The legal implications of 'pre-registration contracts'
The Australian corporate law has seen major reforms in the last couple of years (Tomasic, Bottomley & McQueen,2002). For instance, section 131 of the Corporations Act 2001 dealing with pre-registration contracts is no-longer necessary. This is clearly illustrated by the lack of reported cases since the introduction of provisions for pre-registration contracts into the legislation. The provisions may have been relevant, even important, in a time when there were no shelf companies and we did not have the technology we have today. As this is no-longer the case it is time we simply reverted back to the common law on pre-registration contracts. The common law would make it simpler for the promoter, the company and the third party when making contracts let alone on matters of contractual liability. The purpose of this work is to explore elements of the Australian corporate laws with specific focus on the changes in section 131 of the Corporations Act 2001 dealing with pre-registration contracts. We justify the need for reverting back to the common law with details on how it can make it simpler for the promoter, the company and the third party when making contracts let alone on matters of contractual liability. Our analysis is conducted in light of the common laws of Australia, the statute law of Australia as well as the relevant cases inn the country.
Definition of company law
Company law is a special branch of common law that provides information for the formation as well as termination if companies. It confers that corporations have certain special features like limited liability. The law also regulates the relationship existing between the participants in the company. Company law is therefore intended to regulate the relationships between the various stakeholders in a company.
Definition of statute law
Statute law is a law which is made up of written laws that are adopted by a given legislative authority or body. This law is often contrasted with case law that is noted to originate from various discussions of a country's appellate courts with guidance from constitutional law which is based on the nation's written constitution.
The functions of company law
Just like any other legal entities, corporations too are also subjected to laws of the country. The implication of this is that laws like criminal laws, contract laws, tort laws, property laws, environmental laws as well as competition laws also apply to companies (Mason & O'Hair,1973). In certain cases, certain necessary modifications are carried out in order to account for the fact that corporations are artificial persons.
What the company law covers
Company law covers all issues involved in the creation as well as termination of corporations as well as the conferring on the corporation on companies as well as their participants. This law also covers issues to do with the relationships existing between various participants in the company.
The company law has implications for individuals dealing with a given company as opposed to individuals. An individual is noted to deal with any given organization voluntarily by entering into a formal contract with the company. It may also be via an involuntary means such as being a victim of crime or even an act of negligence that is committed by a given corporation.
The Australian corporate law is a function of common and astute laws of Australia. The common law system is noted by the Australian Department of Foreign Affairs and Trade (2012) which was developed in the UK. It is noted to form the very basis of Australian jurisprudence. The common law is very distinct from the civil system that is used in Europe, Japan and South America that is a derivative of the Roman law. The main feature of the common law is noted to be the fact that judges' decisions in all pending cases are duly informed by the decisions of cases that were previously settled.
The legal implications of 'pre-registration contracts'
According to the Australian corporate law on pre-registration contracts, the individuals who form given company or even procure the formation of the company are referred to as promoters (McGaughey,2006). A corporate "promoter" is therefore noted to be an individual who is amn organizer who is self-constituted and who also finds a given venture or enterprise and helps in attracting investors, incorporate it as subsequently launch is as a business with the view of earning various levels of promotional profits. A perfect example of a case is Daly v. Jackson, 226 Or 471, 478, 360 P2d 542, 545 (1961). Another court defined a corporate "promoter" as an individual who when acting alone or with others helps in the formation of a given corporation and then procure for it capital and instrumentalities to enable it to effectively conduct business. A perfect example of a court case being Goodman v. Darden, Doman & Stafford Associates, 100 Wash 2d 476, 670 P2d 648, 650, n 2 (1983). The term is however used in broad terms to describe an individual who brings a given company into existence.
In regard to the legal implications of pre-registration contracts' in the context of Australian law, the Australian common and astute laws indicates that a non-active participant in the formation of a given company may also be regarded as a promoter. A case in point being the High Court ruling in Tracy v Mandalay Pty Ltd. (1953) 88 CLR 215. In this particular case, it was alleged that certain people who are associated with a company (Mandalay Pty Ltd.) which was newly formed had allegedly breached their obligated fiduciary duties to the given company.
These individuals had been noted to have participated in a certain scheme in which a new company had purchase land as well as shares at very inflated prices thus producing substantial gains for the relevant parties/participants. The high court is noted to have first confirmed that indeed the promoters owed certain fiduciary duties to these charges. These second issue which arose was whether all of the defendants were indeed legal promoters since some of them were ever directly involved in the process of formation or any other transaction to procure the firms or its assets (Lipton, Herzberg, Welsh,2011; Harris, Hargovan, Adams,2011; Austin R & Ramsay,2010; Baxt, Fletcher, Fridman,2008; Hanrahan, Ramsay, Stapledon,2010).
Dixon CJ, Williams and Taylor JJ are noted to declare jointly that any person who leaves it to other individuals to get up to the corporation upon the notion that they will also profit from the operation may subsequently be referred to as promoters.
The Corporations Act on the other hand does not provide any definition of the term "promoter." However section 9(1) of the previous Corporations Law is noted to provide a definition of the term "promoter" which is more exclusionary and is applicable only to the context of prospectus issuance.
Promoters are noted to commonly incur liabilities at a personal level in order to effectively cover for the expense of forming a given company as well as to secure property or even rights for the unformed corporation / company. The aim is to utilize it once the company comes into expense.
Promoters are also noted to have the tendency to purport have incurred contractual obligations or debts in the name of and maybe for the benefit of the uninformed corporation (Ciro & Symes,2009;Li & Riley,2009; Cassidy,2010;Harris,2008; Harris,2009).
These kinds of transactions were originally referred to as 'pre-incorporation' or 'pre-formation' contracts (Bonzaier, 2010). However nowadays, they are called pre-registration' contracts. This is in presumption that the company comes into actual existence upon its registration according to s 119.
However a total of three main questions arise in regard to the pre-registration contracts. These includes;
1. Is the newly formed corporation liable to perform o even pay damages for the breach of a contract that was supposedly made in its name as well as on its behalf prior to its actual registration?
2. Can the newly formed corporation certain seek specific performance as well as damages for the breach of a given contract that was supposedly made in its name or/and on its behalf prior to its actual registration?
3. Is the given corporation promoter personally liable to the performance contract or even pay damages to a given third party if the corporation fails or even refuses to perform its contractual obligations that were duly undertaken in the legal entity's name prior to its actual registration?
These questions can effectively be solved by the application of 3 basic propositions;
1. A corporation or company does not assume the title of a 'legal persons' and this means that the company does not exists in common law until such a time and unless it has been incorporated (registered)
2. It is legally impossible for a non-existent legal person to have legal rights as well as obligations. Therefore, the company cannot enter into contract or even incur debts