Presentation on theme: "governance and capacity to"— Presentation transcript:
1 governance and capacity to Internal companygovernance and capacity tocontract
2 Promoters and preregistration contracts Corporate Law: Law principles and practicePromoters and preregistration contractsA promoter brings the company into existence and determines the type of company created.
3 The role of the promoter Corporate Law: Law principles and practiceThe role of the promoterThe Corporations Act does not really state the definition or function of a promoter‘A promoter is one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose’.Twycross v Grant (1877) 2 CPD 469
4 The role of the promoter cont … Corporate Law: Law principles and practiceThe role of the promoter cont …A promoter is essentially the person who formsa company by carrying out the steps leading to the registration of the company.Passive promotersA person can be held to be a promoter even though they do not take an active part in the registration of the company and other incidental activities, but leave it to others on the understanding that they will benefit or profit from the enterprise.Tracy v Mandalay Pty Ltd (1953) 88 CLR 215
5 Duties of promoters Fiduciary Duties Corporate Law: Law principles and practiceDuties of promotersFiduciary DutiesA promoter stands in a fiduciary relationship with the company and must act bona fide in the interests of the company and not in their own personal interest.Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218
6 Duties of promoters cont … Corporate Law: Law principles and practiceDuties of promoters cont …A promoter’s fiduciary duties (similarly to directors) include:not to make a profit at the expense of the companyto make full disclosure of any interest in any contract entered into by the companyto disclose company profits to representatives of potential investorsto act honestly and with reasonable skill, care and diligence.Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218Gluckstein v Barnes  AC 240
7 Remedies for breach of duties Corporate Law: Law principles and practiceRemedies for breach of dutiesRescission: the company may rescind the contract when the parties can be returned to their pre-contractual position (Erlanger v New Sombrero Phosphate (1878) 3 App Case 1218); rescission and damages may also be recoverable.Recovery of secret profit: a secret profit may be recovered by the use of a constructive trust.Forfeiture: a promoter may forfeit any position they hold in the company (e.g. an appointment as a director).
8 Disclosure of personal interest Corporate Law: Law principles and practiceDisclosure of personal interestPromoters are required to disclose personal interest in the prospectus disclosure documentation under ss 711(2) and 711(3) of the Corporations Act 2001 (Cth).Promoters may also incur statutory liability under the following sections of the Act: 588FH, 711(2),711(3), 728, 729.
9 Pre-registration contracts Corporate Law: Law principles and practicePre-registration contractsA company cannot enter into a contract before it is registered, because it does not exist as a separate legal entity until registration.A pre-registration contract is made by a person on behalf of a company before it is registered or incorporated.At common law, a pre-registration contract is void.Kelner v Baxter (1866) LR 2 CP 174Black v Smallwood (1966) 117 CLR 52
10 Pre-registration contracts cont … Corporate Law: Law principles and practicePre-registration contracts cont …A party may be personally liable for a pre-registration contract if that was their intention.Bay v Illawarra Stationery Supplies Pty Ltd (1986) ACLR 429
11 Pre-registration contracts under s 131 Corporate Law: Law principles and practicePre-registration contracts under s 131Section 131 replaces the common law on pre-registration contracts and establishes the rights of the promoter, the company and a third party regarding a pre-registration contract:a company can ratify the pre-registration contractthe promoter remains liable if the company does not ratify the contracta court can determine how much the company and/or the promoter is liable for to third parties.
12 Pre-registration contracts under s 131 cont … Corporate Law: Law principles and practicePre-registration contracts under s 131 cont …Section 131 only applies to contracts made before the company is registered. It does not apply when a company was registered at the time the contract was made and later changed its name.Commonwealth Bank v Australia Solar Information Pty Ltd (1987) 5 ACLC 124.
13 Pre-registration contracts under s 131 cont … Corporate Law: Law principles and practicePre-registration contracts under s 131 cont …For ratification to be effective, the company must ratify and be registered within a time agreed to by the parties or within a reasonable time.Ratification is determined by the facts and may be express or implied.When the company ratifies the contract, it assumes all the rights and obligations under the contractAssumption of contract rights is not possible if the proposed company name was not reasonably identifiable with the company in whose name the pre-registration contract was entered into.Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd  NSWSC 967.
14 When a company is not registered or fails to ratify the contract Corporate Law: Law principles and practiceWhen a company is not registered or fails to ratify the contractUnder s 131(2) of the Corporations Act 2001 (Cth), a person (the promoter) is liable to pay damages to each party to the pre-registration contract if the company is not registered or if the company is registered but does not ratify the contract or enter into a substitute contract:within a time agreed by the partiesif there is no agreed time, within a reasonable time after the contract is entered into.
15 Corporate Law: Law principles and practice When a company is not registered or fails to ratify the contract cont …Under s 131(3) of the Corporations Act 2001 (Cth), if the promoters are sued under s 131(2), the court may do anything it considers appropriate in the circumstances, including ordering the company to do one or more of the following:pay all or part of the damages that the person (promoter) was liable to paytransfer all property that the company received because of the contract to a party to the contractpay an amount to a party to the contract.
16 Corporate Law: Law principles and practice When a company ratifies the contract but is unable to perform its obligationsSection 131(4) of the Corporations Act 2001 (Cth)provides for when the company is registered and ratifies the pre-registration contract under s 131(1) but fails to perform all or part of the contract because it is unable or unwilling to perform its contractual obligations.A court may order the promoter to pay all or part of the damages that the company is ordered to pay (s 131(4)).If the company does not pay, the promoter will be required to pay the third party.
17 Limiting the promoter’s liability Corporate Law: Law principles and practiceLimiting the promoter’s liabilityUnder s 132(1) of the Corporations Act 2001 (Cth), promoters may avoid liability if they obtain the consent of the other contracting parties to release the promoters from liability in relation to the contract.Under contract law, promoters may avoid personal liability by agreeing with the third party that a new or substitute contract will be entered into in place of the pre-registration contract after the company is registered (s 132(2)).Note: Under s 132(2) a promoter has no right of indemnity against the company if sued on behalf of the company.