COMPANIES ACT 1985

Companies Act 1985

Companies Act 1985

Introduction

A pre-incorporation contract is a contract purported to made by or on behalf of a company which has not been formed. It is the intention of this essay to examine how the courts have decided on promoter's liability in relation to pre-incorporation contract. As stated above, a pre-incorporation contract is one which is attempted to be made on behalf of a company which is not yet formed. (Sealy 2008:55)The problem with these contracts is who exactly is liable under them. The question to be asked is, is the company liable or is it the promoter who incurs liability. At common law, a number of rules were established. The first one is that until the company is formed it has no legal existence.

Discussion

The Companies Act 1985, which governs the ways in which companies in the UK are formed, registered and regulated, was designed to ensure that governance procedures were fully complied with during all stages of the company's life - from inception to existence and, if necessary, through the processes of bankruptcy and liquidisation. Large parts of the Act have subsequently been replaced by the Companies Act 2006, which is informed by swathes of modern EU business and financial legislation. However, until at least October 2009, parts of the 1985 act are still in force, including section 36C, which governs pre-incorporation contracts and the ways in which overlap can affect contracts that are drawn up between two parties of which one may be at an early stage of incorporation. This is understandable, (Alan ,John 2008:41)to a degree, since a new company will want to have various contracts and assurance in place before embarking upon the process of incorporation. However, the difficulty is that a pre-incorporated company has no ability to sign contracts, while the role of proxy signatories, such as individuals and solicitors, is barely covered by either the 1985 or 2006 acts. However, recognising the problems in this area, the 1985 act attempted to resolve a number of areas of difficulty.

The 1985 act seeks to formalise arrangements to deal with a number of inherent paradoxes that limit the efficacy of pre-incorporation contracts. Since a pre-incorporation contract involves a situation in which the corporation has yet to be incorporated, a person who purports to act on behalf of the corporation cannot have any authority as an agent for the corporation (the corporation would have to exist first before the steps could be taken to grant a person authority as an agent). As Janet Dine argues, "the paradoxes are understandable and, to an extent, sustainable, as long as you accept that any company will need to sign certain contracts before it can be formally incorporated" (Dine & Koutsias, 2007, p. 158). There is, under English law, a need for a pre-incorporated company to have some kind of legal status, but there is (as yet, including the 2006 act) no provision for an official pre-incorporation status; instead, this is largely a mixture of various commonly accepted ...