Chapter 6CompaniesSolutions to the problem of personal
liability of promoters
A promoter or other person conducting the company’s
business prior to its incorporation can overcome the
difficulties facing him as regards personal liability in the
following ways.
1 By incorporating the company before any business is
done so that there are no pre-incorporation transactions.
2 By agreeing a draft contract with the other party and
making it an object of the company that the company
shall enter into it on formation. Nevertheless, if the com-
pany does not in fact enter into it, through the agency of
its directors, there is no binding agreement either on the
promoter or on the other party or the company.
3 By making a binding contract between the promoter
and the other party and a draft contract on the same terms
with the company. The binding contract must provide
that once the company is formed and signs the draft
contract through its agents, the promoter is released
from the first contract which was binding on him.
This is a simple solution for most promoters who,
after all, are usually promoting their own businesses as
companies. They are normally in charge of the company
and the board following incorporation and can easily
arrange that the company signs through its agents the
draft contract, thus releasing the promoter from his first
binding contract.
4 By making a pre-incorporation contract with a specific
clause saying that the promoter is not liable on it, as s 51
allows. There would seem to be little point in a third
party signing such a contract since neither the company
nor the promoter would be bound.
It is possible to purchase from company registration
agents a company which is already formed, sometimes
called a ‘shelf ’ company because the agent takes it off his
shelf and hands it over in terms, at least, of its essential
documents. In such a case problems relating to pre-
incorporation contracts do not arise because the com-
pany is in existence when the contract is made. It should,
however, be noted that it will be necessary to change the
directors and secretary of the shelf company since these
will be the agents who formed it; also, the name may not
suit and may need to be changed.Contracts (Rights of Third Parties)
Act 1999
Under this Act the promoter and the third party are able
to give the company, when it is incorporated, the right
to sue and be sued upon a pre-incorporation contract.
The Act makes clear that a party given such rights in a
contract (in this case the particular pre-incorporation
contracts(s)) does not have to be in existence when the
original contract is made.
However, the use of the 1999 Act in this way will not
free the promoter from liability because he or she will
still be a party to the underlying contract on which the
company has been given third-party rights.The company’s constitution
Section 17 deals with this and is a new provision. Under
its provisions a company’s constitution includes the
following:
■the articles of association and the resolutions and
agreements set out in s 29, e.g. special resolutions;
and
■resolutions giving the directors authority to allot
shares and for plcs to effect a market purchase of their
shares;
■a resolution for voluntary winding-up (members or
creditors);
■the certificate of incorporation.151liable on it’. Some commentators have suggested that
this means that the maker of the contract cannot sue on
it but only be sued by the other party. This interpretation
would produce a rather one-sided agreement and the
Court of Appeal affirmed in Braymist Ltd v Wise Finance
Co Ltd(2002) that a claim can be brought on a pre-
incorporation contract by the person purporting to act
for the company. In that case a solicitor signed a pre-
incorporation contract for the sale of land on behalf of
Braymist. Wise Finance, the other party, later refused to
go on with it. Braymist and the solicitor joined in a claim
for damages and it was held that the presence of the
solicitor as a claimant resulted in the claim succeeding.
The solicitor was not merely liable on the contract but
could also sue for its breach. The solicitor would hold
any damages received on behalf of the company and
could be made to account to the company for them if he
or she refused to account though that scenario did not
arise in this case nor would it be likely to in practice.