personal liability of a person who contracts for a non-existent company
Sri Lanka Law Reports - 2002
- Volume 1 , Page No - 176
COURT OF APPEAL
TILAKAWARDANE, J. AND UDALAGAMA, J.
CA NO. 401/94- DC
COLOMBO NO. 1905/M
AUGUST 23, 2000 AND MARCH
30, 2001
Companies Act, No. 20
of 1982 - Account opened with Bank by sole Directors - Facilities obtained by
the Directors - Company not incorporated - As the company was non-existent is
the contract a nullity? - Liability of the "Directors".
The
plaintiff-respondent instituted action against the defendant-appellants for the
recovery of a certain sum with interest. The defendant-appellants entered into
an agreement with the plaintiff-respondent Bank to open an account between the
plaintiff Bank and A. D. R. Products, the 1st and 2nd defendants-appellants
were named as Directors and they signed as Directors. The company was never
formed and the Bank was not informed of this fact; overdraft facilities have
been requested for and obtained by the 1st defendant-appellant purporting to
act as the Director on behalf of A. D. R. Products. It was contended that since
no company was formed, the contract was a nullity and could not be enforced.
The District Court held in favour of the plaintiff-respondent.
On Appeal -
Held :
(1) In pursuance of the
agreement monies were released and accepted by the defendant-appellants.
(2) Sums of money
released from time to time into the account was released only because the
defendants-appellants had duly completed and handed over the document P1,
holding out that a company was in the process of being registered.
These monies had been depleted
or used by the defendant-appellants, both had the sole authority and were the authorized
signatories duly recognized by the Bank.
'When
a person contracts on behalf of a non-existent company he was personally
liable.'
Per Tilakawardane, J.
"Once monies were
received there was an accountability on those actually receiving the monies to
repay the same, and they could not seek protection under legal fiction to avoid
payment."
(4) The rights and
obligations of the parties to the contract, the Bank on the one hand and the
defendant-appellants on the other cannot be transferred to a non-existent
company, which in any event was not bound by the terms of the contract at the
time it was made.
(5) Notwithstanding the
introduction of the words "Director", "Chairman" the
defendants-appellants were personally responsible and liable to pay the monies
outstanding on the account.
(6) The corporate veil,
which would have shielded them from liability cannot be availed of as
admittedly the body corporate A. D. R. Company Ltd., was non-existent.
APPEAL from the
judgment of the District Court of Colombo.
Cases referred to :
1.
Newborne v. Sensolid - (GB) 1954 QB 45,
1953 1 ALL ER 708.
Newborne v Sensolid
(Great Britain) Ltd [1954] 1 QB 45
Mr Newborn was selling goods on behalf of the
Newborn company that was not incorporated. The contract was signed – Newborne
(London) LTD and underneath was the name of the future director – Leopold
Newborn.
Held: Leopold Newborne never purported to
contract to sell nor sold the goods either as principal or agent. The contract
purported to be made by the company, on whose behalf it was signed by a future
director, and inasmuch as the company was non-existent at the material time,
the contract was a nullity.
The rule of privity of contract keeps away the
company from pre-incorporation contract.
2. Kelner v. Baxter and
Others - 1866 LR 2 Court of Common Pleas. CORPORATE LAW
Kelner v Baxter (1866)
LR 2 CP 174
Facts
A group of promoters
for a new hotel company, the “Gravesend Royal Alexandra Hotel Company”
(Gravesend) entered into a contract for wine.
This contract was
purportedly on behalf of Gravesend, but Gravesend had not at that point been
registered. It was a “pre-incorporation
contract”.
Gravesend was
eventually registered, but by that stage the wine had been consumed before the
money had been paid. Gravesend soon went
into liquidation.
The promoters, as
Gravesend’s agents, were sued.
The promoters argued
that, as Gravesend had been incorporated, the contract had subsequently been
ratified and the liability had passed to the company.
Issues
Were the agents liable
for the pre-incorporation contract post ratification by Gravesend?
Held
The Court of Common
Pleas held that because the company did not exist at the time of the signing of
the agreement it would be wholly inoperative unless it was binding on the
promoters.
A stranger cannot, by
subsequent ratification, relieve the promoters from that responsibility of
liability.
A promoter can avoid
liability if a substitute agreement novices the original pre-incorporation
contract.
3. Ex parte Hartop -12
Ves 349 at 352.
4. Furnivall v. Coombes
- 6 Scott NR 522.
Lalanth de Silva for
defendant-appellants.
Ajantha Coorey with
Nuwan Kodikara for plaintiff-respondent.
Cur. adv. vult.
May 23, 2001
SHIRANEE TILAKAWARDANE,
J.
This appeal has been
preferred by the defendant-appellants against the judgment of the Additional
District Judge, Colombo, dated 31. 03. 1994, wherein he had held in favour of
the plaintiff-respondent and granted the reliefs prayed for with costs.
The plaintiff Bank
instituted action against the defendants who were husband and wife, jointly and
severally for the recovery of a sum of Rs. 858,065/70 together with interest
thereon at 30% per annum from 1st May, 1986, until full and final settlement
and turnover tax on such interest at 5% and costs.
Parties admitted the
Contract (P1) which was an agreement dated 22. 06. 1979 to 'comply with the
rules for the time being for the conduct of such accounts' and to open an
account between the plaintiff Bank and A. D. R. Products. 1st and the 2nd
defendant-appellants were named and they signed as the sole Directors of that
company. The 1st defendant-appellant admittedly signed this agreement as
'Director' on page (1) of the contract but on its reverse signed as the
Chairman. The agreement also purported to carry a certification on its reverse
that a Board meeting of the Board of Directors of A. D. R. Products had been
held on 20th, June, 1979, resolving : "that a Banking Account in the name of
the Company be opened with the Commercial Bank of Ceylon Limited and that the
said Bank be and is authorized to honour Cheques, Bills of Exchange and
Promissory Notes drawn accepted or made on behalf of the company by any one of
the Directors and to act on any instructions so given relating to the account,
whether the account be overdrawn or not, or relating to the transactions of the
Company". This Board resolution had also been signed by the 1st
defendant-appellant (as Chairman) and the 2nd defendant-respondent (as
Director).
This agreement P1 had
been tendered with P7 which was a letter dated 22. 06. 1979 sent by the 1st
defendant-appellant signed by him as Director of A. D. R. Products. This letter
was a request to open the account in the name of company A. D. R. Products, and
informs the Bank that "The Company is under incorporation and no sooner we
receive the Certificate of Registration and Articles of Memorandum will be
forwarded to you".
Admittedly, this
company was never formed (vide admissions at page 106 of the brief) and the
Bank was not informed of this fact by either of the Directors/Chairman. The
reasons for not forming the company were never given as neither the 1st
nor the 2nd defendant-appellant had given evidence at the
trial although, they had both admittedly signed the aforesaid agreement P1 with
the Bank, as well as the purported resolution of the Company, (contained in the
reverse of P1).
Nevertheless, by
letters dated 14. 09. 1981 (P6) and 15. 07. 1983 (P5) repeated overdraft facilities
have been requested for and obtained by the 1st defendant-appellant purporting
to act as the Director on behalf of A. D. R. Products.
The Bank had by letter
dated 24. 01. 1984 (P4) addressed to the 1st defendant-appellant in his
personal capacity, informed him that the overdraft facilities of several
accounts including the aforesaid account
maintained in the name of A. D. R. Products were unsettled and requested him to
regularize the accounts. The letter also referred to an earlier letter dated 10.
01. 1984 which had been sent to the 1st defendant-appellant on the same
subject. The letter P4 sent under
registered post had
been addressed to the 1st defendant-respondent in his personal capacity. He had
not informed the Bank that he was not liable or that such amounts were not due
from him.
Two further letters
dated 17. 07. 1987 were sent under registered post to both the 1st and the 2nd
defendant-respondents by the said Bank demanding settlement but neither letter
had been answered nor had the Bank been informed that the company- had not been registered.
The document P2, which
was also admitted, was an extract of the statement of accounts relating to the
account bearing No. 269 in the name of A. D. R. Products for the period 1.10.
1981 to 27. 05. 1986. The statements revealed that the account had been overdrawn
in a sum of Rs. 858,065.70 of 30. 04. 1986. The fact that this amount was
outstanding to the Bank at all times and has not been settled to date was not
challenged. Most importantly, the fact that these monies had been received
personally by both the 1st and 2nd defendant-appellants had been admitted by
admission (2) recorded on 16. 08. 1993. (vide page 105 of the brief).
According to the
evidence of the witness for the plaintiff Bank, B. Y. Ranjith Sebasthian,
monthly statements had been sent to the two defendant-appellants, (page 113 of
the brief). Neither of the defendants had ever testified that they had not
received these statements nor that they had no knowledge of the monies paid out
on the accounts. The evidence by this witness that neither of the two
defendants had ever denied receiving these monies therefore went unchallenged
(page 114).
Counsel for the
defendant-appellants submitted that this witness had ". . . . plainly
admitted that the 2nd defendant was not involved at all" (page 124). This
is incorrect, as the question that had been put to the witness Ranjith
Sebasthian was that there was no connection between the personal accounts and
the account that was the subject-matter of the case. It was to this question
that the witness had replied that no monies from the impugned account had been
paid into a personal account of the 2nd defendant-respondent (page 124). The
witness did not testify that 'the 2nd defendant was not involved at all'. Even
an inference on this reply alone that the 2nd defendant was not involved at all
cannot be made.
Importantly, this
witness stated that unless both the Directors had signed the agreement the loan
would not have been given pending the formation of the company, and the loan
was granted to both of them jointly (page 115). The witness further stated that
every change in address of the defendant-appellants had been informed to the
Bank, and accordingly similar change in the address of the purported company
had also simultaneously been requested (page 127). This witness also stated
that there was transference of monies between this account and the other
personal accounts of the 1st defendant-appellant (pages 128 and 129).
Significantly, in spite of the abovementioned evidence of the witness for the
Bank even the 2nd defendant-appellant did not give any evidence disclaiming her
accountability or liability.
The position of the
defendant-appellants was that in considering the privities of the contract, the
Court must bear in mind that the defendant-appellants had at all times acted as
Directors/Chairman of the "A. D. R. Products Ltd.". Since no company
by that name was formed, they claimed that A. D. R. Products Ltd. was
non-existent and therefore the contract was a nullity and could not be
enforced. Counsel cited the case of Newborne v. Sensotid (1) in support of his
no proposition that an unformed company was not liable. In that case a contract
for the sale of goods by a company was signed by the sellers as "yours
faithfully, Leopold Newborne (London) Limited", after which the name of
Leopold Newborne was written. The Courts held that the contract could not be
enforced because the company had never been formed, as evidently the
contracting party was the company. Leopold Newborne could not prove that he
was the seller of the goods and therefore he could not sue the buyer for
non-acceptance of the goods. The legal principal enunciated by Lord Goddard was
that he could not enforce his contract when he purported to sell not his goods
but goods belonging to a company. He could not claim it to be "his
contract", "when he never signed on behalf of the company or as an
agent of the company but as the company. The document on which he was suing was
held to be a nullity. The nexus of Leopold New borne to the goods he claimed
could not be established. The legal principal contained in that case was
different and has no relevance to the present case.
In England the law
relating to non-existent companies was altered by legislative intervention in
1972 by section 9 (2) of the European Communities Act of 1972. Now Companies
Act of England 1975 section 36 (c). This section reads as follows
"Where a contract
purports to be made by a company or by a person as agent for a company, at a
time when the company has not been formed, then subject to any agreement to the
contrary the contract shall have effect as a contract entered into by the
person purporting to act for the company or as agent for it and he shall be
personally liable on the contract accordingly."
The Sri Lanka Companies
Act, No. 17 of 1982 does not have a similar provision.
In the present case in pursuance of the agreement P1 monies were released and accepted by the defendant-appellants. The sums of money released, from time to time, into the account P2 was so released only because the defendant-appellants had duly completed and handed over the document P1, holding out that a company was in the process of being registered. (P7) These monies had been depleted or used up by the defendant-appellants. Both had the sole authority and were the authorized signatories duly recognized by the Bank. No tangible evidence had been given that anyone of them had not operated the account or did not receive any benefit. Even though the opportunity was afforded to the defendant-appellants neither gave evidence.
The case of Kelner v. Baxter and Others (2) had set down the principle that when a person contracts on behalf of a non-existent company he was personally liable.
In the same case (page
180) reference had been made to ex parte Hartopm at where Lord Erskine stated
that ". . . The mere fact of a person professing to sign a contract for or
on behalf of or as an agent for another will not per se prevent responsibility
as a contracting party to attach to the former".
In the case of Fumivalt v. Coombes (4) a clause to exclude personal responsibility was included and was held to be repugnant and void, even though the company could not be held liable due to its non-existence.
The principle that underlay these cases was that once monies were received there was an accountability on those actually receiving the monies to repay the same, and they could not seek protection under legal fiction to avoid repayment.
On the face of P1 it was clear that the intention of the parties who signed it was to be liable for the monies that had been received.
There was no doubt that the monies were received and spent by defendant-appellants and no others. The rights and obligations of the parties to the contract, the Bank on the one hand and the defendant-appellants on the other cannot be transferred to a non-existent company, which in any event was not bound by the terms of the contract at the time it was made. The defendant-appellants were personally bound under the obligations created in terms of the contract P1 signed by them. Notwithstanding, the introduction of the words "Director", "Chairman" the defendant-appellants in the circumstances of this case were personally responsible and liable thereto. The defendant-appellants were therefore personally liable to pay the monies outstanding on the account.
The corporate veil which would have shielded them from liability, cannot be availed of, as admittedly the body corporate A. D. R. Company Ltd. was non-existent. I see no reason to interfere with the findings of the Additional District Judge holding them liable to repay the said monies.
Accordingly, the appeal is dismissed with incurred costs payable by the defendant-appellants to the plaintiff-respondent Bank.
UDALAGAMA, J. - I agree.
Appeal dismissed.
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