Concise Corporations Law - Case Study Example

Section 131 of Corporations Act of 2001 The formation of a Company generally occurs after the correct documents have been filed in order to registerthe Company. Documents such as the Memorandum of Association, the Articles of Association and other relevant documents that spell out the business of the Company, the distribution of shares and other relevant provisions, need to be filed with the Registrar of Companies. Section117 of the Corporations Act of 2001 clearly sets out the relevant provisions and procedures that must be followed by a person/s who wish to register their Company.1 During the period while the documents are being prepared and filed, the corporation that is to be set up might choose to enter into contracts with other parties and Section 131 of the Corporations Act of 2001 deals with the pre-registration of contracts and states as follows: “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 becomes bound by the contract and entitled to its benefit if the Company, or a Company that is reasonably identifiable with it, is registered and ratifies the contract within the time agreed to by the parties to the contract.” (www.austlii.edu.au). The Corporations Act of 2001 specifically states that “a Company has the legal capacity and powers of an individual.”2 As Cassidy points out, the purpose of inclusion of Section 131 in the Corporations Act of 2001 was mainly for the protection of third parties in a contract, when a promoter enters into or purports to enter into a contract on behalf of the Company that is to be registered in the future.3 In so far as common law provisions are concerned however, pre-registration contracts do not have much validity because for legal purposes, a Company does not exist until it is formally incorporated or registered. In the case of Kelner v Baxter4 for example, Kelner was a promoter of a Company intending to build and run a hotel, who entered into a contract to buy wine from Baxter. At the time the contract was formulated, the company had not yet been formed and since Kelner claimed to be acting as an agent for the hotel, the contract did not strictly exist. As a result, when Baxter failed to deliver the wine according to the contract, the hotel was placed in a position where it could not take any action to sue Baxter, even if it had been successful in ratifying the contract, because applying common law provisions, a company is also incapable of ratifying a pre-registration contract even after it is ratified. As Cassidy has pointed out, Section 133 replaces any of the rights and liabilities that anyone would otherwise have under a contract executed prior to registration5. Prior to Section 131, Section 81 of the Companies Code was held to apply in the case of those contracts where no such company as specified in the contract, exists In examining the association of Section 131 with the sphere of common law, Cassidy has detailed the case of at a time a pre-incorporation contract is executed, as was held in the case of Commonwealth Bank of Australia v Australian Solar Information Pty Ltd.6 In order for Section 81 to apply, the company should not have been formed at all. The Defendant Towrang Pty Ltd in the case in question, changed the name of their company, prior to which they had incurred some debts payable to the Plaintiff. While the Plaintiff sought to enforce these debts by bringing a claim to apply Section 81 as a predecessor to Section 131, but this motion was struck down by the Court. Where the common law position on pre-registration of contracts are concerned, two cases are significant. One of them is the case of Black v Smallgood7, in which the Court ruled that a person could be held liable for any provisions made prior to registration if the person in question was contracting as a principal. This may be applicable when a person is contracting as a person rather than a corporate entity; hence the contract becomes a completely different matter because this attributes a status of individual to one of the contracting parties; although the individual in question may be a principal in the corporation, s/he is nevertheless contracting as an individual. The provisions laid out in Section 131, do not however allow for the application of such a position, because the various provisions of this section do not allow for it. One of these is the specification that the contract should be ratified within a reasonable time. But as shown in the case of Aztech Science v Atlanta Aerospace (Woy Woy)8, the Court found it difficult to quantity the notion of reasonable time because it is very vague, and concluded that the requirement of reasonable time was to be applied to both registration as well as ratification. This case demonstrated how it was difficult to establish the existence of a prima facie contract under Section 131, applying the criterion of a reasonable time period. The Court finally resolved it by holding that the reference to an agreed time did not mandate the existence of a legally enforceable contract. The parties in this case had mutually agreed to a time for the unregistered company to be registered and ratified and the Court held that this condition did apply in the instant case, because the parties had orally agreed to extend the time limit available and both incorporation and registration had been completed within the required time frame. Secondly, another requirement under Section 131 is that in order for a Company to be able to ratify a contract it must be reasonably identifiable with the proposed company. But this is yet again, another criterion which is difficult to establish with any degree of certainty. Under the Corporations Act, Section 125 (former sections 161-62) have resulted in an abolition of the ultra vires doctrine, which in effect, allows a Company to ratify a contract this is actually outside its objects. Should this happen however, it would make it even more difficult to establish the reasonably identifiable criterion required under Section 131 of the Corporations Act. When a finding of ultra vires can be made, it essentially means that the company has acted outside the scope of its objects and under common law provisions, a contract entered into in this manner can be declared null and void. In the case of Ashbury Railway Carriage and Iron Co v Riche (1875)9, Ashbury stated that the objective of the Company was to build and supply railway stock. Subsequently however, the Company entered into a contract to build a railway system in Belgium, but failed to perform he contract. Riche sued under Section 131 and lost, because the contract fell into the category of ultra vires, i.e., falling outside the scope of the objects of the contract. The Companies Act 1989 however, makes adequate provision for just such an eventuality, because based upon the Articles of Memorandum, it clearly states that the validity of the acts done by the Company will not become questionable on grounds of lack of capacity. Hence, the validity of pre registration contracts becomes very difficult to establish if ultra vires applies, because common law provisions will apply, unless they are provided for as laid out in the Companies Act 1989. Under the provisions of the Companies Act, a company cannot use the defense of ultra vires in a legal action and cannot put forward the defense of ultra vires to justify non performance of a contract. Another important aspect which needs to be considered while evaluating the validity of pre-registration contracts is the effect of ratification. Under the provisions of Section 131, a pre-registration contract would be valid if it is ratified within a reasonable period of time. Applying the common law position however, a contract has a retrospective operation, i.e, it becomes effective from the time that the contract is entered into. The forerunner to Section 131(1) of the Corporations Act of 2001 was Section 183(3) which clearly stated that in terms of ratification of a contract, the Company was bound as if “the Company had been formed before the contract was entered into and had been a party to the contract.”10 This Section 183(3) appears to support an interpretation that is similar tot he stipulations of Section 131(1), but the exact time specification as laid out under Section 183(3) is not reproduced in Section 131(1), therefore the question of whether or not the contract has a retrospective effect remains unclear. The very lack of definitiveness in specification of a time for the conclusion of a registration and ratification of a contract makes it difficult to clearly establish the time from which the contract would start to have a retrospective effect. Conclusions: The corporation itself is a perpetual entity, existing until it is wound up and while individuals may deal with a corporation11, they cannot claim any interest in the assets or property of the corporation.12 Hence, the corporation has a definite legal identify, thus when a corporation enters into contracts as a legal corporation per se, it becomes possible to establish the validity of any contracts the corporation enters into. The principles of common law can also be applied to contracts executed in this manner, because the corporation exists as a legal entity. As detailed above, establishing the validity of pre registration contracts is a much more difficult exercise, because the parties to the contract have not as yet been legally constituted in a manner that enables them to enter into a contract. The corporation as an entity does not come into existence unless it has been duly registered and ratified. As a result, initiating and pursing any legal action on the basis of a contract entered into before one of the parties, i.e, the corporation has been established as a legal entity is difficult. Moreover, as detailed above earlier, the provisions of Section 131 are also difficult to establish clearly, as also demonstrated in the case judgments which have been cited. First, establishing what exactly constitutes a reasonable period of time for the registration and incorporation of a contract is a difficult exercise. Secondly, establishing whether the contract has been entered into by a business entity that is reasonably identifiable with the proposed company is also a difficult exercise and cannot be easily determined. The doctrine of ultra vires also demonstrates the inapplicability of Section 131, because it would automatically render a contract null and void, so that a contract that has not been ratified would have an even greater chance of being declared null and void by the courts. In particular, it is the failure of Section 131 of the Corporations Act to fall within the provisions of common law which render it largely inapplicable. Moreover, with the passage of other legislation such as the Companies Act and the modifications which have been made to the Corporations Act in recent years, the question of contracts entered into during the pre-registration period does not really apply. As may also be noted from the detailed description above, most of the contracts pertaining to pre-registration such as Black and Smallgood have been concluded in earlier years and there are very few recent cases which have arisen in this regard, which further substantiates the argument that Section 131 is no longer applicable. References: “Corporations Act 2001 – Section 131”, Retrieved September 7, 2010 from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s131.html Cassidy, Julie, 2006. “Concise Corporations Law”, Federation Press Cases cited: Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7HL 653 Aztech Science v Atlanta Aerospace (Woy Woy) (2005) NSWCA 319 Black v. Smallwood (1966) 117 CLR 52 Commonwealth Bank of Australia v Australian Solar Information Pty Ltd (1987) 5 ACLC 124 Kelner v Baxter (1886) 18 QBD 54 Lee v Lee’s Air Farming Ltd (1961) AC 12 MaCaura v Northern Assurance Co Ltd (1925) AC 619 Read More