Promoters-Question DADA AFA
1. Problem Question pertaining to pre-incorporation signed
by a promoter for purchase of equipment. Promoter who
becomes a majority shareholder and MD dies after
commencement of business. Company has defaulted in
making further payments to supplier despite persistent
demands.
The area of law is promoters and pre-incorporation contracts.
Issues:
1. Whether the promoter could lawfully execute a contract on behalf of
an unformed company?
2. Whether or not the Company is bound by the pre-incorporation
contract.
Applicable law to issue 1
Section 12(1) of the Companies Act, 1963, Act 179 broadly defines a
promoter as any person who is or has been engaged and interested in the
formation of a company. However, person engaged in their professional
capacities to assist in procuring the formation of company cannot be
deemed as promoters.
A promoter is by law required to observe utmost good faith toward the
company in any transaction with it or on its behalf in accordance with
section 12(2)(b) of Act 179.
In Erlanger v New Sombrero Phosphate Co promoters of a company
who were members of a syndicate leased land with right to mine
phosphate deposits to the company they formed. The value was twice the
actual price. It was argued by counsel for the respondents that, if the
promoters had been mere vendors with no connection with the company,
then the quote of the purchase price would not have been an issue.
Nonetheless, due to their position, they were required to transact in good
faith and not to take undue advantage of the company. The House of
Lords held that the transaction was not in good faith, therefore could not
stand.
Therefore, promoters can lawfully enter into agreements on behalf of the
yet to be formed company but must do so in good faith.
Applicable law to issue 2
A pre-incorporation contract is defined succinctly in section 13(1) as any
contract or other transaction purporting to be entered into by a
Promoters-Question DADA AFA
company prior to its formation or by any person on behalf of the
company prior to its formation.
The law goes ahead to stipulate that it may be ratified by the company
after its formation; and thereupon the company shall become bound by
and entitled to the benefit thereof as if it had been in existence at
the date of such contract or other transaction and had been a party
thereto.
At common law, contracts that were entered into before the formation of
the company were not binding on the company. This position on the law
was clearly established in the case of Kelner v Baxter. The promoters of
a yet-to-be-formed company purchased wine from the plaintiff which was
consumed before the formation of the company. The company failed
before Kelner could be paid and the plaintiff brought an action against the
promoters personally to recover.
Per Erle CJ, a stranger (company) could not by subsequent ratification,
relieve a person professing to an agent of that stranger of contractual
liability between the agent on behalf of a non-existent stranger principal
and a third party. The company was not bound by obligations when it was
inoperative, hence the contract was binding on the defendants.
The second case that requires commentary in order to better understand
the common law position on pre-incorporation contracts is Newborne v
Sensolid(Great Britain) Ltd. Here, Leopold Newborne (London) Ltd
which was in the process of being formed purported to sell 200 cases of
tinned ham to Sensolid Ltd by the engineering of the promoter of the
company being Mr Newborne. Sensolid failed to take delivery and
Newborne instituted an action for damages for breach of contract and
failure to accept goods. The contract was not upheld because a non-
existent company could not be bound by a prior contract.
On appeal, Lord Goddard CJ upheld the arguments of the respondent. He
added that the only person who had any contract with the respondent was
the company; however it not being in existence at the time of the
contract, it was deemed that no contract existed to be enforced. Mr
Newborne also could not benefit from his wrongdoing by saying ‘well it
was my contract”.
The Ghanaian case of Panagiotopoulos v Plastico Ltd. (consolidated)
adopts the common law position of pre-incorporation of contracts before
section 13(1). In this case Apaloo JSC reasoned that a company is not
bound by contracts purporting to be entered into on its behalf by its
Promoters-Question DADA AFA
promoters or other persons before its incorporation. Neither can it ratify
the contract.
However, despite the above case law section 13(1) of Act 179 has
effectively amended the common law position in relation to ratification of
pre-incorporation contracts. The law now permits a company to consider
the propriety of contracts entered into on their behalf before their
incorporation and have the option of ratifying the pre-incorporation
contract. This lies at the discretion of the company to ratify or not to
ratify.
This principle of law of ratification of pre-incorporation contracts was
affirmed and its dimensions espoused in Jabranska Slobodina Plovidra
Split v OSYA Ltd.
Amuah Sekyi J ruled that the burden which lay on a claimant to prove
ratification under Act 179, s. 13 was a very heavy one. There should be a
clear and unequivocal act on the part of the company if ratification was to
be inferred. Such an act might be a resolution of the company in general
meeting adopting the contract, or a resolution to the same effect passed
at a meeting of the board of directors and confirmed in a general meeting.
A mere letter signed the managing director would be insufficient to
amount to ratification unless there was evidence that he was
communicating a decision to ratify taken by the company in general
meeting or by the board of directors which had been confirmed by the
company in general meeting.
Section 13(2) of the Companies Act also declares that, in the absence
of any express agreement, any person who acted in the name of the
company prior to the ratification of the contract will be personally bound
by the contract or transaction and be entitled to any benefit thereof. This
provision seeks to impose liability on any agent of the company who
contracts on behalf that company; in the event that the agent fails to
expressly agree that he would not be personally bound by the contract
entered into.
The above provision is in sync with the case of Phonogram Ltd v Lane.
The well-established law illustrated in this case is that, unless a person
acting on behalf a non-existent company expressly excludes himself from
liability of the company he is personally liable for any liability incurred,
thereafter.
From the laws laid down, the current Ghanaian position does allow
companies to ratify pre-incorporation contracts by overt means.
Promoters-Question DADA AFA
Nevertheless, until the company adopts a pre-incorporation contract it is
not binding on the company. Personal liability devolves on the promoter in
the absence of express agreement to exclude himself from liability.
