WEALTH LEGISLATION

QUESTION

VICTORIA UNIVERSITY

FACULTY OF BUSINESS

SCHOOL OF LAW

Education Centre of Australia

BLO 2205 CORPORATE LAW     ASSIGNMENT                  Semester 1  2012

Section 131 of the Corporations Act 2001 dealing with pre-registration contracts is no-longer necessary. This is clearly illustrated by the lack of reported cases since the introduction of provisions for pre-registration contracts into the legislation.

The provisions may have been relevant, even important, in a time when there were no shelf companies and we did not have the technology we have today. As this is no-longer the case it is time we simply reverted back to the common law on pre-registration contracts. The common law would make it simpler for the promoter, the company and the third party when making contracts let alone on matters of contractual liability.

Discuss

Your answer should discuss the common law, statute law and relevant cases.

(Total of 30 marks)

SUGGESTED REFERENCES:

Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 16 edition Thomson Reuters.

Students should remember to look at the Lipton and Herzberg website. www.lipton-herzberg.com.au

* Article: Wayne Courtney, Failed Pre-registration Contracts and the Statutory Remedy (2007) 25 C&SLJ 226

Harris, J. Hargovan, A.  Adams, M. Australian Corporate Law LexisNexis Butterworths 3rd edition, 2011

Austin R.P. & Ramsay, I., Ford’s Principles of Corporations Law, Butterworths, Australia, 14th edition, 2010.

Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition, 2008.

Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. CCH 11th edition 2010

Redmond, P., Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney, 5th, 2009.

Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 8th edition 2009

Li, G, Riley, S. Applied Corporate Law: A Bilingual Approach  LexisNexis 1st Edition 2009.

Cassidy, J. Corporations Law Text and Essential Cases. Federation Press, 3rd edition Sydney 2010

Harris, J. Corporations Law, LexisNexis Study Guide 1^st edition 2008

Harris, J. Butterworths Questions and Answers Corporations Law:, LexisNexis, 3rd Edition Sydney 2009.

Anderson C, Dickfos J, Nehme M, Hyland M, Dahdal A, Corporations Law – Butterworths Focus Series, 3rd Edition Butterworths, Sydney 2009

Tomasic,R.,Jackson,J.,Woellner,R., Corporations Law – Principles, Policy and Process 4th Edition Butterworths., Sydney, 2002.

Tomasic, R. Bottomley,S. McQueen,R. Corporations Law in Australia, 2^nd Edition Federation Press, Sydney 2002.

Latimer, P, Australian Business Law CC, 2011 Edition.

Vermeesch,R B, Lindgren, K E, Business Law of Australia Butterworths, 11th Edition, 2005.

Pentony, Graw, Lennard & Parker, Understanding Business Law 3rd ed Butterworths, 2009.

Crosling G M, Murphy H M, How to Study Business Law 4th Edition, Butterworths, 2009.

• See chapter 6 in Lipton,Herzberg & Welsh 16^th Edition

The papers will be marked on the following basis:

Referencing

In law, the preferred referencing style is footnoting. Students are reminded that they will lose marks if they merely reproduce passages copied word for word from texts and other references without attempting to convey information and express ideas in their own words.  Of course this does not preclude the intelligent use of relevant quotations in respect of which proper references are given.

It should be noted that the references must be given in respect of all material included in the essay.  References are not to be confined to situations in which the writer is citing a particular case or using a direct quotation.  For example, if the writer is putting forward a legal proposition or using a statement or idea drawn from a specific source, that source must be acknowledged by reference.  It is essential that references be properly acknowledged at all times and marks will be deducted if this is not done.  References may be acknowledged by numbering them consecutively throughout the essay and by giving details of the references by way of numbered footnotes at the bottom of the relevant page, or by way of a list at the end of the essay.  Note carefully that the edition and page numbers of references must be given: it is not sufficient to merely give the name and author of the work.  When referring to cases, the full case citation must be given.  In addition, a bibliography should always be included at the end of the essay.  Students should contact the lecturer if they are in any doubt as to the requirements for the giving of references.

Referencing: Footnotes or end-notes must be used to acknowledge the source or sources of information contained in the assignment.  Footnotes are preferred, but either will be accepted. In regard to the acknowledgment of references and matters of style and presentation, students are referred to:

1. Australian Guide to Legal Citation – VU Library Homepage. For all referencing questions for your assignment or any legal writing See: Australian Guide to Legal Citation: The VU Library has a 4 page edited version under Information for researchers: Click on Information for researchers and then click on Referencing and then click on Style Manuals. A copy of the Australian Guide to Legal citation is also available on Webct.

See:  http://w2.vu.edu.au/library/referencing/files/AGLC2.pdf

Also see Monash Legal Abbreviations for abbreviations of legal publications.

See: http://www.lib.monash.edu.au/legal-abbreviations

2. G.R.E. Phillips and L.H. Hunt, Writing Essays and Dissertations,

3. G Campbell, The Little Black Book. (available in the bookshop).

Students are required to pay careful attention to spelling, expression, and legibility in the writing of their essays.  There should be a margin on the left hand side of each page.  Students should keep a copy of the essay submitted.

Format

• Typed preferably and double-spaced
• Title page with student name and number, Subject code and name, topic
• A4 paper
• Sequential page numbering
• No folders

Assignments must be typed (word processor), using one side of the page only and leaving a wide margin.  The word limit is 2,000 words.

SOLUTION

Introduction

A propriety company comes into existence after its registration, unlike the Shelf Companies which come into existence just by the transfer of the shares. In Australia companies are being registered under corporation Act 2001. It is a common wealth legislation administered by ASIC. Registration of a company makes it a separate legal entity than its members. It can hold property in its own name.  It can sue and can be sued. Also it is a declaration to the public about the company’s capital, shares, assets and limitations if any.[1] Section 124 of Corporation Act 2001 gives Company same status as of an individual, it can make an agreement. Whereas, section 125 says that the act of a company to enter into an agreement will not be invalid only because this is beyond the powers on its incorporation. [2] Registration is the most important thing and not just a task to be completed or just a step towards establishing a business.

Pre registration contracts

Before registration of the company, they might lease or contract for the purchase of some premises from where they intend to operate the company.  These contracts are known as pre registration contract or pre- existence contracts as they are made before the actual existence of the corporation. Generally nobody wants to be responsible for these pre registration contracts so, the question arises is that then who will be held liable for those contracts. The promoters, who signed the contract or the corporations once they came into existence after the registration of contract?[3] Under section 126 of the Act (Cth) gives power to the Company that it can authorize any of its agent expressly or impliedly to contract on its behalf. The person authorized by the company may make, ratify, verify, modify and discharge the contract. The legislators have now incorporated these provisions into various statutes. In Australia these provisions or the pre registration contracts are now dealt under section 131-133 of (Cth).[4] It provides that the contract made by the promoters of the company before the registration of the contract, is enforceable, as per section 131(1), with this provision that it should be at first instance ratify by the corporation after its registration, before the said time and if there is no time fixed, then before the reasonable time.  The provisions of Australian law are very much influenced by the common law provisions. First we should look what common law says about the pre-registration contracts.

Common Law On pre-registration contracts

Common Law view is that a company or corporation can not be considered as existing for legal purposes until its being registered. This view makes company incapable for entering into any contract before registration.[5] If it took much time for any company to be registered, and meanwhile the promoters of the company feels it necessary to buy some stocks for the company and signs the contract. Now the question arises about the contracts validity because before registration the company cannot authorize any person or its promoters to enter into any contract even for the benefit of the company. These situations cause many problems in enforceability of such contracts and the damages arise from its breach.[6]

In common Law a company cannot even ratify the pre existing contract after it has been registered. (Kelner v Baxter [1866] LR 2 CP 174.) The reason is related to the Law of Agency because in it the ratification is made retrospective and a company can not have an agent prior to its registration. In the pre- registration contracts cases it can not be applied retrospective because the company was not in existence at the time when the contract is made.  The contract can only be ratified only on the ground that a new contract should be made on the terms and conditions exactly similar to the earlier one. This is known as ‘Novation’ contract.

The situation can be easily understood by the case of Poonindie Bricks Pvt. Ltd V Bascombe.[7] In this case, persons as nominee of the company, before its registration entered into a lease contract for ten years and after its registration the company approved the lease agreement and started paying the rent. In tenth year of lease, Bascombe tried to exclude Poonindie from the lease contract. Believing the contract to be a valid one, he proceeded to the court for claiming his rights. It was held by Legoe J that any attempt to ratify and adoption of another contract is invalid can court could not rely on the lease. Another case on the same issue is regarding the inability to claim damages from the company if the contract is a preexistence contract. In Re Dale & Plant limited[8], it was held by the court that the claim of secretary of the company who was appointed on the basis of a pre registration contract, which was further attempted to be ratified is not valid and hence he can not claim from the company the damages arise out of it but he can only be entitled for the quantum merit.[9]

These circumstances created much problem for the third party who being ignorant many times, has to suffer loss because of this common Law rule. Later on, with the case of Black v Smallwood [1966] 117 CRL 62, court rejected the rule of law established in Kelner v Baxter on the grounds that the promoter or the person who was acting on behalf of the company at the time of contract, is presumed to have taken the liability of the contract.[10] The rule created much problem for those small companies which are not listed and have no legal knowledge to avoid the liability.[11] This rule also created many problems for the promoters.

Statutory remedies for the problem of pre- registration contracts

To minimize the difficulties created by the rule on pre-registered contracts by Common Law, Section 131-133 were incorporated under Corporations Act 2001.

While many other countries made early attempts to find the way to solve these difficulties. In Australia, the first attempt was made in 1979 by the Victorian Law reform Commissioner to introduce the change in the legislation. The original version was created in 1980 after the criticism on the difficulties created by Common Law.

Section 131 gives power to the third person to enforce a pre registration contract with a company, which ratifies it after the registration. It also provides that if the company does not come into existence or the contract is not ratified by the company then the person who was representing company in contract will be held liable for the damages suffered by the third person.  This section has the scheme of balancing the responsibility and liability on to the promoters and the corporations of a pre registration contracts while protecting the interest of the third party.[12] Under Section 131(1), a company is bound by the terms and conditions of the pre- existence contract, if it ratifies it after coming into existence within the agreed time or if there is no time specified in the Contract then within the reasonable time.  In, Common wealth Bank of Australia v Australian solar Information Pty. Ltd. [1987] 5 ACLC 124 it was held that the provisions of section 131 will only apply in the contracts made before the incorporation but not after it, even if the company changed the name.[13] Section 131(2) provides for the liability of the person who acts on behalf of the company, he will also be liable if he is acting on behalf of other promoters in the company. In Bay v Illavarra Stationary supplies[14] that out of four promoters only one entered into a contract for the office supplies before registration, then only he will be liable for the damages caused to the plaintiff in case of company’s failure to ratify the contract and not the other promoters. In these situations, court will do whatever they thing fit either to pay all or part of the money agreed in the contract or transfer the property that the company  received out of the contract.[15]

Section 132 of the Act releases a person entered into contract with the representative of a non existing Company from all liabilities but it does not give him the right of indemnity against the company even if the person is acting or purports to be the trustee of the Company.[16]

Previously these provisions were incorporated under section 81 on the basis of Minogue report but with some criticism in drafting it was further included in Section 131(2).  The approach of the Corporation Act was to create a fictitious contractual situation and the damages are to be calculated on the basis of damages would have been caused if the contract had been discharged on the ground of breach. When the company after ratifying a pre existence contract and fails to oblige the terms and conditions of that contract will be held liable for the breach of Contract and will allow the courts the pierce the corporate veil to measure the damages for the third party.

Extra protection is given to the person who contracts with the company before the incorporation of the company. The purpose behind it was to restrict a person from deliberately establishing an asset less company just to ratify the pre existence contract made by him for his benefits.

Conclusion

No doubts, Section 131 to 133 of Corporation Act 2001, have gone way long to rectify the problems raised during the enforcement of contracts made before the existence of a company.   The statutes in Australia gave much relief to the third party who contracts with the company before its incorporation than the provisions of Common Law. There are also other remedies available under the torts law if there is any breach of contract. These provisions are important when the company to be established is a propriety company which needs registration otherwise the ‘Shelf’ companies which are the result of new technologies do not need to be registered. These are the companies which can be incorporated just by the transfer of shares to it; the only time which it takes is in the transferring of the shares. We can say that the provisions under section 131 of Corporation Act 2001 are no more applicable because of the decreasing trends of time taking propriety companies. Now Online registration of Companies are much more easier.

References:

1. Paul Latimer, 2012, ‘Incorporated Company’, Australian Business Law, 31^st ed. P-685.
2. Julie Clarke, 2011, ‘Corporations Act 2001’, Australian Contract Law, viewed on 25^th may 2012 from http://www.australiancontractlaw.com/legislation/cthcorporations.html
   1. Roman Tomasic, Stephen Bottomley and Rob McQueen, ‘Corporations Law in Australia’, 2001, Federation Press, P-218.
   2. Wayne Courtney, Failed Pre-registration Contracts and the Statutory Remedy (2007) 25 C&SLJ 226, University of Sydney, Lawbook co.
   3. Austin R.P. & Ramsay, I.M, ‘Ford’s Principles of Corporations Law’, Butterworths, Australia, 14th edition, 2010.

1. Julie A. Cassidy, 2006, ‘Promoters and Pre-Registration Contracts’, Concise Corporation Law, Federation Press, P-68.
2. Lipton, P., and Herzberg, A., Welsh, M, ‘Promoters and Pre-registration Contract’ Chapter 6, Understanding Company Law, 15^th edition Thomson Reuters.
3. Anderson C, Dickfos J, Nehme M, Hyland M, Dahdal A, Corporations Law – Butterworths Focus Series, 3rd Edition Butterworths, Sydney 2009

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