Pre-Registration Contracts & Internal Governance Rules

Topics: Corporation, Company, Companies law Pages: 15 (3971 words) Published: January 12, 2011
Law of Associations 200018

Copyright © 2002 Thomas Feerick Lecturer School of Law, UWS

Lecture 6 – Week 6

Pre-Registration Contracts &
Internal Governance Rules

This lecture has 2 parts. Part 1 examines the legal implications of ‘pre-registration contracts’. Part 2 discusses ‘internal governance rules’.

1.Pre-Registration Contracts

The people who form a company or procure its formation are commonly known as ‘promoters’. The courts have construed the term ‘promoter’ broadly. In Twycross v Grant (1877) 2 CPD 469, for example, Cockburn CJ declared that a promoter was:

one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.

In Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, the High Court held that non-active participants in the formation process may be promoters. In this case it was alleged that various people associated with a newly formed company (Mandalay Pty Ltd) had breached their fiduciary duties to the company. They had participated in a scheme whereby the new company purchased land and shares at inflated prices, producing substantial gains for the participants. The High Court first confirmed that promoters owe fiduciary duties to their charge. The second issue was whether all of the defendants were promoters, as some were not directly involved in the formation process or the impugned transactions.

Dixon CJ, Williams and Taylor JJ jointly declared that:

persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters.

The Corporations Act does not provide a definition of ‘promoter’. However, s 9(1) of the former Corporations Law provided an exclusionary definition of ‘promoter’ which applied only in the context of issuing a prospectus. The definition excluded:

a person [who] by reason only of acting in proper performance of the functions attaching to his professional capacity or his business relationship with a promoter of the corporation.

Promoters frequently incur liabilities personally to cover the expense of forming a company or to secure property or rights for the unformed company to utilize once it comes into existence. Alternatively, promoters may purport to incur debts or contractual obligations in the name of, and perhaps for the benefit of, an unformed company. Such transactions originally were described as ‘pre-formation’ or ‘pre-incorporation’ contracts. Now they are called ‘pre-registration’ contracts, presumably in order to highlight the point that a company comes into existence immediately upon registration: s 119. Three questions frequently arise in relation to pre-registration contracts:

• Is the newly formed company liable to perform or pay damages for breach of a contract that was purportedly made in its name or on its behalf prior to its registration?

• Can the newly formed company seek specific performance or damages for breach of a contract that was purportedly made in its name or on its behalf prior to its registration?

• Is the company promoter personally liable to perform the contract or pay damages to a third party if the company fails or refuses to perform contractual obligations that were undertaken in the company’s name prior to its registration?

These can be solved by applying three basic propositions:

• A company does not become a ‘legal person’ and therefore does not exist in law until and unless it has been formed (ie, registered);

• A non-existent legal person cannot have legal rights or obligations and therefore cannot enter into contracts or incur debts; and

• A person cannot be an ‘agent’ for a non-existent principal.

The Corporations Act deals with pre-registration contracts in Part 2B.3

While s 133 states that Pt 2B.3 ‘replaces any rights or obligations that anyone would otherwise have on the...
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