Practicability of Section 131 of the Australian Corporate Law - Coursework Example

Running head: Australia Corporate Law Name: University/College: Course: Lecturer: Date: Introduction This paper examines the place and practicability of Section 131 of the Australian Corporate Law. By and large, it is of paramount importance to make clear whether or not this particular section of the Corporation Act 2001 is really applicable and necessary in line with the court rulings of similar a nature. For purposes of accuracy and clarity, this paper purports to delineate judicial proceedings that would endorse or render irrelevant the need for Section 131. As such, the philosophy of application and necessity of this section revolves around the pre-registration contracts. If there be any reason to make the court believe that indeed no other legal precedence would provide appropriate justice other than Section 131, then we can confidently ascertain that the aforesaid section is indispensable. However, one must not fail to consider the role of technology and shelf companies when addressing issues of legality pertinent in pre-registration. Notwithstanding, the Corporation Act, 2001 is an act of parliament drafted and adopted to ensure a systematic legal sanity in the administration of justice and order as far as business affairs are concerned. In the event that evidence based analysis of the statutes finds the section dormant and void, then we shall have sufficient course to subject it to judicial amendments or abolition all together. The argument of the paper then is whether or not this law is still necessary in a country where an alternative law seems to work well in its place. Is Section 131 necessary? The section referred to as herein as S131 permeates the legal procedures applicable in matters concerning pre-registration of business entities and companies. It outlines the provisions of action and contractual liability of parties whereas a contract so defaulted was instituted before the said company was registered. Thus, the ratification of the contract in question remains debatable in the sense that it had not been accomplished within a reasonable period of time.1 To begin with, this section is further divided into four (4) subsections. Each subsection provides for what governs the parties to the contract in question, S131. In the event that one suffers economic injury as a result of the pre-registration contract, who shall be held liable. Is it the person who acted in the interest of the pre-registered company or the non-existing company itself? Besides, what legal reasoning would the court follow in the bid to restore order? Well, the Act is quite clearly drawn, but how well has it been applied in Australia. This is the bone of contention (Harris et al, 2008, p 413). Since its inception in July, 2001, the Corporation Act has been in play. Whereas it is emanating that Section 131 has been quiescent, it does not at all mean that there shall never be reported cases for which the section thereof would be applicable. Remember that the law is not a fault finding instrument but a peace restoration mechanism as observed, (Adams, 2004, vol 56 p 592). Thus, the existence of Section 131 could be the reason why companies have opted to go technology and shelf way as to avoid unwarranted contractual liability. I will not however fail to recognise the fact that judicial precedence has provided adequate legal remedy to lots of contractual conflicts. The case of Bay v Illawarra Stationary Supplies P/L [1986] ACLR 429 illustrates a very practical order of ruling. Although the case herein was presided way before the Corporation Act, 2001 came into being; it illustrates how to resolve conflicts where contract(s) are made and the company fails to ratify it on its registration. On the other hand, the law acknowledges the fact that judicial precedence takes priority in determining a ruling in a court of law. This is reasonably practicable in order to sustain the ruling of predecessors in cases of similar nature. However, the application of judicial precedence is subject to the discretionary powers of the attorney (Mason, 1992 vol 2(1) p 1). It is for this reason that there need to be an instrument on whose grounds a court attorney may make an independent ruling as provided in Section 131(3). There are substantial elements that would render a case to be slightly different. This is demonstrated in the case of Black V Smallwood [1966] 117 CLR 52. In its ruling, the court held that the promoter was liable to pay damages equivalent to the amount the company could have been liable for had it been registered. This ruling is a perfect component of the application legally provided in Section 131(2) of the Corporations Act, 2001. Though the case is a judicial ruling, subsequent cases of so similar a nature would be resolved by the capitulation of Section 131 as read with the said precedence. It is for this reason that I strongly believe the Section 131 should prevail. Thus, I commit to disagree with the fact that Section 131 is not necessary. 2 Shelf companies and technology have made Section 131 irrelevant First and foremost, I disagree with this perception. We must realise that not all the current firms are shelf and not that the upcoming companies will always be of that shelf nature. This is the punch line of argument for which Section 131 cannot be declared void and irrelevant. In a contemporary society where technology is fast sweeping all the market, there still exist a society of old folks who still believes in doing things the old way.3 They are part of us and we cannot lock them out of business simply because technology has come as the proverbial liberation of the 21st century, (Briggs and Evan, 2008 vol 60, p 288). The law is the law, and so be it. The section whose integrity is herein challenged was just drafted at the verge of technological advancement. The idea of having the Section 131 clause in the Corporations Act 2001 did not just rise from the blues. It was a result of the observed inadequacies of the incumbent Common Law practicable in addressing corporate conflicts. As illustrated in the case of Black v. Smallwood [1966] 117 CLR 52, the Common Law read with the statute provisions of judicial rulings, (Baxt et al, 2008, 10th ed.). Here, the Common Law excused the promoter from liability on grounds that there was no legal entity since the company in question did not exist. However, it held that the promoter would only be personally liable if his/her interest was to be one of the company’s principles. Hold it there! Section 131 makes it clear that the promoter shall be liable in the event that the company is not registered hence the contract thereof is not ratified. Precisely, the promoter shall be liable to pay an equivalent of the total sum the company would have been legally responsible to recompense for breach of contract thereon. This clause is applicable regardless of the impact of technology in the present business arena. On another note, the Section 131 therein claimed to be irrelevant is actually a redefined rule of law that makes technological corporate transactions more transparent and accountable. Mark that the same technology is the root cause of e-fraud of all times. The mess include cyber crimes and ghost companies that never existed and shall never be. The so called virtual companies that at times do lack the very basics of law especially in the Western continent. 4 From the era of goldsmiths, salt money and franchised banks, business had always been based on mutual trust and universal ethics of good faith, (Austin and Ramsay, 2010, 14th ed.). When technology came and took over the minds of men and women, fraud dragged itself along to the business community. Promoter became cynical including the ones masquerading as legal agent of the pre-registered companies. If such promoters and agents were to cause the honourable court to believe that their interest was genuine from whose default the party thereon suffered loss, then the injured party should have legal ground for action against the perpetrator. Where a pre-registration contract has been breached with total failure of consideration, what should the law do? It goes without a say that the law should protect the innocent and administer justice accordingly. However, the principles of Common Law came to be way before the complicated maze of technological advancements and the current shelf companies, (Pentony et al, 2009 3rd ed.). How then shall we address the injustices of such transactions where contracts can be entered even before the company acquires contractual capacity? What would happen if it fails to exist all together? Would the court sit and watch offenders go scot free? Of course the Common Law releases them from liability on the basis that the contract negotiated by them was not valid since the company for whose interest they acted did not exist. The solution saw the magnificent birth of Section 131 of the Corporations Act, 2001. As such, the technology and shelf companies have not rendered Section 131 irrelevant. In Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited [2005] NSWCA 319, the case has clearly distinguished the need for this section.5 Common Law is better for Promoters, Companies, and Third Parties As determined by the Common Law, it is sufficiently true that contracts so entered into by promoters prior to the registration of the company are null and void. Thus, the law shall not consider them enforceable. With this in mind; promoters, companies and third parties are at liberty not to accept liability for contracts under the Common Law, (Baxt et al, 2008, 10th ed). In the case of Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45, the court held that the defendant herein referred to as the Sensolid Ltd was not bound by the contract a promoted effected on its behalf prior to its registration. By such a ruling, the court acquitted the defendant of the charges. A similar verdict was held in Kelner v Baxter [1866] LR 2 CP 174. The case illustrated that indeed, the promoter was not bound by the pre-contractual contract. Where a promoter and the supposed company fails to ratify a contract or performs her part, the court shall not allow them to escape liability under the Act therein, (Section 131.2 & 3). To be on the safe side, promoters, companies and third Parties prefer drafting perpetual contract subject to the provisions of the Common Law. Consequently, I hold the opinion that indeed Common Law is better for Promoters, Companies and Third Parties. Issues of contractual liability Literally, refers to the power to enter into a contract enforceable by law between persons, parties (or their interests thereof) with legal rights to sue and be sued. Such parties are bound by the provisions of the contract and bear the burden of liability for defaults thereupon. In Common Law, contractual liability only exist and prevail between parties with contractual ability. As such, the law recognizes the aspect of legal entity of persons including registered companies whose rights are enforceable either by statutes or by Acts. Hence, it reasonably excuses persons without contractual right from liability in contracts entered into and defaulted by their pre-registered principals who did not exist at the time of the contract (Adams, 2004, vol 56). Such promoter(s) would be perceived to be contractually liable to pay damages for breach of contract instituted by them for pre-registered companies in which they had the intent of being principle(s) as expounded in Understanding Company Law, (Lipton et al, 15th ed. online) Under Section 131, the law recognises pre-registered companies as a legal separate entity and their implied promoters. Thus, the parties have contractual ability.6 In the event that a firm is either not registered or it failed to perform her part of the ratified contract, the court bestows on that firm and/or its promoters contractual liability for breach of the aforesaid contract. By its provisions, Section 131(3) empowers the court to order the concerned parties to pay whole or in part the determined damages payable to the injured party, (Pentony et al, 2009 3rd ed). Conclusion This section focuses on pre-registration contracts. As previously stated, not all companies that are in existence are shelf companies; consequently, it is wise to note that there are those that will indeed need the law. Doing away with this particular section simply because large companies have no more use for it is like denying justice to the smaller companies that still find it useful. Consequently, it is my belief that Section 131 of the Corporations Act, 2001 is necessary and has not been rendered irrelevant by shelf companies and technology. Its role of outlining the legal responsibility of parties therein as opposed to the mandates of Common Law that is best suited for promoters as justified by judicial precedence make it relevant today and in future. Therefore, this section should not be abolished. Reference Anthony Mason, (1992) Corporate Law: The challenge of complexity. Australian Journal of Corporate Law vol 2(1) p 1. Austin R.P. & Ramsay, I (2010) Ford's Principles of Corporations Law (14th ed ).Australia: Butterworths. Baxt, R., and Fletcher, K.L., Fridman, S. (2008). Corporations and Associations Cases and Materials on (10th ed) Butterworths, Australia. Blair, E., Elliott, KR., Manning, B. & Mossuto, M. (2004). International Law. Oxford University Press: Oxford. Briggs Kristyn and Evan Richards (2008) Time for a new business judgment rule? Keeping Good Companies vol 60, p 288 Cassidy, J. (2010) Corporations Law Text and Essential Cases, (3rd ed). Federation Press: Sydney Harris, Hargovan & Adams (2008). Australian Corporate Law, LexisNexis:Butterworths p.413 Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 15th edition Thomson Reuters. Retrieved, August, 19, 2010. http:// www.lipton-herzberg.com.au Michael Adams (2004). Whether to protect or punish: legal consequences of contravening the Corporations Act. KGC vol 56 p 592. Pentony, Graw, Lennard & Parker (2009). Understanding Business Law (3rd ed) Butterworths,. Vermeesch, RB. & Lindgren, KE. (2000), Business Law of Australia, (7th ed), Globe Press: Queensland. Read More