Coporate Capacity Cases

Coporate Capacity Cases

Prior to Incorporation

Kelner v Baxter.[1866] L.R.2 CP 174

The promoters of a hotel company entered into a contract on its behalf for the purchase of wine. When the company formally came into existence it ratified the contract. The wine was consumed but before payment was made the company went into liquidation. The promoters, as agents, were sued on the contract. They argued that liability under the contract had passed, by ratification, to the company. It was held, however, that as the company did not exist at the time of the agreement it would be wholly inoperative unless it was binding on the promoters personally and a stranger cannot by subsequent ratification relieve them from that responsibility.

On the other hand, a promoter can avoid personal liability if the company, after incorporation, and the third party substitutes the original pre-incorporation contract with a new contract on similar terms. Novation, as this is called, may also be inferred by the conduct of the parties such as where the terms of the original agreement are changed.

A promoter can also avoid personal liability on a contract where he signs the agreement merely to confirm the signature of the company because in so doing he has not held himself out as either agent or principal. The signature and the contractual document will be a complete nullity because the company was not in existence (Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45).

Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708

Many years later in Newborne v. Sensolid (Great Britain) Ltd., [1953] 1 All E.R. 708 the English Court of Appeal made it clear that promoter liability was to be based on a rule of construction approach – i.e. promoters were only liable if it was intended in the circumstances that they were themselves to be parties to the contract.

In Newborne v. Sensolid Ltd. Newborne had entered into a contract with Sensolid Ltd. to supply tinned ham to Sensolid Ltd. The price of tinned ham fell and Sensolid Ltd. refused to take further deliveries of tinned ham from Newborne. The contract had been signed by Leopold Newborne underneath the words Leopold Newborne (London) Ltd. It was not formally signed “on behalf of Leopold Newborne (London) Ltd.” as had been the case in Kelner v. Baxter. Unfortunately, Leopold Newborne (London) Ltd. had not been incorporated. Leopold Newborne (London) Ltd. was later incorporated and it brought an action against Sensolid Ltd. That action was dismissed because Leopold Newborne (London) Ltd. had not been incorporated at the time the contract was entered into.

Leopold Newborne then sued Sensolid Ltd. in his own name seeking to enforce the pre-incorporation contract on the basis that he was a party to the contract himself. The argument was made on the basis of Kelner v. Baxter saying that if the contract was not with Leopold Newborne (London) Ltd. then it must have been with the person who signed on behalf of the company, namely, Leopold Newborne.

The English Court of Appeal held that the correct approach was a rule of construction approach. The real test was whether the promoter was intended, in the circumstances, to be a party to the contract or not. It was held that given the way in which the contract was signed by Leopold Newborne it was intended to be a contract with the company and only the company. In other words, given the way in which it was signed it indicated that it was not intended that Leopold Newborne be a party to the contract himself. Thus Leopold Newborne could not enforce the contract in his own name.

Phonogram Ltd v Lane [1982] QB 938

A rock group intended to perform under the name "Cheap Mean and Nasty" and to form a company for the
purpose to be called "Fragile Management Ltd". Mr Lane accepted a cheque from Phonogram for £6,000,
signing his name "for and on behalf of Fragile Management Ltd". The money was to be used to finance
production of an album and was repayable if this was not achieved. When the album was not produced,
Phonogram sought to recover the money from Lane, the company having not been in existence at the time
the contract was made. Lane argued that his signature "for and on behalf of" the company amounted to an
agreement that he was not to be personally liable on it - an "agreement to the contrary" in terms of s.36C.
(Then s.9(2) of the European Communities Act 1972). Held: This was not sufficient to exclude the operation of the section, which would be given full effect unless there was a clear and express exclusion of personal liability. Lane was thus liable to repay the money.

The terms of the pre-incorporated contract are included in the company’s Articles?

Browne v La Trinidad (1887) 37 Ch D 1

A meeting of directors decided that an EGM should be convened to remove Browne as a director. The resolution to remove him was subsequently passed at the EGM. Browne tried to claim that his removal was not valid as he had not received adequate notice of the board meeting. Held: The notice he had received of the directors' meeting was inadequate, but he should have complained straight away, and by failing to do so he had waived his right to challenge the resolution taken at the EGM. Further, the inadequate notice made no difference to the subsequent vote at the EGM (the members were unanimous). The court refused to interfere, as this would mean the whole procedure would pointlessly have to be gone through again.

Eley v Positive Government Life Assurance Co Ltd (1876) 1 Ex D 88

The articles provided that Eley was to be appointed as the company's solicitor, and that he should not be removed from office except for misconduct. Eley was employed as solicitor and he became a member of the company some time after its incorporation. When the directors ceased to employ him and used another solicitor, he sued for breach of contract. Held: The articles did not create any contract between the company and Eley in his capacity as solicitor.

Statutory Position

S20 Trinidad and Tobaogo

20.(1)Except as provided in this section, a person who enters into a Pre-incorporation

written contract in the name of or on behalf of a company before it comesagreements

into existence is personally bound by the contract and is entitled to the benefits of the contract.

(2)Within a reasonable time after a company comes into existence, it may, by any action or conduct signifying the intention to be bound thereby, adopt a written contract made, in its name or on its behalf, before it came into existence.

(3)When a company adopts a contract under subsection (2)-

(a)the company is bound by the contract and is entitled to the benefits thereof as if the company had been in existence at the date of the contract and had been a party to it; and

(b)a person, who purported to act in the name of the company or on its behalf ceases, except as provided in subsection (4), to be bound by or entitled to the benefits of the contract.

(4)Except as provided in subsection (5), whether or not a written contract made before the coming into existence of the company is adopted by the company, a party to the contract may apply to the Court for an order fixing obligations under the contract as joint or joint and several, or apportioning liability between or among the company and a person who purported to act in the name of the company oron its behalf and the Court may, upon the application, make any order it thinks fit.

(5)If expressly so provided in the written contract, a person who purported to act for or on behalf of a company before it came into existence is not in any event bound by the contract or entitled to the benefits of the contract.

Szecketv Huang (1999) 168 DLR 402

An individual entered into a contract "on behalf of a company to be formed". The company never was formed and an action was brought against the individual. In earlier drafts it had been proposed that the individual should contract "personally and on behalf of a company to be incorporated" but the words "personally and" were deleted. By s. 21(1) of the Business Corporations Act, R.S.O. 1990, c. B.16, "Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract . . .". By s. 21(4) "If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract . . .". The defendant was held liable and appealed to the Ontario Court of Appeal.

Held, dismissing the appeal, liability was to be determined solely under the statute.

The intention of the legislature was that a person contracting on behalf of a corporation to be formed should be personally liable in the absence of express agreement to the contrary. Here there was no such express agreement and consequently s. 21(1) applied.

Canwest International v Atlantic (1994) 48 WIR 40

Company law - Locus standi - Whether parties to a pre-incorporation contract are aggrieved persons who can apply for relief under s. 228 of the Companies Act, Cap. 308.

Facts: By way of originating summons under section 228 of the Companies Act the respondents (then plaintiffs) sought a number of reliefs from the court against the appellants (then defendants). King, J. (Acting) held that the plaintiffs' were complainants within s. 225(b) of the Companies Act and could apply to the court for relief under section 228. The defendants appealed against this decision on the grounds that the plaintiffs were neither shareholders nor directors of the defendant companies.

Held: (i) Under s. 228 of the Companies Act the court can make whatever orders the interests of justice require;

(ii) section 231 provides that a party to a pre-incorporation agreement can apply under it as an aggrieved person under s. 228 to have the terms of the agreement for issue of shares to him enforced against the other parties to the agreement;

(iii) no error of law had been shown and there was no ground for interfering with the exercise by the judge of his discretion.

Appeal dismissed with costs.

Post Incorporation

Ashbury Carriage & Iron Co v Riche (1857) LR 7 HL 653

The company bought a concession for the construction of a railway system in Belgium and entered into an agreement to finance Riche to construct a railway line. The objects clause in the memorandum of the company stated that it was established to manufacture and sell railway carriages and other railway equipment and to buy and sell timber and coal. Riche began work on the contract and sums of money were paid over by the company in connection with the contract. The company later ran into difficulties, and the shareholders wanted the directors to take over the contract in a personal capacity, and to indemnify them against any loss. The directors then repudiated the contract on behalf of the company, and Riche sued the company for breach of contract. Held: The financing of the concession was ultra vires and void as it was not within the objects of the company - the company could use its money to make things for railways, but not to make railways as such. The contract with Riche was therefore void, and the directors were entitled to repudiate it.

Gratuity Payments

Re W. & M. ROITH, LTD.

R. controlled two private companies, a manufacturing company, R., Ltd., and another company which sold the manufactured goods of R., Ltd. R. was a director and the general manager of R., Ltd., but he had had no service agreement with either company. In the summer of 1957 he consulted his solicitor concerning the continuity of the business after his death and his desire to make provision for his wife and certain other dependents without dividing the control of either company between them. By special resolution on Mar. 17, 1958, the articles of association of R., Ltd. were altered and a new article was added enabling the directors to award pensions and annuities to, among other persons, widows of directors. On Dec. 3, 1958, when R. was fifty-eight years of age and his health was no longer good, a service agreement was entered into between R., Ltd. and R. by which he was appointed general manager for the remainder of his life and agreed to devote the whole of his time and abilities to the business of the company; under the agreement he was entitled to such salary as might from time to time be agreed between him and the company. The agreement then provided, by cl. 5, "[R., Ltd.] hereby covenants with [R.] that in the event of his death occurring during his retention of [office] under this agreement [R., Ltd.] will pay to [his widow]... a pension at the rate of £ 1,040 per annum during the remainder of her life..."; and it provided by cl. 6 "[R.] hereby declares himself to be a trustee for [his widow] of the benefit of the covenant on the part of [R., Ltd.]... to pay a pension to [her]". R. died on Jan. 30, 1959, and the pension was duly paid thereafter until R., Ltd. went into a creditors' voluntary winding-up on Dec. 10, 1963. On Oct. 13, 1964, R.'s executors lodged proof for the value of the pension. On appeal against rejection of the proof,
Held: the true inference from the circumstances was that the service agreement was not reasonably incidental to the carrying on of R., Ltd.'s business nor entered into bona fide for the benefit of and to promote the prosperity of R., Ltd.; accordingly the proof had been rightly rejected (see p. 432, letter C, post).

HUTTON v WEST CORK RAILWAY COMPANY

A company carrying on business has power, by the vote of a general meeting, to expend a portion of its funds in gratuities to servants or directors, provided such grants are made for the purpose of advancing the interests of the company. But this does not apply to a case where the company has transferred its undertaking to another company and is being wound up.
A railway company had which no provision in its articles for paying remuneration to directors, and had never paid any, sold its undertaking to another company at a price to be determined by an arbitrator. By the Act authorizing the transfer it was provided that on the completion of the transfer the company should be dissolved except for the purpose of regulating their internal affairs and winding up the same and of dividing the purchase-money. The purchase-money was to be applied in paying the costs of the arbitration and in paying off any revenue debts or charges of the company, and the residue was to be divided among the debenture holders and shareholders. After the completion of the transfer a general meeting of the company was held at which a resolution was passed to apply oe1050 of the purchase-money in compensating the paid officials of the company for their loss of employment, although they had no legal claim for any compensation, and oe1500 in remuneration to the directors for their past services:-
Held, by the Court of Appeal (dissentiente Baggallay, L.J.), that the resolution was invalid, as the company was no longer a going concern, and only existed for the purpose of winding-up

Contractual Effect of Memorandum and Articles

Hickman v Kent or Romney Marsh Sheep Breeders' Association [1915] 1 Ch 881

Hickman was a member of the association but it proposed to expel him. He brought an action for an injunction to prevent the expulsion, but the articles provided for disputes between the association and its members to be referred to arbitration. The court stayed the action so that the matter could be referred to arbitration - the article was binding between the company and its members

The company’s dealings with Outsiders

The Rule in Turquands Case

Mahony v East Holyford Mining Co.[1875] LR 7 HL 869

Bankers who have funds of a company (formed under the Companies Act, 1862) in their hands may, (acting bona fide,) lawfully honour the cheques of the directors of the company, signed according to a form sent by them to the bank, without being bound, previously, to inquire whether the persons pretending to sign as directors have been duly appointed to office, in conformity with the provisions of the memorandum and articles of association.
W., in concert with some friends and dependents of his, started a company called a mining company. The Memorandum and Articles of association were registered. Subscriptions were obtained from persons becoming shareholders, and these subscriptions were paid into a bank, which had been described in the prospectuses of the company, as the bank for the company. The bankers received a formal notice, signed by the person who described himself as the secretary of the company, that they were to pay the cheques signed by "either two of the following three directors," and countersigned by himself, in accordance with a "Resolution passed this day;" and the names of the three persons described as directors, and their signatures, were enclosed with the "Resolution." The bankers from time to time, while the business of the company appeared to be going on, received cheques signed and countersigned as described, and duly honoured them. When the fund had been, almost entirely, drawn out, the company was ordered to be wound up. It then appeared that there never had been a meeting of shareholders, nor any appointment of directors or of a secretary, but that the persons who had got up the company had treated themselves as directors and secretary and appropriated the money obtained from the subscriptions:-
Held, that the official liquidator could not recover from the bankers the amount of the cheques which, under the circumstances disclosed in the case, they had thus bona fide paid.
Where those who draw and those who (bona fide) honour cheques, intend them to operate on a certain account, no objection can afterwards be taken that that account is not specifically mentioned on the face of the cheques.