Pre registration contracts Essay

This essay has a total of 1566 words and 7 pages.

Pre registration contracts

The common law view of pre-registration contracts was that the company did not exist for
legal purposes until it had been formally incorporated (registered). This common law view
resulted in company's being unable to enter a binding contract until they had been
registered.

However "given the delays which can be encountered in the registration process, the
promoter of a company may wish to enter into contracts 'for' the company prior to its
incorporation" . An example of this may be a promoter wanting to ensure a company will
have stock on hand so it will be ready to operate when its registered. He might order
stock and sign the contract in the unregistered company's name. Since a company did not
exist before registration it could not sign a contract itself or appoint an agent to sign
on its behalf. Therefore promoters could not be seen as the company's agent. Circumstances
such as this are problematic and raise difficult questions as to the enforceability of the
contract and the availability of damages for its breech.

At common law, a company was also incapable of ratifying a pre-registration contract after
it was registered. "This was because under the law of agency , ratification has a
retrospective effect and the contract was regarded as being made at the time it was
entered into by the agent when the company was not in existence" .

A company could only be held liable for a pre-registration contract if it entered into a
new contract with the same terms as the pre-registration contract after it was registered.
This is called ‘novation'.

Seeing as though a company would not be held liable on a pre-registered contract, the
courts recognised that innocent third parties could be prejudiced. Accordingly "the courts
were prepared on occasions to infer an intension by the promoter to assume personal
liability on the contract"

An important case is Kelner v Baxter (1866) where the promoters who had signed the
contract on behalf of an unformed company were held to be personally liable. In this
particular case the promoters of an unformed company agreed to purchase stock and signed
an agreement, which stated ‘on behalf of the Gravesend Royal Hotel Alexandra Hotel
Company Limited'. A difficultly had arisen as since the company had not yet been formed
the promoters who signed the agreement could not be seen as agents of the company. The
court found the promoters to be personally liable. This case shows that a promoter who is
aware when negotiating the contract that the company does not yet exists, faces a strong
‘presumption' that the promoter intended to take personal liability, and will need to
produce strong evidence to rebut this presumption.

One of the leading cases on the common law position of pre-registration contracts is the
decision of the High Court in Black v Smallwood. ‘The High Court rejected the argument
that kelner v Baxter created a rule of law that whenever a person contracted for an
unformed company, they must be assumed to have attended personal liability' . The outcome
shows us that although promoters were sometimes held personally liable for pre-registered
contracts (kelner presumption) that there are instances in which promoters were found not
to have intended to undertake personal liability on a contract for an unregistered
company. An example of this would be the promoter believing that he was acting for a
company that was already registered.

The common law view also created problems for promoters. If a promoter used his personal
money or performed services on an unregistered company's behalf, the promoter can not
require the company when it was later registered to reimburse the expenses. The directors
could decide to reimburse the money if they chose to do so but the promoter had no common
law remedy if they refused.

To overcome the difficulties with the common law position on pre-registration contracts
and to introduce a greater fairness and certainty into this area ss131-133 of the
Corporations Act 2001 deal with contracts made before a company is registered. A major
impact of section 131 is that it "enables the outsider to enforce a pre-registration
contract against the company if it ratifies the contract after it has been registered.
However, if registration does not occur or the company does not ratify the
pre-registration contract , the person who entered the contract on behalf of the company
becomes personally liable to pay damages to the other party" . Section 131 is only for
contracts which are made before a company is registered. It does not apply where a company
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