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 comes
agreements
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 or on
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.
Szecket v 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.
Agency Principles
Ostensible/ Apparent Agency
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd. [1964] 2 QB 480
A managing director without express authority form the board, but with their knowledge, employed on
behalf of the company a firm of architects and surveyors for submission of an application for planning
permission, which involved preparing plans and defining boundaries. The company was liable for the fees.
Where an outsider deals with an officer of a company who holds himself out as having authority to engage
in a particular transaction then he will be held to have that authority
Statute
21. (1) A company has the capacity, and, subject to this Act and any
Capacity and
other law, the rights, powers and privileges of an individual including,
powers
without prejudice to the foregoing, the power to hold lands in any part of Trinidad
and Tobago or elsewhere.
(2) A non-profit company may not, without the licence of the President, hold
more than two acres of land but the President may by licence empower any such
company to hold lands in such quantity, and subject to such conditions, as the
President thinks fit.
(3) A company has the capacity to carry on its business, conduct its affairs
and exercise its powers in Trinidad and Tobago to the extent that the laws of
Trinidad and Tobago permit and in any jurisdiction outside Trinidad and Tobago to
the extent that the laws of that jurisdiction permit.
(4) It is not necessary for a by-law to be passed to confer any particular
power on a company or its directors.
(5) This section does not authorize any company to carry on any business or
activity in breach of(a) any written law prohibiting or restricting the carrying on of the business
or activity; or
(b) any provision requiring any permission or licence for the carrying on of
the business or activity
22. A company shall not carry on any business or exercise any power that it Powers
reduced
is restricted by its articles from carrying on or exercising, nor shall a company
exercise any of its powers in a manner contrary to its articles.
23. For the avoidance of doubt, it is declared that no act of a company,
Validity of acts
including any transfer of property to or by a company, is invalid by reason only that
the act or transfer is contrary to its articles.