract on similar terms stated on the previous failed pre-incorporation contract. Seeing as a company does not have enough funds as well as the legal personality prior to the registration of the company, it would seem that it must be treated in similar manner as a bankrupt corporation. This would mean that the promoter of the company would only be liable for minimal damages for the breach of the warranty authority (Hambrook 1982).
References Pages
Austin, R.P.; Ramsay, I.M; Ford, H., 2015. Principles of Corporation Law. Ohio: Lexis Nexis
Carter, J.W; Peden, E.; Tolhurst, G.J., 2007. Contract Law in Australia. Ohio: Lexis Nexis
Courtney, W., 2007. Failed Pre-Registration Contracts and the Statutory Remedy. Company and
Securities Law Journal, [e-journal] 25 (4). Available at: http://www.worldcat.org/title/company-securities-law-journal/oclc/263088211
Hambrook, J.P., 1982. Pre-incorporation contracts and the national companies code: what does
section 81 really mean?. Adelaide Research & Scholarship, [e-journal] 8(1-2). Available at: http://www.austlii.edu.au/au/journals/AdelLawRw/1982/7.pdf
Palgrave., n.d. Corporate Law. [ppt]. Palgrave Macmillan. Available at: cdn-
media.macmillan.com.au/palgrave/lecturer-restricted/Chapter4.pptx
WIPO, 2013. Corporations Act of 2001. [pdf]. WIPO. Available at:
<http://www.wipo.int/edocs/lexdocs/laws/en/au/au196en.pdf> [Accessed 06 January 2016]
