Promoter and Ratification

Topics: Fiduciary, Contract, Corporation Pages: 10 (3366 words) Published: August 9, 2010
PART A
(a)
Promoters & Pre-registration contract
A promoter is a person who is involved, actively or passively, in forming a company, raising its capital and establishing its business at any period prior to the company obtaining a certificate of complete registration: Twycross v Grant.[1] Part 2B.3 of Corporations Act 2001 (Cth) purports to overcome the common law difficulties of earlier cases based on the law of agency[2] and provides an exclusive set of rules to determine primary and secondary liabilities under pre-registration contracts.[3] Section 131(1) describes it as contracts made ‘on behalf of’ or ‘for the benefit of’ a company before it is registered. The contract with Ted’s Technology Pty Ltd is apparently ‘for the benefit of’ or ‘on behalf of’ the proposed company as Petunia and Paul signed the purchase contract in the name of Lifestyle Ltd as directors. Also, the company was yet to be incorporated at that time of the contract. These are the key attributes that are sufficient to attract the terms of s 131. Ratification

The primary liability lies on Lifestyle Ltd by a pre-registration contract if it is registered and ratifies the contract: s 131(1). The company is registered as given fact. Ratification means that a company has adopted or confirmed the pre-registration contract.[4] Under s 126(1) a company’s power to ratify may also be exercised by an individual acting within the company’s express or implied authority and on behalf of the company (derived from agency law). Ratification may be express or implied by conduct and in Herrman v Simon[5], the doctrine was said to be based upon principles of estoppel for implied ratification. Thus a company which acts as though the contract has been ratified may be held to have ratified it even though there may be no formal resolution to that effect. Assuming that the company was registered when Ted called Petunia, she as a director has an actual authority to ratify the contract. The goods were delivered and a month has passed with Petunia’s assurance of payment. Keeping the goods for a month without returning is arguably an indication for an implied ratification by conduct and Petunia’s agreement to honour the contract expressly also sets good grounds to argue that the contract was ratified both expressly and impliedly.

Section 131(4) gives additional protection to Ted who contracted with non-existent company. If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the persons who entered into the contract, in this case Petunia and Paul to pay all or part of the damages that the company is ordered to pay. The section does not state the detailed circumstances in which such an order would be made. The court under the previous subsection 187(7) would make the order for the secondary liability if it were just and equitable to do so.[6] Arguably, similar considerations would drive the court in its deliberations over whether to make such an order under the replacement s 131(4). This section is also designed to prevent a person from deliberately setting up an assetless company to ratify a pre-registration contract and therefore avoiding a liability for damages under s 131(2).[7] It seems neither equitable nor just for Petunia and Paul to pay for the purchase which was intended to be used by the company. It also cannot be inferred as a bogus company used as a vehicle to avoid liability from the given facts. Therefore, Lifestyle Ltd will be bound to the contract under s 131(1). No Ratification

If the assumption made above is incorrect and in fact, the company was not registered when Ted called Petunia, this will not invalidate the argument above. Although Petunia’s agreement to honour the contract would not be an express ratification as she is now a promoter rather than a director, the conduct (of keeping the goods without returning for a prolonged time) would suffice as an implied ratification as the...

Bibliography: Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
Adler v ASIC (1992) 41 ACSR 72
Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd [2005] NSWCA 319
Bay v Illawarra Supplies Pty Ltd (1986) 4 ACLC
Black v Smallwood (1966) 117 CLR 52
Gemstone Corp of Australia Ltd v Grasso (1994) 12 ACLC 653
Herrman v Simon (1990) 4 ACSR 81
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Hughes v NM Superannuation Board Pty Ltd (1993) 29 NSWLR 653
Kelner v Baxter (1866) LR 2 CP 174
Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2005] QSC 233
Tavistock Holdings Pty Ltd v Saulsman (1990) 3 ACSR 502
Tracy v Mandalay Pty Ltd (1953) 88 CLR 215
Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488
Twycross v Grant (1877) 2 CPD 469
Textbooks
HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, 12th ed 2005, LexisNexis Butterworths
John Farrar, Corporate Governance, 3rd ed, 2008, Oxford
Phillip Lipton and Abe Herzberg, Understanding Company Law, 14th ed, 2008, Lawbook Co
Robyn Donnelly, Corporations Law, 2nd ed, 2003, LexisNexis Butterworths
S. Woodward, H. Bird and S. Sievers, Corporations Law in principle, 6th ed, 2003, Lawbook Co
Journal articles
Michael J Whincop, “Of Dragons and Horses: Filling Gaps in Pre-incorporation Contracts” (1998) 12 Journal of Contract Law No 3
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[1] (1877) 2 CPD 469; Tracy v Mandalay Pty Ltd (1953) 88 CLR 215
[2] Kelner v Baxter (1866) LR 2 CP 174; Black v Smallwood (1966) 117 CLR 52
[3] Michael J Whincop, “Of Dragons and Horses: Filling Gaps in Pre-incorporation Contracts” (1998) 12 Journal of Contract Law No 3
[4] Phillip Lipton and Abe Herzberg, Understanding Company Law, 14th ed, 2008, Lawbook Co, p.139.
[5] (1990) 4 ACSR 81
[6] HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, 12th ed 2005, LexisNexis Butterworths, p.724.
[7] Phillip Lipton and Abe Herzberg, Understanding Company Law, 14th ed, 2008, Lawbook Co, p.140.
[8] [2005] NSWCA 319
[9] (1993) 29 NSWLR 653
[10] Corporations Act 2001 (Cth)
[11] Robyn Donnelly, Corporations Law, 2nd ed, 2003, LexisNexis Butterworths, p.45.
[12] (1986) 4 ACLC
[13] John Farrar, Corporate Governance, 3rd ed, 2008, Oxford, p.118.
[14] [1967] 2 AC
[15] (1854) 1 Macq 461; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
[16] (1994) 12 ACLC 653; Adler v ASIC (1992) 41 ACSR 72
[17] [1914] 2 Ch 488
[18] [1983] 2 Qd R 508
[19] (1990) 3 ACSR 502
[20] [2005] QSC 233
[21] John Farrar, Corporate Governance, 3rd ed, 2008, Oxford, p.121.
[22] S. Woodward, H. Bird and S. Sievers, Corporations Law in principle, 6th ed, 2003, Lawbook Co, pp.61-75
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