Tuesday, October 7, 2008

PRE- INCORPORATION CONTRACTS.



A pre-corporation contarct is one which is entered into when the Company is in the process of being incorporated but is not yet completed it. At common law such contracts were held to be void, as the Company is not yet in existence.Newborne v Sensolid [1954]

IN the case of Kelner x Baxter [1866] certain individuals were purportedly acting on behalf of the Gravesend Royal Alexandra Hotel Co. Ltd which was in the process of being formed. The individuals entered into a contract for the purchase of wine from K.The wine was delivered to the Company after its formation but before K was paid the Company went into liquidation.

The Court held that the Company was not liable but the individuals were personally liable as they had entered into contracts before the Company came into existence.

In the case of Phonogram v Lane [1982], before incorporating a company called Fragile Management Ltd.L contracted with the Plaintiff for a loan of 12,000 to finance a pop group called Cheap, Mean & Nasty. The Plaintiff wrote to L in which reference was made to him undertaking to pay. He neverthelss was required to sign and return a copy for and on behalf of Fragile Management Ltd.The Company was never performed and the group never performed.

The Court held that the defendant was personally liable to repay the money advanced.

The above problems were overcome when the legislation was enacted in the form of Sect35(1) and Sect 35(2) of the Companies Act 1965.

Prior to ratification by the Company the person or persons( promoters) who purported to act in the name of the Company shall, unless there is an agreement to the contrary,be personally bound by the contract or other transaction and entitled to its benefit. In short the outsider can make the promoters who acted when the Company was still in its pre-incorporation stage, to be personally liable should the Company decide not to ratify the contract after its incorporation.For ratification to take place there must be an express agreement between the Company and the Promoter.

13 comments:

Anonymous said...

Thank you. I'll read this up after today's lecture on preincorporation contracts.

Anonymous said...

Thank you. I'll read this up after today's lecture on preincorporation contracts. Banke from University of Lagos, Nigeria

Anonymous said...

cliff mugambi from catholic uni of E.A. and i have a company law exam in 1.5 hrs. thank you. peace

Max said...

I am presently doing company law and will sit the examination in my next sitting.I am studying with the University of Huddersfield in England, on the flexible program. This 'pre-incorporation contract' info is a like an oasis in a desert.I am already privy to this information,however having a different way of presenting the fact in one place in a concise manner can really help, as is the case here.

Many Thanks
Cool ( living in the Cayman Islands)

Cool

Anonymous said...

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Have a look if you have one.

Anonymous said...

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lililala said...

love your brief explanation about this topic..thank you very much ;)

manav said...




That's interesting! Can you please share more about it? Thank you.



Company Formation

Sonal said...

Thanks for your brief exaplanation............

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