Analysis of Companies and Partnership Law Cases - Case Study Example

Corporations Law Research Part The pre-registration of contracts is included under the Corporations Act of 2001 and it provides some element of certainty on the issue of pre-registration and whether or not contractual provisions will be enforceable . 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.”1 When a formal contract has not been executed however, a promoter who is working on behalf of a client and carries out actions and secures oral agreements, may find itself in a difficult position from the point of view of enforcing the provisions of any oral, pre-registration agreements that are made. Promoters may not necessarily be the parties in a contract, because they are only working on behalf of one or the other party; as a result they are not protected in the event of a default by either party. 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.2 Promoters often seek to achieve agreement on contractual provisions before the expense of formally executing the contract is actually undertaken. Since there is no formal protection for third parties until the contract is actually formally executed in writing, the pre-registration of contracts provides grounds for legal enforcement when a third party is damaged by the failure of one or the other parties to adhere to contractual provisions. It leaves a third party especially vulnerable if the formal incorporation of the contract does not go through for any reason, such a last minute deadlock, insolvency of either party and similar reasons. In so far as common law provisions are concerned, 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 Baxter3 for example, Kelner was a promoter of a Company, i.e, the Gravesend Royal Alexandra hotel, intending to build and run a hotel, who entered into a contract to buy wine from Baxter. The plaintiff offered to sell a stock of wine for £900; an offer that was accepted by the defendants. At the time the contract was formulated, the company (i.e, the Alexandra hotel) had not yet been formed and since Kelner claimed to be acting as an agent for the hotel which had not yet been formally incorporated, the contract did not strictly exist. The agreement was incorporated, but the registration of the company was delayed and it finally went into insolvency. 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. The Court in this instance, was in agreement that the promoter was personally liable. In the absence of a contract, the hotel could be held liable only if someone from the defendant company was held personally accountable. The Court therefore held that the company was not liable, because it could not ratify a pre incorporation contract. As opposed to this, in the case of Black v Smallgood4, 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. Hence, in cases where the pre-incorporation of contracts is concerned, the status of the contracting person as an individual will largely determine whether or not the Corporations Act of 2001 can be successfully applied in claiming damages. Part 2: Summary: This case deals with the stocks held by four major stockholders in the SDl company, of which two shareholders, i.e, Bill and Anna have sold on their shares to other parties. The SDI Company, being in a financial bind because the demand for its services is declining, is keen to capitalize on the uncalled capital that is available with the four shareholders, in the following amounts (a) Anna - £60,000, Bill £75,000, Charlie - $140,000 and Dora £175,000. The problems associated with the calling up of capital however are that (a) Anna has sold on her shares to Docu Control, although SDI has not yet acknowledged that a transfer of shares has taken place and (b) Bill’s shares have been sold to Mystery Holding Pty Ltd, which has become insolvent and is in liquidation. Both Charlie and Dora have paid £140,000 each to SDI. Hence the capital still remaining uncalled is £35,000 from Dora, as well as Anna and Bill’s share of the uncalled capital. Issue: The major issues that arise in this instance are as follows: (a) Is the amount of £60,000 recoverable rom Anna or rom DocuControl, when Anna’s written request or transfer of her shares has not yet been formally acknowledged by SDI? (b) Can SDI recover the amount of £75,000 that is due from Mystery Holding, since the company is now insolvent? Rule: Section 131 of the Corporations Act of 2001 sets out the provisions for pre-incorporation of contracts, stating that a Company may be liable or any contract entered into on behalf of a Company that is in the process of being formally incorporated as a Company. Every contract, in order to be relevant and applicable, requires an offer, an acceptance and an intent to enter into a contract, before it can be legally enforced. The limited liability provisions of the Corporations Act of 2001 allow a Company to function with a separate legal personality, as laid out under Section 124(1). As a result, individuals within the Company will not be liable for the Company’s debts5. Section 471(A) will also apply, which states that when a Company is in the process of insolvency, a person cannot perform any exercise or function as an officer of the Company. Section 471(B) states that no legal claims can be instituted against the Company during the insolvency proceedings, but Section 471 (C) clarifies that the rights of secured creditors will not be affected. Application: In the case of Anna, the problem of pre-incorporation does arise, because SDI has not formally acknowledged her written request for transfer of shares. The question that arises is whether Anna has even been formally released from her ownership of shares and whether Docu Control can be called upon to pay up the uncalled capital that is due on those shares. While it could be said that there has been an offer, i.e, Anna making a written request for transfer of ownership of shares sold to Docu Control, there has been no acceptance. SDI has been silent and therefore no acceptance can be construed, as a result, the intent to enter into legal relations cannot be established either and proving the existence of contract may be a difficult process. The net conclusion that must be drawn in this instance is that Anna may be called upon to make good the payment of balance of uncalled capital, because from a legal standpoint, she is still the owner of the shares in SDI. Her sale of the shares to Docu Control could be legally held to be a private transaction, over which the courts cannot exercise any legal provisions. SDI may still be able to recover these dues from Anna. In the question of Bill’s uncalled for holding, the transfer has definitely been made to Mystery Holdings, because SDI has formally acknowledged the transfer of shares. Mystery holdings is the new owner and liable for payment of uncalled capital. The limited liability would also apply in this case, because Mystery Holdings is a corporate entity and no person in the company can be held liable for its debts, unless the company itself has been constituted as a partnership. Applying Rule 471A, no one can function as an officer of the Company, hence claims cannot be made against a particular person. Applying Section 471C however, the relevant issue would be whether the calling of capital can be held to be a secured debt. Since shares in another company may not be held to be secured debt that creditors can legally claim whether the debtor is insolvent or not, the recovery of these amounts may be difficult. Conclusion: In conclusion, SDI may need to press on with Dora to collect the balance of £35,000. Where Anna’s uncalled for capital is concerned, Anna could rely on her written notification to SDI, which the Company can contest and require Anna to pay up the amount. Alternatively, it could choose to acknowledge the written request at a late date and then put in a claim with Docu Control to collect the uncalled capital. Where the question of Bill’s capital is concerned however, it may not be possible for SDI to recover it because those shares have been sold to Mystery Holdings which is in insolvency proceedings and creditors cannot enforce collection of their debts unless and until the proceedings are completed and balance of funds left over after the secured creditors have been paid. References: Cassidy, Julie, 2006 “Concise Corporations law”, Federations Press. Case law: Black v. Smallwood (1966) 117 CLR 52 Kelner v Baxter (1886) 18 QBD 54 Lee v lee’s Airfarming Ltd (1961) AC 12 Salomon v Salomon and Co (1897) AC 22 Read More