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RATIONALE FOR PRE-INCORPORATION CONTRACT NOT BINDING AT COMMON LAW

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Dictum

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. The company was not permitted to ratify or adopt it, and it could not, after incorporation, enforce the contract, nor sue, e.g. for damages for breach of contract – Natal Land etc Co. Ltd. v. Pauline Colliery Syndicate Ltd. (1904) AC 120. These common law rules were a source of considerable inconvenience for the promotion of business.

— U. Mohammed, JSC. Societe Favouriser v. Societe Generale (1997) – SC.126/1994

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RATIONALE BEHIND NULLITY OF PRE-INCORPORATION CONTRACT

In Kelner v. Baxter (1866) L. R. 2 C.P. 174 Erie C.J. explaining the rationale of the principle [pre-incorporation contract] said: “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”.

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PRE-INCORPORATION CONTRACT NOT BINDING IS A COMMON LAW RULE

The rule that the company is not bound by a pre-incorporation contract purportedly made by it on its behalf, even if ratified by it after incorporation, is a rule of common law and not a statutory provision.

— Ogundare, JSC. Societe Favouriser v. Societe Generale (1997) – SC.126/1994

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LEAVE OF COURT BEFORE SUING A COMPANY UNDER LIQUIDATION

Let me quickly state that Section 417 of Companies and Allied Matters Act, 1990 is in all fours with Section 580 of Companies and Allied Matters Act, 2020. Now Section 417 of Companies and Allied Matters Act, 1990 provides:- “…if a winding up order is made or a provisional liquidator is appointed, no action or proceedings shall be proceeded with against the company except by leave of the Court.” The above provision is very clear and unambiguous. It means clearly that if a winding up order is made or a provisional liquidator is appointed, no action or proceedings shall be proceeded with against the company undergoing liquidation. The intendment of the said provision is not to stop an aggrieved party from proceeding against the company which has been issued a winding up order or which a provisional liquidator has been appointed, but that leave of Court must be sought and obtained before commencing the action or proceedings.

— J.I. Okoro, JSC. Universal Properties v. Pinnacle Comm. Bank, NJA, Opia, Heritage, Fatogun (SC.332/2008, Friday, April 08, 2022)

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IN RECEIVERSHIP COMPANY DOES NOT LOSE ITS LEGAL PERSONALITY

It is important to appreciate the fact that the company neither loses its legal personality nor its title to the goods in the receivership.

– Karibi-whyte, JSC. Intercontractors v. National Provident (1988)

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WHO MAY SUE FOR INJURIES DONE TO THE COMPANY

Jenkins, L.J. in Edwards Vs Halliwell (1950) 2 ALL ER 1084 @ 1066, where His Lordship held inter alia: “The rule in Foss Vs Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and or all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that if a mere majority of the company or association is in favour of what has been done, then cadit quaestio. Thus, the company or association is the proper plaintiff in all actions in respect of injuries done to it. No individual will be allowed to bring actions in respect of acts done to the company which could be ratified by a simple majority of its members. Hence the rule does not apply where the act complained of was ultra vires the company, or illegal or constituted a fraud on the minority and the wrongdoers are in the majority and in control of the company.”

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FRAUD LIFTS VEIL OF INCORPORATION

One of the occasions when the veil of incorporation will be lifted is when the Company is liable for fraud as in the instant case. – Galadima JSC. Alade v. Alic (2010)

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