Liability Of Promoter In Pre-Registration And Post-Registration Contracts
Separate Legal Identity of a Company
The central concern in wake of the given facts is to outline the potential liability of Steve (the promoter) in relation to a contract formed after the company registration and a preregistration contract which was subsequently not ratified by the board.
A key aspect of company is that it possesses a separate legal identity as has been outlined in s. 124(1) Corporations Act 2001. This provides the company the capacity to enact various contracts in its name. This has significant implications for the shareholders of the company. This has been witnessed in the landmark verdict of Salomon v A Salomon and Co Ltd [1897] AC 22 case. Since the company is a different legal entity, hence the liabilities arising out of contractual relationships it has formed through its agents, would be borne only by the company and not by the shareholders. Hence, there is no personal liability on the shareholders for any unsettled contractual liability or claim on the company (Cassidy, 2013).
It is a common practice that promoter(s) tends to enact contracts on behalf of company before registration and such contracts are categorised as pre-registration contracts. For these contracts to be legally binding on the company, the same needs to be ratified by the board of directors after registration of company (Baxt, Fletcher & Fridman, 2016). If the board of the registered company does not ratify the pre-registration contract, then the same would not be binding on the company and the promoter enacting the contract would be held personally liable as per s. 131(2) (Harris, 2014). However, as per s. 131(3), secondary liability of the pre-registration contract may be borne by the company if the court deems so. The relevant case law demonstrating the above understanding is Commonwealth Bank of Australia v Australian Solar information Pty. Ltd. (1987) 5 ACLC 124 (Ciro & Symes, 2013).
Based on the above law, the liability of a pre-registration and post registration contract needs to be highlighted.
Pre-Registration Contract – This has been enacted by Steve (promoter) on behalf of WA Gold Exploration Ltd (Company) for the supply of drill machines from Thor Mining Machinery Ltd which are required by the company for conducting the business. The board of directors of the registered company does not ratify this contract and instead execute a contract with United Mining Machinery Ltd for supply of drill machines. Hence, as per s.131(2), Steve would be personally liable to Thor Mining for the breach of contract.
Post Registration Contract – The board of the company has executed a contract with Volvo Trucks Australia for the supply of ore trucks. The company before taking the delivery of these trucks becomes bankrupt. In this scenario, the company would be held liable by Volvo Trucks for breach of contract. Steve along with other promoters would not be personally held liable for this contract in accordance with Salomon v Salomon case.
Conclusion
The discussion carried out above clearly highlights that Steve would be held liable by Thor Mining for breach of pre-registration contract while the company would be held liable by Volvo Trucks for breach of post-registration contract.
Pre-Registration Contracts
The key concern is to offer advice in relation to legal enforceability of the two contracts that have been enacted by a partners Simon, for the partnership firm.
It is noteworthy that partnership is a type of agency relationship where there is principal agent relation between the partners. This is because each of the partners acts as agent when entering into contracts on behalf of the firm. This partner (acting as agent) who is executing the contract represents the other absent partners (acting as principal). This understanding has been highlighted in s. 5, Partnership Act 1892 (NSW) (Gibson & Fraser, 2014).
The implication of the above relation between partners is that a contract enacted by one of the partners would be binding on all the other partners provided that the contract is related to partnership business’s normal scope of activities (Carter, 2012). A relevant case law is Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 in which a partner executed a contract in business related activity despite lacking the appropriate authority. However, the contract was still held as binding on all the partners (Davenport & Parker, 2014). If any contract deals with a subject that lies outside the normal scope of business activities of the firm, then such a contract would not be held binding on the other partners if the contracting partner lacks the requisite authority. Also, the innocent partners can sue the partner at default for claiming damages caused owing to contract (Vermeesch & Lindgren, 2011).
There is a partnership firm named Computer Solutions with Simon being one of the partners. No partner is allowed to execute contracts of more than $ 10,000 without consent from all other partners. Simon has enacted a contract for 50GB hard disk purchase with Sunstar Computer. Simon lacks authority to execute the contract since the deal size is $ 15,000 (i.e. exceeds $ 10,000) and he has failed to obtain consent from others. But since the purchase of hard disk is related to business of the firm, hence this contract is binding on the other partners who would have to pay $ 15,000 for the 50GB hard disk.
The another contract which Simon has enacted is with You Beaut Ute Ltd with an intention to diversify the business into freight as well. Since the contract value if less than $ 10,000, hence despite not having the support of the other partners, the contract would be considered binding on the other partners. This is because legal authority is present with Simon to enact this contract. The other partners can sue the erring partner Simon and claim damages for the losses caused owing to entering these two contracts.
Conclusion
The two contracts enacted by Simon are binding on all the partners of the partnership firm. The partners can sue Simon for claiming damages incurred due to these contracts.
References
Baxt, R., Fletcher, K.L. & Fridman, S. (2016). Corporations and Associations Cases and Materials (10th ed.). Butterworths: LexisNexis Australia.
Carter, J. (2012). Contract Act in Australia (3rd ed.). Sydney: LexisNexis Publications
Cassidy, J. (2013). Corporations Law Text and Essential Cases (4th ed.). Sydney: Federation Press.
Ciro, T. & Symes, C. (2013). Corporations Law in Principle (9th ed.). Sydney: LBC Thomson Reuters