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

companys 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

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 companys 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.