Company Law - Formation Flashcards
Who is a promotor?
Someone who ‘undertakes to form a company with reference to a given project and to get it going, and who takes the necessary steps to accomplish that purpose.’
What is the status of a pre-incorporation contract?
The company will not be bound by a pre-incorporation contract (before the company is registered).
Pre-incorporation contracts cannot be ratified or adopted after incorporation.
The promotor is then personally liable under the contract as the company doesn’t exist.
Kelner v Baxter (1866)
Promotors cannot escape personal liability for pre-incorporation contracts
Facts: 3 promoters entered into a contract with the claimant to purchase wine on behalf of the proposed Gravesend Royal Alexandra Hotel Co. The wine was supplied and consumed before the money was paid. Shortly after incorporation the company went into liquidation.
Held: as the company was not in existence when the contract was made it was not bound by the contract and could not be sued for the price of the goods. Neither could it ratify the contract (because the company did not exist at the time the contract was made).
How can a promotor avoid personal liability?
- CA 2006, s51 (section 51 agreement)
- incorporating the company before making contracts
- postponing finalising contracts until company is formed
- buying an ‘off the shelf’ company
What is a section 51 agreement?
Where a third party relinquishes a promoter from personal liability, they would be unable to sue the promoter if the company did not subsequently comply with the terms of the contract.
Phonogram Ltd v Lane (1981)
Section 51 Agreement
Facts: Phonogram gave £6,000 to Mr Lane who was part of an aspiring rock group and signed it was ‘for and on behalf of Fragile Management Ltd’. The money was meant to be put towards the making of an album, however the album wasn’t made. Phonogram went to retrieve his money from Mr Lane however he argued that he received it ‘on behalf of Fragile Management Ltd’ and wasn’t personally liable.
Held: the exclusion wasn’t clearly and expressly stated in the contract, making Mr Lane liable to repay Phonogram
Tinnevelly Sugar Refining Co Ltd and Others v Mirrlees, Watson and Yaryan Co Ltd (1894)
The Third Party is not Bound
Facts: Two men bought machinery from Mirrlees Watson saying they were acting on behalf of Tinnevelly but the company was in fact not formed until two weeks later. The machinery supplied was defective and Tinnevelly attempted to sue Mirrlees Watson on the basis of the defects.
Held: Tinnevelly had no rights under the original agreement and had no locus to subsequently ratify the actions of the two men who were acting as promoters.
What forms must be submitted to the Registrar to form a company?
- Application of Registration
- Constitutional Documents (Memorandum of Association & Articles of Association)
When does a company exist?
The company exists from the date on the certificate of incorporation
What type of company needs a trading certificate?
Public companies need a trading certificate and cannot commence trading until the Registrar has issued one
What is the Memorandum of Association?
Constitutional document that used to state the nature of the activities and regulate the directors/members
What are the Articles of Association?
The internal rules within the business. These can be custom made by the company or model articles can be adopted.
Eley v Positive Government Security Life Assurance Co (1876)
Articles don’t bind the company to non-members
Facts: The articles stated that Eley should be appointed as the company’s solicitor for life.
Held: This was not a right given to him as a member and he could not rely on the articles to give him the position for professional services. (As a solicitor he had no claim – he was attempting to enforce an employment right not a member’s right - his membership was irrelevant to his claim).
What kinds of resolution is needed to alter Articles? (s21)
special resolution (75%)
