Pre-Incorporation or Preliminary Contracts

Position of promoters

1.       Company not bound by pre-incorporation contract

English & Colonial Produce Co. Ltd., Re (1906)

A solicitor prepared the Memorandum and Articles of Association of a company and paid the necessary registration fees and other incidental expenses to obtain the registration of the company. He did this on the instruction of certain persons who later became the directors of the company.

Held, the company was not liable to pay the solicitor’s costs, although it had taken the benefit of his work.

 
2.       Company cannot enforce pre-incorporation contract

Natal Land & Colonisation Co. Ltd. V. Pauline Colliery & Development Syndicate Ltd., (1904)

The Natal Land & Colonisation company agreed with an agent of the Pauline Colliery & Development Syndicate Ltd. Before its formation to grant a mining lease to the Syndicate. The Syndicate was registered and discovered a seam of coal. The company refused to grant the lease.

Held, there was no binding contract between the company and the Syndicate.

 
3.       Promoters personally liable

Kelner V. Baxter (1866)

A hotel company was about to be formed and persons responsible for the new company signed an agreement on 27^th January, 1866, for the purchase of stock on behalf of the proposed company, payment to be made on 28^th January, 1866. The company was incorporated on 20^th February, 1866. The goods were consumed in the business and the company went into liquidation before the debt was paid. The persons signing the agreement were sued on the contract.

Held, the persons signing were promoters and personally liable on their signatures.

Promoter

The fiduciary position of a promoter may be summed up as follows:

•     Not to make any profit at the expense of the company
•     To give benefit of negotiations to the company

                 Erlanger V. New Sombrero Phosphate Co.,

•      To make a full disclosure of interest or profit
•       Not to make unfair use of position

Erlanger V. New Sombrero Phosphate Co.,

A syndicate, of which Erlanger was the head, purchased an island said to contain valuable minerals. Erlanger, as promoter, sold the island to a company newly formed for the purpose of buying it. A contract was entered into between X, a nominee of the syndicate, and the company for purchase at double the price actually paid by Erlanger.

Held, as there had been no disclosure by the promoters of the profit they were making, the company was entitled to rescind the contract and to recover the purchase money from Erlanger and the other members of the syndicate.

Conclusiveness of certificate of incorporation

T.V. Krishna V. Andhra Prabha (Pvt.) Ltd., 

Even though the certificate of incorporation is conclusive for the purpose of incorporation, it does not make an illegal object a legal one. But the position is firmly established that if a company is born, the only method to put an end to it is by winding it up.

Conclusiveness of certificate of incorporation

Jubilee Cotton Mills Ltd. V. Lewis

On 6^th January, the necessary documents were delivered to the Registrar for registration. Two days after, the Registrar issued the certificate of incorporation but dated it 6^th January instead of 8^th, i.e., the day on which the certificate was issued. On 6^th January some shares were allotted to Lewis, i.e., before the certificate of incorporation was issued.

The question arose whether the allotment was void.

Held, the certificate of incorporation is conclusive evidence of all that it contains. In law the company was formed on 6^th January and, therefore, the allotment of shares was valid.

Conclusiveness of certificate of incorporation

A certificate of incorporation given by the Registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act have been complied with in respect of registration.
This is known as Rule in Peel’s Case

Barned’s Banking Co.; Re Peel’s Case,

The reason for this rule was expressed by Lord Cairns in Peel’s Case thus:

 “When once the Memorandum is registered and the company holds out to the world as a company undertaking business, willing to receive shareholders and ready to contract engagements, then, it would be of the most disastrous consequences if after all that has been done, any person was allowed to go back and enter into an examination of the circumstances attending the original registration and the regularity of the execution of the documents”.

The company is a sham

Gilford Motor Co. Ltd. V. Horne

Horne, a former employee of a company, was subject to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant.

An injunction was granted both against him and the company to restrain them from carrying on the business.

The company was described in this judgment as “a device, a stratagem”, and as “a mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation”.