41. Ratification by company of contracts made before incorporation Flashcards
- Ratification by company of contracts made before incorporation
General overview
[41.01] The common law which does not allow the ratification of a contract made by an agent of the company that was non-existent at the time of contracting was changed by s 41 to allow a valid ratification of the contract when the company subsequently comes into existence.
Pre-incorporation contracts
[41.02] Section 41 provides for the ratification of contracts entered into by a company before it comes into existence. Upon ratification by the company, the contract shall be binding on the company, and the company shall be entitled to the benefit of the contract as if it had been in existence
Persons liable prior to ratification
[41.03] Subsection (2) provides that the person(s) who purported to make the contract on behalf of the company shall, in the absence of express agreement to the contrary, be personally liable on the contract: Phonogram Ltd v Lane [1982] QB 938, CA ; Braymist Ltd v Wise Finance Co Ltd [2002] EWCA Civ 127; [2002] Ch 273, CA . In the UK, s 51 of the Companies Act 2006 (UK) has different wordings. Section 51 deals with the personal liability of the agent on the contract made on behalf of the company before it comes into existence rather than specifically allowing the company to ratify the pre-incorporation contract when the company comes into existence: Braymist Ltd v Wise Finance Co Ltd (above). Hence, in the UK, the law as it stands at Natal Land Co & Colonization Ltd v Pauline Colliery and Development Syndicate Ltd [1904] AC 120, PC still applies.
Promoter’s liability to third parties
[41.04] A founder and promoter of a country club, being the directing mind and will of two companies, one of which owned the land which was leased to the other for 30 years to run the club, owed fiduciary duties to the club’s members, and in his breach of those duties and acting in conflict of interest, was made liable for exemplary damages to the plaintiff and the 79 members he represented
Contracts (Rights of Third Parties) Act (Cap 53B)
[41.05] It would appear that the company may be able to enforce a pre-incorporation contract made on its behalf before it comes into existence pursuant to s 2 of the Contracts (Rights of Third Parties) Act (Cap 53B). There is no case law on this point although the UK Law Commission (Law Com No 242, 1996) was of the view that although s 2 may arguably apply to enable a pre-incorporated company to enforce a contract after it comes into existence, it is better that the matter be dealt with separately as a matter of company law: see Len Sealy and Sarah Worthington, Cases and Materials in Company Law (8th edn) (2008, Oxford University Press) p 94.
When company already in existence
[41.06] Section 41 has no application where the company was already in existence when the contract was made: Oshkosh B’Gosh Inc v Dan Marbell Inc Ltd [1989] BCLC 507, CA . Where the company has been described by an incorrect name
Contracts under seal
[41.07] An affixing of the seal without any resolution of the board of directors, but by the direction of the three persons who had the chief management of the affairs of that company was considered as affixed by due authority: Re Barned’s Banking Co, Ex p The Contract Corp (1867) LR 3 Ch App 105, CA. A memorandum of transfer of land that was properly sealed by the signature of the secretary and the director was valid: Standard Chartered Bank v Central Wood Tiles Sdn Bhd [1990] 2 MLJ 361, HC. Where the seal is forged or the signatures on the documents are forged, the document is a nullity and cannot bind the company: Ruben v Great Fingall Consolidated [1906] AC 439, HL . Where there is irregularity in the sealing of the document, the irregularity can be rectified under s 392(4)(a) of the Act: see the cases therein. Where the sealing was authorised but the transaction has yet to be authorised, the contract is probably valid: see Tan Cheng Han, Walter Woon on Company Law (Revised Third Edition) (2009, Sweet & Maxwell) para 3.55. The fact that the company seal had been affixed on a document did not per se raise any legal presumption that the parties intended it to be executed as a deed. Evidentially, however, it could lend weight to a party’s assertion that the document was intended to be and had in fact been executed as a deed
New ss 41A, 41B and 41C
[41.08] Section 41(5) only provides for the affixing of the common seal by the company’s duly authorised agent or attorney on deeds through a written authority under its common seal. See further, the requirement under ss 41A, 41B and 41C.
Contracts required by law to be in writing
[41.09] An example of such contracts is contracts for the sale of land: see Statute of Frauds, 1677 chapter 3 29 cha 2 and s 53 of the Conveyancing and Law of Property Act (Cap 61) which provides that on or after March 1, 1994, a conveyance of any estate or interest in land other than a lease for a period not exceeding seven years at a rack rent shall be void at law unless it is by deed in the English language.
Oral contracts
[41.10] See s 25 and the cases cited there.
