The common law view of pre-registration contracts was that the company did not exist for legal purposes until it had been formally incorporated (registered). This common law view resulted in company's being unable to enter a binding contract until they had been registered.
However "given the delays which can be encountered in the registration process, the promoter of a company may wish to enter into contracts `for' the company prior to its incorporation" . An example of this may be a promoter wanting to ensure a company will have stock on hand so it will be ready to operate when its registered. He might order stock and sign the contract in the unregistered company's name. Since a company did not exist before registration it could not sign a contract itself or appoint an agent to sign on its behalf. Therefore promoters could not be seen as the company's agent. Circumstances such as this are problematic and raise difficult questions as to the enforceability of the contract and the availability of damages for its breech.
At common law, a company was also incapable of ratifying a pre-registration contract after it was registered. "This was because under the law of agency , ratification has a retrospective effect and the contract was regarded as being made at the time it was entered into by the agent when the company was not in existence" . A company could only be held liable for a pre-registration contract if it entered into a new contract with the same terms as the pre-registration contract after it was registered. This is called novation'.
Seeing as though a company would not be held liable on a pre-registered contract, the courts recognised that innocent third parties could be prejudiced. Accordingly "the courts were prepared on occasions to infer an intension by the promoter to assume personal liability on the contract"
An important case is Kelner v Baxter (1866) where the promoters who had signed the contract on behalf of an unformed company were held to be personally liable. In this particular case the promoters of an unformed company agreed to purchase stock and signed an agreement, which stated on behalf of the Gravesend Royal Hotel Alexandra Hotel Company Limited'. A difficultly had arisen as since the company had not yet been formed the promoters who signed the agreement could not be seen as agents of the company. The court found the promoters to be personally liable. This case shows that a promoter who is aware when negotiating the contract that the company does not yet exists, faces a strong presumption' that the promoter intended to take personal liability, and will need to produce strong evidence to rebut this presumption.
One of the leading cases on the common law position of pre-registration contracts is the decision of the High Court in Black v Smallwood. The High Court rejected the argument that kelner v Baxter created a rule of law that whenever a person contracted for an unformed company, they must be assumed to have attended personal liability' . The outcome shows us that although promoters were sometimes held personally liable for pre-registered contracts (kelner presumption) that there are instances in which promoters were found not to have intended to undertake personal liability on a contract for an unregistered company. An example of this would be the promoter believing that he was acting for a company that was already registered.
The common law view also created problems for promoters. If a promoter used his personal money or performed services on an unregistered company's behalf, the promoter can not require the company when it was later registered to reimburse the expenses. The directors could decide to reimburse the money if they chose to do so but the promoter had no common law remedy if they refused.
To overcome the difficulties with the common law position on pre-registration contracts and to introduce a greater fairness and certainty into this area ss131-133 of the...
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