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Introduction to Business Law - Essay Example

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Pre-incorporation Contracts and Section 51 of Companies Act 2006 Name Subject School Lecturer Date Pre-incorporation Contracts and Section 51 of Companies Act 2006 Introduction A pre-incorporation contract (PIC) is any contract that a company may have entered into with another party before it was actually registered as a company…
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Download file to see previous pages Such contracts may get accepted since they provide immense benefits for the company. However, there may be certain circumstances under which such contracts may not be valid especially if the company does not reach into formal incorporation and the individual who has entered into such contracts (usually the promoter) would be held liable for the contract. The promoter is a person who would perform the various activities on behalf of the company even before it has been incorporated and in this way is an agent of the company. He would make several leases and contracts for the company such that the company can be incorporated are able to start off with its required functions that may arise from its objectives. Hence, supposing the company fails to get incorporated or if the shareholders do not accept the contracts, then the promoter may be personally held liable for all the pre-incorporated contracts (National Paralegal College 2003). The problem is actually more serious when the promoter is dealing with a party who may be interested in starting their own company and the promoter is an implied agent for a non-existing birth upcoming company. Hence, the position of the promoter is said to be ambiguous (Singh 2011). On the other hand, contracts are utmost needed for parties to legally be obliged into providing services or goods for a company to be formed. Contracts may be formed at different stages before pre-incorporation and without the presence of pre-incorporation contracts; the company would not be able to come into existence (University of London 2007 p. 43). In several instances, the legal question has been asked whether it is possible for a company to enter into a legally enforceable contract even before it comes into existence. Hence during the period of promotion of the company, the promoters may act as agents (make decisions on behalf of the company), and their role would end once they appoint the board of directors for the company. According to common laws, pre-incorporation contracts would not oblige a company. Once the promoter incorporates the company and appoints the board of directors, he has to hand over all matters to the board of directors, including the contracts that were made during pre-incorporation. The board of directors may accept these contracts or reject it which in turn would hold the promoter personally liable and not the company. Basically there are three types of contracts that may be entered into including pre-incorporation contracts, residuary contracts and provisional contracts (Expedite 2010 p. 10.7). In this paper, the stand of the promoter would be assessed with regards to the pre-incorporation contracts based on the statutory provisions (such as Section 36C of the Companies Act 1985, section 51 of the Companies Act 2006 & Article 7 of the First Directive of the EEC1) and common laws (such as Kelner vs. Baxter2 and Phonogram vs. Lane3). Since the liability on the promoter is very high, recommendations would be made that the promoters can implement in order to reduce or avoid liability with the pre-incorporation contracts. Common laws on pre-incorporation contracts One of the leading and initial cases regarding pre-incorporation contracts was Kelner vs. Baxter4 held before the Court of Common Pleas in England. In this case, there were a group of promoters who had created a contract with other parties for a company ...Download file to see next pagesRead More
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