by John Wojtowicz (Director - Law Central Legal)

To best understand the concept of pre-registration contracts, it would be helpful to first consider a hypothetical situation. Mr. Smith decides he is going to start a company called Smith’s Shoes. The company is to sell shoes and be incorporated in Australia under the Corporations Act 2001 (Cth). Before he gets to incorporate the company, Mr. Smith finds the perfect property for him to sell shoes from. The seller of the property is willing to give Mr. Smith a bargain price, but it has to be purchased right away. Mr. Smith signs the contract on the behalf of ‘Smith’s Shoes Pty Ltd’ despite the fact that the company doesn’t exist yet. Alternatively, Mr. Smith might enter into a contract for the supply of shoes under the name ‘Smith’s Shoes Pty Ltd’ before he has registered the company. In both situations, Mr. Smith has endeavoured to contract on behalf of a company which doesn’t exist because it hasn’t been registered. This is known as a pre-registration contract.

Historically and in other jurisdictions, pre-registration contracts have also been referred to as pre-incorporation contracts. The current Australian legislation refers to them as ‘pre-registration contracts,’ making it the preferred term. However, it is useful to know the terms have been used interchangeably. Pre-registration contracts have been legislated in Part 2B.3 of the Corporations Act 2001 (Cth). This includes sections 131, 132, and 133. Section 133 makes it clear that part 2B.3 is intended to replace any rights or liabilities anyone might otherwise have had in relation to pre-registration contracts. This means the previous statutory provisions and the common law can no longer be relied upon for establishing rights and liabilities.

Under the Corporations Act 2001 (Cth), the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract within the agreed time period or, if no time was agreed upon, within a reasonable time after the contract was entered into. If the company is not registered or the company is registered but does not ratify the contract or enter into a substitute for it, again within the time agreed or within a reasonable time after the contract was entered into, then the agent entering the contract on behalf of the unregistered company may be held liable for damages. Each of the requirements and specific liabilities are discussed in this bulletin. 

Recently, there has been a substantial increase in the ease and speed in which you can register a company due to the use of shelf companies and more recently, the ability to register a company online. Due to the rising use of online company registration, pre-registration contracts no longer experience widespread use. Most people in the situation of Mr. Smith would register a company online and be able to use it almost right away to sign the contract. However, not everyone chooses to register their company online and pre-registration contracts still experience some use.

Which Contracts will be deemed a pre-registration contract?

The meaning of a pre-registration contract is included in the Corporations Act 2001 (Cth). Section 131(1) begins:

“If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered …”.

Because of this section, the law relating to pre-registration contracts will not be applicable if the company in question has been incorporated before the contract is made. This issue was firmly decided by the courts in Commonwealth Bank of Australia v Australian Solar Information Pty Ltd (1986) 11 ACLR 380. The court ruled that the law of pre-registration contracts was not applicable when a shelf company was used to enter into a contract before the shelf company was renamed to suit the business purpose.

Company is reasonably identifiable with: 

As specified by s 131(1) of the Corporations Act 2001 (Cth), an unregistered company must be reasonably identifiable if the contract is to be binding. The most obvious solution to this problem would be to register the company under the same name that was used to enter into the contract. Mr. Smith could sign the contract on the behalf of ‘Smith’s Shoes Pty Ltd’ and then register ‘Smith’s Shoes’ as a proprietary limited company. The company would be reasonably identifiable with the one that entered into the contract.  Using the same name may not always be a possible or desirable solution. A company may still be deemed to be reasonably identifiable even if it is named differently. This is possible where the facts surrounding the contract clearly show that the registered company is the company which was intended to be contracted with. A well-prepared pre-registration contract will make it clear who the parties to the contract are, even if the company is unable to register the exact same name. It may be the case that a company which has the same name, but is substantially different to the company that is a party to the contract, will not be held as reasonably identifiable.

The Contract is Ratified:

For the company to be bound by the contract under s131(1) of the Corporations Act 2001 (Cth), it must be ratified by the company within a certain time frame. In all cases, registration of the company must take place before the company can ratify the contract. A company which is not registered technically does not exist, therefore it cannot ratify a contact. If the agent and the other party to the contract have agreed to a time, then the registration of the company and the subsequent ratification must be completed within the agreed upon time. If no time frame for registration and ratification has been agreed upon, then it must be done by the company within a reasonable amount of time after the contract is entered into. If the time frame requirements are not met, then the contract will may be deemed enforceable under the Corporations Act 2001 (Cth).

What will constitute ratification was outlined by Basten JA in Aztech Science v Atlanta Aerospace (Woy Woy) [2005] NSWCA 319. Ratification may be express or implied by the company. A contract will be expressly ratified by a company when the company’s language or conduct specifically acknowledges the contract as their own. Implied ratification will occur when the company does not expressly acknowledge the contract as its own, but acts in a manner which is only explainable by the acceptance of the contract as its own. In determining ratification, the concept of an ‘act’ includes positive acts made, as well as omissions or failure to act. Basten JA held that in some cases it will be necessary to communicate the ratification to the other party, yet in other circumstances it may not be necessary. An usual circumstance where communication may not be deemed necessary for ratification, is when there is only a small time frame left in which to ratify. In those circumstances, an internal act of governance by the company which adopts the contract might be sufficient to meet the ratification requirement.

Liability:

If the company successfully registers and ratifies the contract, then they will be held as bound by that contract. The company will then hold all the entitlements and obligations which come from being a party to the contract. Failure to perform the required obligations means they will be liable for breach of contract. If a company breaches the contract after ratifying it, statute allows the court the discretion to hold the contracting agent liable to pay all, or part of, the damages the company is ordered to pay for the breach of contract.

If the company is not registered, then the agent will be liable to pay damages to the other parties to the contract. The amount of damages the agent will be required to pay, is equal to the amount of damages the company would have paid if the contract was ratified but not performed.

If the company is registered but the company does not ratify the contract or enter into a substitute contract, then the agent will have the same liability as if the company had not been registered. However, in these circumstances 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 the agent is liable to pay; transfer property the company received under the contract, and/or pay an amount to a party to the contract.

The Corporations Act 2001 (Cth) imposes a high level of liability onto the contracting agent of a pre-registration contract. The law allows the agent to be released from this liability if the other parties to the contract sign a release of liability. However, even after the release, the agent will not have any right of indemnity against the company regarding their liability under the law of pre-registration contracts.

Gold and platinum members read on for information on changing the agreed time frame for ratification.  

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.