PERSONAL LIABILITY OF "DIRECTORS" OF
NON-EXISTENT COMPANIES.
I n Black v. Smallwood and Cooper1 the plaintiffs contracted to
sell their land to a company called Western Suburbs Holdings Pty. Ltd.
The defendants signed the contract on behalf of the company as directors. At the time that the contract was signed Western Suburbs Holdings
Pty. Ltd. had not been incorporated, and was not incorporated until
more than six weeks later. The plaintiffs brought a suit for specific
performance against the defendants, who denied that any contract
had been made between the plaintiffs and themselves. Jacobs J. held
that the defendants could not say that they did not intend to assume
any personal liability and that the contract must be regarded as
between the plaintiffs and the two defendants; he therefore granted
a decree of specific performance. I t is submitted with respect that
this decision was wrong and that there was no cQntract between the
plaintiffs and the defendants.
In Kelner v. Baxter2 three persons who signed a contract of sale
on behalf of a company which had not yet been incorporated were
held to be personally liable on the contract. The Court of Common
Pleas (Erle C.J., Willes, Byles, and Keating JJ.) held that where a
person purports to sign a contract as an agent, but has no principal in
existence at the time, he is personally liable on the contract. However,
in Kelner v. Baxter the defendants signed the contract as agents of
the non-existent company, and not as directors like the defendants in
Black v. Smallwood and Cooper. The importance of this distinction
is shown by the case of Newborne v. Sensolid> where the plaintiff
signed a contract as director of a company which had not yet been
incorporated: it was held that he could not sue on the contract
personally. The plaintiff in Newborne v. Sensolid, like the defendants
in Bldck v. Smallwood and Cooper, signed not as agent of the nonexistent company, but as the company itself; and the company not
then being in existence, the contract was nugatory.
Jacobs J. thought that it was not open to him not to follow the
decision of the Court of Appeal in Newborne u. Sensolid, but distinguished the facts in Newborne u. Sensolid from those in the case before
him on the grounds that in Newborne u. Sensolid the person who
1
2
3
[I9641 N.S.W.R.1121.
(1866) L.R.2 C.P. 174.
[1954] 1 Q.B.45.
signed on behalf of the non-existent company was the plaintiff,
whereas the persons who signed on behalf of the non-existent company
in the case before him were the defendants. Jacobs J. denied that it
made any difference whether a person who signed a contract on
behalf of a non-existent company did so as an agent or as a director;
he held that the true distinction between Kelner v. Baxter and Newborne v. Sensolid was that in Kelner v . Baxter the persons who signed
on behalf of the non-existent company were the defendants, while in
Newborne v. Sensolid it was the plaintiff who signed on behalf of the
non-existent company, and said:-4
"Now, the reasons which could lead to such a conclusion
could be various and it may be true to say that there is a body
of reasoning in the judgment of Parker J., and in the judgments
in the Court of Appeal which would lead to the conclusion that
there would be no difference whether the person signing be
plaintiff or defendant. With great respect to their Lordships I
cannot accept that reasoning; I do not think that Kelner v.
Baxter was simply a case where, on a true construction of the
contract, the agent intended a personal liability, nor do I think
that, generally speaking in the English Law, a difference in legal
liability arises depending upon whether a written contract is
expressed in the form: "A" as agent for "X" Limited, and "X"
Limited with a subscription "A" or "A director". I t must be
borne in mind that, except in special circumstances, a person
contracting as agent is presumed not to intend to make himself
personally liable.
In my view a distinction must be drawn between the position
of a plaintiff and the position of a defendant. Where the person
who signed as agent is the plaintiff, the defendant is entitled to
say: 'I never contracted with you, I intended to contract with
"X" Limited and I cannot have a different contracting party
forced upon me'. On the other hand, when the agent is sued on
the contract, it seems to me that the other contracting party is
entitled to say: 'Since you contracted on behalf of a fictitious
principal you must be presumed to have intended to make yourself personally liable, otherwise our solemn dealings were a farce;
even though I intended to contract with a non-existent person,
I can elect to treat the contract as one with you personally'.
I t is true that if it is made clear that the agent accepts no
personal liability, whether or not the company is in existence,
4
[I9641 N.S.W.R.1121, at 1123.
then there will be no room for the imposition of a personal liability upon him. Such a case would be a rare one, but the possibility
of such case points to the principle, which in my view, is applicable, namely the principle of estoppel. The defendant in such
case cannot be heard to say that he did not intend to assume any
personal liability, when the effect of such an assertion would be
to destroy the possibility of the f i i contract and relationship
which the other party intended."
It is submitted that Jacobs J. was wrong both in his reasoning and
on the authorities.
In Newborne v. Sensolid Parker J. made it clear that he distinguished that case from Kelner v. Baxter on the grounds that the
defendants in Kelner v . Baxter signed as agents, whereas the plaintiff
in Newborne v . Sensolid signed as a director, and said:--6
"Mr. Pearl, however, argued, and it was an argument which
impressed me, that the principle in those cases to which I have
referred had no application here. In those cases there was an
agent undertaking to do certain things himself as agent for somebody else. In the present case, however, unlike Kelner v. Baxter
and Harper @ Co. v. Vigers Brothers, there is no signature by
anybody at all as agent. To bring this case within the principles
of those cases the contract, it seems to me, would have to read:
'I, Leopold Newborne, on behalf of the company agree to sell,
and have sold to you . . .' and so on, and signed 'Leopold Newborne, by authority of and as agent for the company'. In other
words, the agent would be contracting to do certain things,
albeit as agent . . . . But that is not this case."
The judgment of Parker J. was expressly approved by the Court of
Appeal (Lord Goddard C.J., Morris and Romer L.JJ.), and Lord
Goddard C.J. said :-6
"What we cannot find in this case is that Mr. Newborne
ever purported to contract to sell either as agent or as principal.
The contract was one which he was making for the company, and
although Mr. Diplock has argued that in signing as he did Mr.
Newborne must have signed as agent, since the company could
only contract through agents, that was not really the true
position. . . . I t is a case in which the company is contracting
and the company's contract is authenticated by the signature of
5
6
[1954] 1 Q.B. 45, at 49.
Ibid., at 51.
I
one of the directors. This contract purports to be a contract by
the company; it does not purport to be a contract by Mr. Newborne."
In support of his decision Jacobs J. cited Summergreene v . Parker7
and Kings Norton Metal Co. v. Eldridge.8 I t is submitted that these
cases do not in any way assist his argument, and are, indeed, irrelevant.
I n Summergreene v. Parker the plaintiff, an estate agent, was employed by the defendant to sell her business on commission. He obtained
an offer, which the defendant accepted, from two persons who purported to be acting as trustees of a company "to be formed". The
defendants refused to complete the sale and the company was never
formed. The plaintiff sued for his commission. The Full Court of New
South Wales, reversing the decision of the trial judge, held that on the
principle of Kelner v . Baxter the two "trustees" were liable on the
contract and that therefore the plaintiff could recover his commission.
The High Court (Latham C.J., Williams, Webb and Fullagar JJ.)
reversed this decision on the ground that the offer made by the
"trustees" was too uncertain to constitute a binding contract. The
question of the personal liability of the "trustees" under the rule in
Kelner v. Baxter did not therefore arise, and Fullagar J. said:-D
"I do not myself think that Kelner u. Baxter . . . affords any
assistance in the present case."
The case of Kings Norton Metal Co. v. Eldridge is of even less assistance. In that case the plaintiffs sold goods to a rogue who was trading
under the assumed name of Hallam & Co. and who resold them to
the defendants, who bought them bona fide and for value. The Court
of Appeal held that as there was no real firm called Hallam & Co.
known to the plaintiffs, the contract was not void for mistake but
merely voidable for fraud. The question of agency did not arise.
Jacobs J., in the course of his judgment, based the personal
liability of the defendants on the principle of estoppel. However, in
Kelner u. Baxter, the Court of Common Pleas (Erle C.J., Willes,
Byles, and Keating JJ.) made no reference to the principle of estoppel, and decided the case on the ground that when an agent contracts
on behalf of a non-existent principal he is personally liable; while in
Newborne v. Sensolid Parker J. expressly denied that Kelner v. Baxter
was decided on the basis of estoppel and said:-lo
7
8
9
10
(1950) 80 Commonwealth L.R. 304.
(1897) 14 Times L.R. 98.
(1950) 80 Commonwealth L.R. 304, at 323.
[I9541 1 Q.B. 45, at 47.
". . . it is plain that this principle, that the agent is liable, is not
based on breach of warranty of authority, because, as I have said,
the principal is not in existence; it is not bksed on any question
of estoppel; but it is based on this principle, that it is only by
holding him personally liable that any effect can be gven to
the contract."
And even if the decision in Kelner v . Baxter had been based on estoppel, it is submitted that that prinicple would have been of no assistance
to Jacobs J. in Black v. Smallwood and Cooper. The only representation made by the defendants in that case which could possibly ground
an estoppel was that a company existed, so that they were estopped
from denying the existence of the company: but the company in fact
did not exist and estoppel cannot create a non-existent entity, nor
can it create a liability. A more promising line of attack would be
one based on breach of an implied warranty, although this would
involve differing from Newborne v. Sensolid, which Jacobs J. does
not overtly profess to do: even then, however, the only remedy available to the plaintiffs would have been damages, not specific performance.
Support for the proposition of Jacobs J. that a distinction must
be drawn between the position of a plaintiff and that of a defendant
can be found in the case of Hollman v . Pullin.ll In that case the
defendant agreed to work as a medical officer for a medical association, one of the terms of the agreement being that on leaving the
service of the association he could not practice as a medical practitioner
within a certain area. The plaintiff signed the agreement on behalf
of the association which, at the time he signed the document, had
not yet been formed. When the defendant later left the association's
employment and entered into practice within the prohibited area,
the plaintiff sued for an injunction. Vaughan Williams J. dismissed
the action and said:--l2
"It must not be assumed that the question admits of the same
solution whether the supposed agent is suing or is being sued.
It might well be that an agent who without any real principal
induced another to accept a contract might find it difficult upon
the facts to escape personal liability as himself the contractor,
and yet if he himself were endeavouring to sue on the same contract he might find the difficulty reversed when he endeavoured
11
12
(1884) Cab. & E. 254.
Zbid.. at 257.
to enforce it against one who denied that he ever entered into
such relation with him personally."
In Hollman v. Pullin, however, the plaintiff signed as agent, not as
director; moreover, it was a case at first instance, and the view expressed by Vaughan Williams J. is directly contrary to that expressed by
Parker J. in Newborne v . Sensolid in a judgment expressly approved
by the Court of Appeal: it is also directly contrary to the later decision
of Pickford J. in Harper 3 Co. v. Vigers Brothers,18 a decision which
was approved by Parker J. in Newborne v. Sensolid. In that case the
plaintiffs entered into a contract with the defendants, professing to
act "as agents": they did not in fact have any principals, and it was
held that they could sue on the contract themselves. Furthermore, it
is submitted, Hollman v. Pullin is of dubious authority as it appears
to be based on a complete misconception of Kelner v . Baxter. In
Hollman v. Pullin Vaughan Williams J. said :-"
". [it was] maintained
that it was a general principle of
law that wherever an agent or a representative affected to conclude a contract on behalf of an alleged principal, and no such
principal existed, the agent was in law himself the contracting
party; and for this [was] cited the authority of Kelner v . Baxter.
There is however no authority for laying down such a proposition
as a rule of law."
With respect to the learned judge it is precisely this proposition which
was laid down by the Court of Common Pleas in Kelner v . Baxter. In
that case Erle C.J. said:-l5
"The cases referred to in the course of the argument fully bear
out the proposition that, where a contract is signed by one who
professes to be signing 'as agent', but who has no principal existing at the time, and the contract would be altogether inoperative
unless binding upon the person who signed it, he is bound
thereby."
And Byles J. said:-16
"The true rule, however, is . . that persons who contract as
agents are generally personally responsible where there is no other
person who is responsible as principal."
In Black v. Smallwood and Cooper Jacobs J. expressed the view
that the question before him was one of considerable general import-
..
...
.
[I9091 2 K.B. 549.
(1884) Cab. & E. 254, at 256.
15 (1866) L.R. 2 C.P. 174, at 183.
16 Zbid., at 185.
1s
ance. It is submitted that its practical importance is probably restricted
to cases where the remedy of specific performance is available: for
even although "directors" of non-existent companies who sign as
directors and not as agents are not liable personally on the contract,
nor for breach of warranty of authority, yet they may be liable in
damages either for fraud or for negligent misrepresentation under the
principle in Hedley Byrne v. Heller.17
W. E. D. DAVIES."
17
[1963] 3 Weekly L.R. 101, [1963] 2 All E.R. 575.
LL.B. (Wales), of Gray's Inn, Barrister-at-Law; Senior Lecturer in Contract
and Mercantile Law, University of Western Australia, 1961-.