Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Companies Act 2006 Assignment

LLB BUSINESS LAW COURSEWORK
Critically examine the extent to which Section 51 Companies Act 2006 has clarified the law relating
to pre-incorporation contracts
...
1 The CA 2006 sets out detailed
rules about raising capital through the issuing of shares and maintaining the capital at a certain level
once it has been raised
...

Section 51 of the CA 2006 is the focus of this essay and concerns pre-incorporation contracts, deeds
and obligations
...


This

paper considers issues that arise on the incorporation of a company, such as the responsibilities and
liabilities of those who decide to set up a company, known as the promoters
...
Section 51 has clarified
the law as practically possible and the uncertainties that existed, but ultimately each case will be taken
on its own individual merits and there are of course exceptions to the general rule that promoters are
personally liable in pre-incorporation contracts
...
The duties of promoters vary, such as entering into pre-incorporation
contracts, handing out a prospectus, appointing directors and finding shareholders desiring to invest in
the new company, but they will always be responsible for the ensuring that the registration process is
complied with
...

Promoters have a general duty to exercise reasonable care and skill, as opposed to some promoters
that have benefitted at the expense of investors, as illustrated by Erlanger v New Sombrero Phosphate

1

Lucy Jones, Introduction to Business Law (1st edn, Oxford University Press, Oxford 2011) 514
...

3
Jones, Introduction to Business Law (n 1) 515
...
This case shows the fiduciary nature of the promoter’s role to the company they set up
...
Promoters are consequently required to make a proper disclosure
of any profit s/he has made to either an independent board of directors or to the existing or prospective
members of the company
...
The company may, however, elect to rescind the contract concerned or where the right
to rescind is not available, such as the involvement of a third party (Edwards v Skyways5), they may
ask the promoter to account for his profit, as in Gluckstein v Barnes6
...
However, the right to rescind shall be forgotten where the company delays
within exerting its rights towards rescinding the contract, or if the company affirms the contract and
claims the profits, as illustrated in Re Cape Breton Company7
...
The
promoters in this circumstance also incur statutory liability to compensate any person who has
acquired the securities to which the prospectus refers and suffers loss as a result of any untrue or
misleading statement or omission in that prospectus
...

Apart from the issue of secret profits, the promoter may still incur expenses and liabilities, such as
registration and legal costs, which s/he will want to pass on to the newly formed company in the
promotion of a private company
...

A pre-incorporation contract is any contract entered into by the promoter for the business of the
company that s/he is forming
...
Prior to this time a business cannot be signed by contracts entered into in
its call or on its behalf
...

4

(1878) 3 App Cas 1218
...

6
[1900] AC 240
...

8
Section 90 Financial Service and Markets Act 2000 as amended by the Prospectus Regulations 2005
...
In Kelner v
Baxter9 it was held that as the business did not live at the time of the affirmation it would be wholly
inoperative except it was binding on the promoters in person and an outsider will not by later
ratification ease them from that responsibility
...
11 The Contract (Rights of Third Parties) Act 1999 allows
enforcement of contracts by third party were there is an express term or provides benefit of third party,
but this leaves the promoter exposed
...
12 Quite clearly, a promoter
cannot attach a non-existent principal towards contracts
...
’13
The key points arising out of section 51 is that any agreement entered into by the promoter either on
behalf of or as the company will impose personal contractual liability and, ordinarily, also correlative
rights of enforcement, on the promoter
...
Phonogram Ltd v Lane14 confirmed that
such a provision must be expressly and unambiguously included in the agreement and will not be
implied
...
A record company sent £6,000
9

(1866) LR 2 CP 174
...
Available from
http://www
...
com/resource/articles-and-assignment/a-promoter-is-one-who-undertakes-to-form-a-company-withreference-to-a-given-project-and-to-set-it-going-and-who-takes-the-necessary-steps-to-accomplish-that-purpose-explain-and-illustrate/
[Accessed 12/04/2012]
11
Ibid
...

13
Section 51(1) CA 2006
...

10

3

Companies Act 2006 Assignment

to Mr
...
The company was never formed and the question arose who was liable to repay the
£6,000
...
Lane had used amounted to words “subject to any agreement to the
contrary” for the purposes of the statutory provision
...
Lane was unable to avoid
personal liability under the agreement
...
The fact the claimant knew the
company was not in existence at the time the contract was made did not alter the defendant’s personal
liability
...
15 The classic view of the purpose of section 51 is that it provides for the right of a third party
to enforce a pre-incorporation contract against the person who purports to act as the agent of the
company that is yet to be incorporated
...
The Court of Appeal resolved the claim of the agent in this case by the
application of section 36C CA 1985, whose wording is the same as section 51
...
The Court of Appeal disagreed, holding that
section 36C(1) (now section 51 CA 2006) provides remedies for and imposes obligations on, a party
who enters into a contract with a company when it has not been incorporated and those obligations
can be enforced by the agent of the unformed company
...

Furthermore, there is no application where company exists, but is misnamed, as illustrated in Oshkosh
B’Gosh Inc v Dan Marbel Inc Ltd17
...

[2002] EWCA Civ 127
...
C
...
C
...

16

4

Companies Act 2006 Assignment

transfer this contractual liability to the company as soon as possible, so they are not running the risk of
being held liable under section 51 for a breach of that contract
...
This rule is illustrated by Natal Land & Colonization Co v Pauline Colliery
Syndicate19, in which a company was prevented by the court from enforcing a pre-incorporation
contract made on its behalf, and extended by Re English & Colonial Produce Co Ltd20, in which it
was held that, even where the company received the benefit of the contract, it could not be made liable
on that contract
...
21
There are, however, ways in which the promoter may transfer his liability to the company
...
22 Novation may also be
inferred from the conduct of the parties, as illustrated in Re Patent Ivory Manufacturing Co, Howard v
Patent Ivory Manufacturing Co
...
There must be positive evidence of re-negotiation on the part of the company and not
merely a passive adoption of the terms of the pre-incorporation contract as in Re Northumberland
Avenue Hotel Co Ltd23
...
Furthermore, there will be no liability for mere confirmatory signature of
the company as was evident in Newborne v Sensolid (Great Britain) Ltd24, but where there is
misrepresentation of authority the promoter may be liable for breach of warranty (Colleen v Wright25)
...
26
Cessation of liability clause is a technique whereby the promoter contracts with a third party, but on
18

(1866) LR 2 CP 174
...

20
[1906] 2 Ch 435
...

22
Natal Land & Colonization Co v Pauline Colliery Syndicate [1904] AC 120
...

24
[1954] 1 QB 45
...

26
Jones, Introduction to Business Law (n 15)
...
The Contracts (Rights of Third Parties) Act 1999 does not
free the promoter from liability for contracts entered into before a company is formed, but its
provisions does allow a person to be given rights in a contract even though they are not party to the
contract or not in existence when the contract is made
...
When the company
is incorporated it will be able to sue and be sued on the contract
...

Of course, a promoter may avoid liability under a pre-incorporation contract by refraining from
entering into the contract until the company has been incorporated
...


The only constraints on making of such a gratuitous payment are that is must be

appropriately disclosed and the directors will need power to make such payments
...
Section 51 of the CA 2006 is styled towards
protecting third parties who contract with promoters, by making the promoters personally liable
within pre-incorporation contracts, unless subject to any agreement to the contrary
...
The effects of section 51 of the CA 2006 on pre-incorporation
contracts are that it must be an express exclusion for the promoter to avoid liability; there is no
application where the company exists, but is misnamed; and a promoter may be liable and enforce
pre-incorporation contracts, so the third party cannot avoid their liabilities and breach the contract,
which is deemed equitable
...


6

Companies Act 2006 Assignment

STUDENT DECLARATION
I, student number 150062, declare that this piece of work contains 2507 words
...


BIBLIOGRAPHY
Books:
Davis (2010), Introduction to Company Law (Oxford University Press, Oxford)
...

Lowry J and Dignam A (2009), Company Law (Oxford University Press, Oxford)
...

Colleen v Wright (1857) 120 ER 241
...

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
...

Kelner v Baxter (1866) LR 2 CP 174
...

Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45
...
C
...
C
...

Phonogram Ltd v Lane [1982] QB 938
...

Re English & Colonial Produce Co Ltd [1906] 2 Ch 435
...

Twycross v Grant (1877) 2 CPD 469
...

Electronic Information/sources:
Business
link
HM
Government
(2011),
Starting
http://businesslink
...
uk/bdotg/action/home [Accessed 12/04/2012]

up
...

Available from http://www
...
com/resource/articles-and-assignment/a-promoter-is-onewho-undertakes-to-form-a-company-with-reference-to-a-given-project-and-to-set-it-going-and-whotakes-the-necessary-steps-to-accomplish-that-purpose-explain-and-illustrate/ [Accessed 12/04/2012]
LexisNexis

8



---