AUTHOR: RAHMAN APALARA
Student (LL.B), Faculty of Law, University of Lagos.
In order to enjoy the benefits of corporate personality, it is important that a company becomes incorporated under the enabling law or statute. A company is an association under an enabling law for the prosecution of some common purpose which may not necessarily be commercial or profit making but usually is. After incorporation, the company comes into existence and it can start its business operation as a company only after that. The rationale being that a company has no legal existence before incorporation. However, before incorporation, this association of persons usually have to conclude certain transactions in preparation for commencement of business. In so doing, promoters usually enter into agreement for the benefit of the prospective company, these agreements are known as Pre-Incorporation Contracts.
Pre-Incorporation contracts put very simply refer to contracts purported to be made on behalf of a company before its incorporation. In Sparka Electrics Nig. Ranor v. Ponmile (1986) 2 NWLR (Pt. 23) 519 at 525, the Court stated that “Pre-incorporation contracts are contracts purported to be made usually by promoters on behalf of a company before it is incorporated.” Before a Company is formally registered, a promoter may have entered into some contracts on behalf of the company before incorporation. It is important that Pre-Incorporation Contracts are distinguished from Provisional Contracts which are contracts made by a Company before the date at which it is entitled to commence business as seen in Re Otto Electrical Manufacturing Co., Jenkin’s Claim (1906) 2 Ch. 390. Provisional Contacts are not binding on the company before that date but they become so on that date. The Provision for provisional contracts was not retained in the CAMA and consequently, provisional contracts have become irrelevant. To be considered as a pre-incorporation contract, such contracts must have been made prior to the existence and incorporation of the company and it must confer a benefit on the company. The following are types of pre-incorporation contract: Joint Venture Agreement especially between Nigerians and Aliens; Shareholders’ Agreements; Contract for Payment of Promoters’ expenses; Directors’ Service Contract (appointment of the Managing Director); Contract Agreement for the acquisition of business or property (Takeover agreement) and Contract for Conversion of partnership to incorporated companies.
This article examines the decision in the Edokpolo Case in relation to effect of pre-incorporation contracts on a company post incorporation as well as the relationship between memorandum and articles of association and pre-incorporation contracts. The paper examines the statements of the Court in this regard and the arguments put forward by Counsel to both parties. Finally, the position of pre-incorporation contracts under Common Law upon which the decision in the Edokpolo Case and the position under the CAMA are considered.
The relevant facts are that the appellant, the plaintiff in the substantive suit filed in the Federal High Court Warri, is a limited liability company incorporated under the Companies Decree 1968 and carrying on business principally In Benin City. Sometime in 1975, the Appellant
and a German based company SEM Nigerian Holding G.H.B.H. and Company Hamburg agreed to set up a wire industry in Nigeria. On the 27th October 1975 to be precise, they entered into an agreement for purposes of incorporating a Nigerian company to carry out the industrial project. Under the agreement, the Appellant was to subscribe 40% of the share capital of the proposed company while the foreign partner was to subscribe 60%. This was in accordance with the Nigerian Enterprises Promotion Decree 1972 then in force, the activity of the proposed company having fallen Within Schedule 2 thereof. The provisions of the agreement principally evinced a desire on the part of both parties (i.e. the appellant and the foreign partner) that only two of them should be shareholders of the proposed company. The provisions of this agreement by the partners were incorporated in the Memorandum of Association of the proposed company. Pursuant to the agreement of October, 1975, the Sam-Edo Wire Industries Limited, 1st Respondent herein, was incorporated on 5th December, 1975.
In its consideration of the appeal before it, the Court of Appeal treated the agreement of 27th October, 1975 as a pre-incorporation agreement. On well-settled principles of Company Law, the Court held that that agreement could not bind the company Sam-Edo wire Industries Ltd. after its incorporation for it was never a party to it. J.C.A. stated as follows:
“… [no] authority in support of the proposition that a pre-incorporation contract can be imputed to a company registered under the Companies Act otherwise perhaps then (sic) by an Act of Legislature. This is simply because it is contrary to the fundamental concept of law which predicates that an agent must have a principal in existence when
the agency is created. There is nothing to prevent the company to enter into an
agreement on the same terms after incorporation but this is a far cry from
ratifying a contract which it could not possibly have made or authorised”
The Court held that that no new agreement existed neither was the Court of Appeal impressed by the inclusion of the October 1975 agreement in the Memorandum of Association. On appeal to the Supreme Court, very copious and well set out briefs of argument were filed by Chief Gani Fawehinmi learned Counsel to the appellant and Chief F. R. A. Williams, S.A.N., learned leading Counsel to the respondents. In his oral argument in expatiation of his brief, Chief Fawehinmi’s main point was that the 1st respondent company had adopted in its
general meetings and meetings of its board of directors the provisions of the
agreement of 1975 and that a new agreement between the appellant and the 1st
respondent company had come into existence. For his part, Chief Williams submitted that the agreement of 27th October 1975 was not a pre-incorporation agreement but a shareholders agreement between the appellant and the German company. This agreement could in no way bind the 1st respondent company.
The Court held that per Nnamani JSC that;
“It is now a well settled principle of Company Law that a company is not bound by a pre-incorporation contract being a contract entered into by parties when it was not in existence. No one can contract as agent of such a proposed company there being no Principal in existence to bind. It is also settled that after incorporation, a Company cannot ratify such a contract purported to be made on its behalf before incorporation.”
The Supreme Court also considered the question whether or not the insertion of a pre-incorporation contract in the object clause of a memorandum of a company would make it binding on the company. The Trial Court assumed that because the 1975 agreement was incorporated into the memorandum of association of the 1st Respondent Company, the terms were binding on that Company. The Court agreed with the Court of Appeal that this was a misconception of the true nature of the effect of the object clauses of a memorandum. The Court held that;
“The object Clause is no more than a list of the objects the Company may lawfully carry out. They are certainly not objects that the company must execute. The inclusion of the terms of the pre-incorporation contracts in the Memorandum of a company is an indication of a strong desire… that the proposed company after incorporation should execute the terms of the agreement so included.”
As to whether there can be a novation by which the company, after its registration can then enter into a new contract, on the same terms as the old contract, Justice Nnamani, JSC, held that at 562;
“But there is nothing preventing the company after incorporation from entering into a new contract to put into effect the terms of the pre-incorporation contract. This new contract can be in express terms or can be implied from the acts of the company after incorporation as well as from the minutes of its general meetings and board meetings.”
RATIONALE BEHIND THE RULE
In Kelner v. Baxter (1867) L.R. 2 C.P 174, it was held that at Common Law, a pre-incorporation contract was not binding on the Company because there was no principal on behalf of whom an agent could have contracted and that the Company was not permitted to ratify or adopt it. The Court stated that;
“…as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendant personally… where a contract is signed by one who professes to be signing ‘as agent,’ but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby; and a stranger cannot by a subsequent ratification relieve him from the responsibility”
Also in Stephen v. Build Co. (Nig.) Ltd. (1968) 1 All N.L.R. 188, the Supreme Court upheld the same principle even where the parties to the pre-incorporation agreement became the only directors and shareholders of the new company. However, as noted in the Edokpolo Case, there is nothing preventing the company after incorporation from entering into a new contract to put into effect the terms of the pre-incorporation contract. This new contract can be in express terms or can be implied from the acts of the company after incorporation as well as from the minutes of its general meetings and board meetings.
The position of the law has however shifted following the passage of the Companies and Allied Matters Act.
POSITION IN THE CAMA
Following several criticisms, there has been a departure from the common law rule. The Company and Allied Matters Act in its Section 72 provides thus:
- Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company, prior to its formation, may be ratified by the company after its formation and thereupon the company shall be bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto
It therefore follows that by this section, any contract or transaction purporting to be entered into by a Company or by any person on behalf of the company prior to its formation shall be bound by and ratified by the company after its formation, the company shall be bound by and entitled to the benefit thereof as if it has been and had been a party thereto.
The Courts made clear in SocieteGeneraleFavouriser Le Development Du Commerce Et De L’Industrie En France v SocieteGenerale Bank (Nigeria) Ltd (1997) 4NWLR Pt. 497 Pg. 8 that the provisions of the Act in Section 624 (1) and 626 make it abundantly clear that existing companies who wish to ratify pre-incorporation contracts agreements could do so because the act applies to them.
The decision in the Edokpolo case reaffirmed the common law principles on a Company’s non-liability for pre-incorporation contracts. It is clear that the common law rules were a source of considerable inconvenience for the promotion of business. Hence, the change in the position of the law, a change which is not restricted to Nigeria. Hence, the decision no longer represents the position of the law in Nigeria as the common law position that a company is not bound by a pre-incorporation contract has now changed in Nigeria by virtue of Section 72(1) of Companies and Allied Matter Act. Section 72(1) has completely hurtled the difficulties in legal theory disallowing a ratification of a contract made on behalf of the company prior to its incorporation. The injustice and unwarranted technicality of enabling a company to deny contractual liability when the directing minds who promoted and incorporated the company are still the ones who stand to benefit from the technicality, the statutory innovation were in accord with commercial reality.
Rahman Apalara is a Final Year Undergraduate of the Faculty of Law, University of Lagos.