The central focus of this essay will be on the legal principle of pre-registration contracts. As the definition of pre-registration contracts ( in legal terms) suggests, they are the kind of contracts that are intentionally entered into, on the behalf of a company that is not yet registered. In pre-registration contracts, a person that enters into an agreement on the behalf of an unincorporated company, is known as a promoter. A promoter is the person who intends to or will generate profit from the formation or the financing as a company. This means that if a pre-registered company enters into a contract, the promoter is entitled to the benefits and incur personal liability from that contract. Therefore, this has led to the introduction of Section 131 of the corporations act. This provides a different and modern view of pre-registration contracts compared to its common law definition. Accordingly, this will lead to a discussion of the common law view of pre-registration contracts and the definition that is provided by Section 131. A large emphasis will also be placed on the role of promoters and companies as well as third parties that are involved in this particular area of law. Pre-registration contracts are now highly uncommon, due to the consequences involved, as this essay will reveal.
According to the common law, if a company is not registered, then it is not recognized as a legal entity. This resulted in the common law rule stating that a company cannot be able to enter into a binding contract prior to them being registered by the ASIC (Australian Securities and Investment Commission) as outlined by Lipton and Herzberg (2001, p.141). Under the common law, it meant that a person was not legally permitted to bind contracts under a company name in the hope that the company would actually be registered. It caused the common law to believe that an unincorporated company is not bound by a contract as a result of an agreement being made between them and an opposing party. Furthermore, Lipton and Herzberg (2001, p.141) indicate that a person who has entered into a contract for a company, prior to it being incorporated, could be personally bound by that contract, only if they had the intention to be contracted as a principal. Therefore, a separate legal entity does not exist and there will be no capacity to enter into contracts at all. Under the common law, if opposing parties intend to enter into a contract with an unincorporated company, that particular contract will most likely be ruled by the courts as invalid.
The common law also takes into account, the contractual rights of third parties with reference to the intentional matters of the parties that are involved in a pre-registration contract, according to Davies (1999, p.142). As a result, there were difficulties for the opposing contracting party, under the common law rule. This is particularly demonstrated in Black v Smallwood (1966) 117 CLR 52, where a contract was entered into by Robert Smallwood and contained his signature under the name of “Western Suburbs Holdings Pty.ltd”. The company was not registered, however this was unknown to Black, as he assumed that the company was registered. Therefore, Black sued Smallwood on the grounds of specific performance of the contract that they entered into. The High Court determined that Smallwood and his partner; J.Cooper did not act as principals or agents for the unincorporated company, which meant that they were not liable to the contract.
The case of Newborne v Sensolid (Great Britain) ltd (1954) 1 QB 45 also generated a similar outcome. In this case, a contract for the sale of goods by Leopold Newborne (London) Ltd was signed by “Leopold Newborne”, which was the name of the man who intended to be a company director. By the time that the goods were delivered to the market, the market collapsed, and the buyers refused to accept the delivery. The court found that the contract was signed when the company remained unincorporated. It was then determines that Newborne was not liable as he had no intention of entering into the contract as a principal or an agent. The only party that appeared to enter into the contract was the company itself and therefore, Newborne was simply authenticating the expression of its will. This meant that a person could not enter into a legally binding contract on the behalf of a company, in the belief that it would be registered.
The introduction of Section 131 of the corporations act has been a replacement of the common law view of pre-registration contracts. According to Pentony, Graw, lennard and Parker (1999, p.577), Section 131(1) states that if a person enters into a contract on the behalf of an unincorporated company, then that company and the individual will be bound by that contract, once the company is registered and the contract is approved within a certain period of time. This was highlighted in the case of Bay v Illawarra Stationery Supplies Pty.Ltd (1986) 4 ACLC 429, where Bay; who was an accountant and being one of four promoters of a company, entered into a pre-registration contract for office supplies on behalf of the proposed company. When the proposed company did not consent to the contract, the suppliers took legal action against all four promoters under Section 131(2), because Bay was acting as a trustee for that company. The NSW Supreme Court ruled that only Bay was personally liable, as he was the only person who signed the contract. However, it was indicated that Bay would have a separate claim against the other three promoters if he acted as their agent in relation to the contract.
According to the cases that were mentioned above, Section 131(1) has changed the common law rule in which a company cannot approve or ratify a pre-registration contract. However, this does not apply where a company has actually been registered at the time when a contract is made, but the company has changed its name. This kind of conduct was exhibited in the case of Commonwealth Bank of Australia V Australian Solar Information Pty.Ltd (1987) 5 ACLC 124. Under Section 131(2), if the contract is not approved, or a company is not established within a certain period, the promoter will become liable to the opposing party for damages. This was described in Bay’s case. Furthermore, the promoter does not need to perform the contract, nevertheless, they must pay the damages that would have been awarded if the contract was accepted, but the company did not perform it. Therefore, Section 131 is mainly concerned with a contract that a person has entered into or intends to enter into, on the behalf of a company prior to its incorporation. This is largely relied upon the effectiveness of a company that comes into existence, which is similar with the company for whom an agent had initially entered into the contract.
Sections 131 and 132 of the corporations act originated from provisions which were first enacted in 1981. These were made inorder to meet inadequacies in the unenacted law regarding pre-registration contracts.
The main purposes of this according to Ford, Austin & Ramsay (2001, p.667) were:
– to enable pre-registration contracts to which it applies to be ratified by a company that is formed after the contract is entered into;
– to impose statutory liability upon a promoter to compensate the third party, where a contract to which section 183 applies is not ratified; and
– in relation to contracts in which the section applies to withhold from promoters from a later formed company and from third parties all rights and liabilities in relation to the contract, other than those that are provided by the section.
This also prompts Ford et.al (2001, p.667) to state that Sections 131 and 132 are suited to a contract in which a person has entered into, or intends to enter into, on the behalf of a company prior to its incorporation. Furthermore, it is presumed that the entity must be an organization which could be registered under the corporations law, according to Ford et.al (2001, p.668) . This leads to the ratification doctrine stating that the approving principal must be in a position to enter into the contract at the same time, when the agent initially commenced their actions. As a result, a person will not be automatically liable when they enter into a contract for a “Principal” that does not exist.
Under Section 132(1), if a person enters into a pre-registration contract, they will not bear any liability to pay damages, given that the opposing party signs a release to that effect, as outlined by Lipton & Herzberg (2001, p.142) . However, under Section 131(2), unless the person is relieved from all liability by the opposing party, a damages liability will be imposed on them when they enter into a pre-registration contract, despite if they are only acting on the behalf of an unincorporated company. Therefore, according to contract law, a promoter is bound by the contract and is entitled to its benefits under Section 131(1). Sections 131 and 132 do not apply to contracts that are supposedly entered into on the behalf of a company, even when the promoter who intended to enter into that contract, had not in actual fact, been gained by that company. The only way that a promoter can gain protection from the consequences of entering into pre-registration contracts, is if they gain a signed release from the opposing party under section 132. By virtue of contract law, according to Woodward and Bird (1999, p.172) , another way in which a promoter can avoid personal liability is where the company and the opposing party enter into a new contract, once that company is actually incorporated.
Furthermore, under Section 131(2), a promoter will be liable to pay damages to the opposing party of the pre-registration contract even if the company is or is not registered, but the contract is not approved of, or if another contract is entered into within an agreed time, then it should be a reasonable time, after the contract was entered into. The amount that the promoter will be liable to pay to the opposing party is the amount that the company would be liable to pay to that party, if they approved the contract, but it was not performed at all. Section 131(4) according to the Australian Corporations Legislation (2001, p.242) states that if a company consents to a pre-registration contract but does not perform any part of it, then the courts could order the promoter to pay all or part of the damages, in which the company is ordered to pay under Section 131(3), as stated by Lipton and Herzberg (2001, p.142) . If an opposing party sues for damages on the grounds of Section 131(2) because a company is registered, but does not approve the pre-registration contract or enter into another contract, the courts would do anything which it believes to be appropriate in the circumstances.
Lipton and Herzberg (2001, p.142) also emphasise that the courts could order a company to do the following:
-pay all or part of the section 131(2) damages;
-transfer any assets that a company received because of a contract to the opposing party; or
-pay an amount to that opposing contracting party.
However, there are exemptions which apply to promoters, companies and third parties, that could be involved in a contract. For example, it is argued by Ford et.al (2001, p.666) that if the promoters enter into a pre-registration contract whilst they are under the belief that the company is registered and had no knowledge of that company not being registered, then it would be very likely that the promoter had the intention of entering into the contract as an agent without incurring personal liability, which was illustrated in the case of Marblestone Industries. Ltd v Fairchild (1975) 1 NZLR 529 at 542. In some cases that involve writings which were completed by promoters, the courts would hold that the promoter did not sign the document as an agent, but just to originate the contractual execution of the company, given that they were under the belief that the company was not formed. A similar scenario arose in the case of Richardson v Landecker (1950) 50 SR (NSW) 250. The Promoter was not liable to the contract, because they did not act as an agent upon entering into the contract. As a result, in both these cases, the Promoters were not regarded as contractual agents in a transaction that is evidenced by a document.
Under the rules that govern the measure of damages for a breach of contract, the third party is entitled to recover an amount from the Promoter who is found to be acting as an agent for an unregistered company, to compensate them for not having an effective contract with them. As a result, if the principal is insolvent in the agreement, then only nominal damages will be paid to the third party. An example of this was portrayed in Hambrook(1982) 8 Adel LR at 125. Therefore, under enacted law, a pre-registration contract would not be effective to give the company any rights against the third party. This will particularly enable vendors to escape from an unprofitable bargain, unless they are bound to the promoters as Ford et.al (2001, p.666) . Therefore, Sections 131 and 132 largely depend to be performed on a company that is later incorporated and which can be easily identified as for whom the promoter had entered into the pre-registration contract. This means that the introduction of Sections 131 and 132 are different to the common law view of pre-registration contracts, in which they do not recognize an unincorporated company being in any position to enter into these type of contracts.
As a result, Sections 131 and 132 of the corporations act have been successful in changing the common law view of companies entering into contracts while they remain unincorporated. This is because that an unincorporated company cannot enter into any contracts or business transactions and therefore, the promoter would not be authorized to incur obligations on the behalf of that particular company. Furthermore, sufficient company description must be displayed at the time when a contract is entered into, inorder for an unincorporated company to be actually recognized as a company. Given that entering into pre-registration contracts falls within Section 131 and in which a company is recognized as being registered, then that company will be bound by the contract and should that contract be ratified, they will be entitled to the benefits of the contract that was entered into. It has been recognized, mainly through statutory law, that once a company is actually formed, they will be permitted to adopt pre-registration contracts, that are intended to be entered into on that company’s behalf, and in which the liability that a promoter has incurred will be automatically eliminated. This has been the main reason as to why that pre-registration contracts are now highly uncommon due to the consequences of a promoter entering into a contract with another party, on the behalf of an unincorporated company.
It has been seen that he introduction of Sections 131 and 132 have had significant effects compared to its predecessor’s view of pre-registration contracts, that being the common law. Despite, pre-registration contracts now being highly uncommon, in the past, they were almost inevitable as promoters entered into these agreements inorder to gain business securities for the unincorporated company, that they were acting on behalf of. Consequentially, pre-registration contracts caused problems for all parties that were involved, especially the promoters, as they had to incur personal liability, despite acting on behalf of the unincorporated company. Therefore, a company cannot have an agent before it is registered, according to Section 131, because it is presumed under the law of agency, that a principal exists, during the time that the agent had initially entered into the contract. However, the company’s ratification of a pre-registration contract, must be within a specific type, after the contract has been created, or before any time that it is agreed to, by the parties that are involved in the contract. As a result, Sections 131 and 132 indicate that a promoter can gain protection from liability in pre-registration contracts. The introduction of these two highly important sections of the corporations legislation has ensured that pre-registration contracts are now a thing of the past.