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Company Law legislation - Essay Example

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The pre-incorporation contracts are entered into on behalf of the company by the promoters of the company. Usually such contracts may include leasing or purchasing real estate property and equipment, hiring of executives, financial arrangements with third parties or agreements with prospective clients.
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Company Law legislation
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Extract of sample "Company Law legislation"

Download file to see previous pages 'A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.'
The UK legislation provides that promoters are personally liable on pre-incorporation contracts, a reform of the common law position which made liability of the promoter dependent on the manner in which the contract was signed. (Mrs. Janet E. Morgan)2
As the company Beta Limited was not in existence, at the time the lease contract was entered into whether Sam being the promoter is liable on the contract depends on the capacity in which he purported to sign the lease contract. Since the contract was signed by Sam as promoter using the wordings "on behalf of Beta Ltd", it can be assumed that he signed the contract in his personal capacity and hence, he becomes personally liable, under the contract for any consequences. This position was confirmed by the court in the case of Phonogram Limited v Lane3
The position would be different if he has signed as "Beta Limited per Sam" then it amount to his signing on behalf of the company. In this case he will not be liable as he has signed on behalf of a company which does not exist.
Liability of Beta Limited:
Since the contract was signed by Sam using the words 'on behalf of Beta Ltd' the company does not become liable on the lease agreement as was decided in the case of Phonogram Limited v Lane
However since the company has continued to pay the lease rent after occupying the premises it amounts to ratification of the action of Sam in leasing the premises on behalf of the Beta Limited entered into prior to incorporation.
At the point when Gamma limited wants Beta Limited to quit it cannot pass on any liability arising there from to Sam under the plea that the contract is entered into prior to incorporation.
Another example to illustrate this case is the decision In Newborne v Sensolid (GB) Ltd4 Here a contract was entered by the plaintiff company with the contract signed as Leopold the promoter as "Yours faithfully, Leopold Newborne (London) Ltd". The court held that neither the company nor the promoter could compel the defendant to enforce the contract as the contract was neither purported to be signed by the company nor the promoter.
Yet another case that proves the invalidity of the contract if the company was not in existence at the time the contract was entered into can be seen in the case of Cotronic (UK) Ltd v Dezonie5 where Dezonie signed a contract for and on behalf of his company and unknown to him the company was struck off the register about years earlier. On knowing this that the company was no more in existence, Denzonie registered another company in the same name and tried to interpret s. 36c to his advantage. The court held that s. 36c would not be applicable as the case was relating to a company that had been formed many years before.
The decision of the court in the case of Oshkosh B'Gosh v Dan Marble Inc and Another6 is also ...Download file to see next pagesRead More
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