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Free «Pre Registration Contracts» Essay Sample

Introduction

Section 131 of the Corporations Act, introduced in 2004, is responsible for outlining procedures that may be relevant to contracts that are made before registration. This is due to the statutory principles held by the common law which suggests that a person getting into a pre-registration contract is not by any means legally bound by that contract. This is due to the fact that the company does not exist thereby rendering null any legal entity, (E. Boros & J. Duns, 2007). However, section 131 of the Corporations Act has sought to clarify this through some of its subsections. These subsections are exemplified by:

 S131 (1) – This section refers to the company that is being bound by the pre-registration contract after its incorporation if the contract is sanctioned within a levelheaded period of time or the contracted time.

S131 (2) – This section affirms that if the company does not sanction the contract or if it does not register, then the person behind it is liable to paying damages that may have been incurred to the other party. Moreover, the sum that the promoter is able to pay would be the same as to that which the company would have been liable to pay.

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S131 (3) – This subsection is applicable in the courts where it gives the court the power to make the company pay for the damages regardless of the fact that it did not ratify the contract. This would be further strengthened if the promoter was acting as an authorized agent of the company S126 (1). Nonetheless, the promoter of the contracted business may also be free from liability if a release is signed by the concerned parties of the pre-registration contract (S132 (1), (T. Ciro & C. Symes, 2009).

Currently, public liability insurance debates have suggested that the law concerning joint and several liabilities be altered, (H. A. J. Ford, R. P. Austin & I. M. Ramsay, 2007). This in turn would impact on the law of partnership as liability would arise due to the agency relationship between partners (s9 Partnership Act 1958). Furthermore, sections 13, 14 and 16 of the Partnership Act 1958, a predecessor of the Section 131 of the Corporations Act, suggest that there would be little difference between tort and contract in regard to liability issues, s14 and s9.

In conclusion, in regard to whether it is mandatory for all companies to issue prospectus to the Australian Securities and Investments Commission when outlining securities, it is imperatively important for any company which is limited by shares to make a disclosure and present a prospectus with the ASIC-S718 except when the company falls within the exclusions as listed in the S708 and S708A, (D. Morrison & C. Anderson, 2010).

Case studies

To begin with, we would look at the case of Eley versus Positive Security Life Insurance. This case serves as a good and practical example of how Section 131 of the Corporations Act can be applied. This case presented conflicting ideology concerning pre-registration contracts where a court ruled that there was nowhere in the constitution where a member would seek to enforce the right to a capacity as opposed to being a member. This was in regard to the demands by Eley who sought to assert some rights in his capacity as a solicitor of the company. However, the court ruled that in order for Eley to demand these rights, he would have entered into a separate contract which was independent of the constitution, (R. Baxt, K. Fletcher, S. Fridman, 2009).

This was inline with the stipulated role of the high court which is illustrated by the protection in the separation of powers. This had been further stressed in the case by the Attorney General and Alinta Ltd. This case represented the strain and struggle for independence between the state and individuals. If the rule of law had to be sustained, some of the administrative bodies such as ASIC (Australian Securities and Investments Commission ), a Commonwealth administrative body that administers, investigates and promotes company compliance with the Corporations Act 200, would be liable for prosecution and interrogation under an independent judicial system, (R. Baxt et al 2009). Moreover, the role of the high court and other judicial bodies in interpretation and enforcement of corporate law becomes evident.

Another case that may be associated with Section 131 of the Corporations Act regarding pre-registration contracts is that of Hickman versus Romney Marsh Sheep- Breeders Association. In this case, Hickman had fallen out with the association and had sought justice from a court. However, in their articles of association, contained in the contract he had signed with the association stated that incase there was any problem amongst the members then the case would be taken for arbitration. Hickman had overlooked this clause in the Articles of Association and therefore had breeched some of the conditions that had been outlined in the Articles of association.

Contrary to the above earlier case of Eley versus Positive security Life Insurance where the case was settled in court, the Articles of Association contained in the contract by Hickman and Romney Marsh Sheep- Breeders Association stated that no case would be taken to court but would be dealt by arbitration, (R. Baxt et al 2009). This represents a case whereby Section 131 of the Corporations Act has made it simpler for the promoter, the company and the third party when formulating governing principles in a contract as well as matters concerning contractual liability.

Having observed this and the impact of the above case, it would be justifiable to see how Section 131 of the Corporations Act has such provisions as of the above case. To begin with, S140 (1) in the Corporations Act is very relevant in the above case where it states that a company’s constitution or replaceable rules which applicable in the company have the right of being viewed as a contract. These rules or guidelines may be in between:

(a) The company and each member

(b)  The company, each director and the company secretary

(c)  A member and each other member, under which each member consents to observing and performing the constitution and rules so far as they apply to that person, (T. Ciro & C. Symes, 2009).

Another instance through which Section 131 of the Corporations Act has simplified how contracts can be made and the stipulation of the Articles of Association is in the case of Rayfiefld versus Hands. Rayfield and Hands were members and directors of a certain company and in their Article of Association, it stipulated that if a shareholder had any intention of selling his/her shares; he/she had to advise the directors where the directors would buy them and pay a fair value for them. In this case, the Article of Association affected both Rayfield’s and Hand’s positions as members hence Rayfield exploited this capacity by enforcing the contract and buying the shares, (R. Baxt et al 2009).

The above examples have served as good illustrations as to effectiveness of the Section 131 of the Corporations Act of 2001. It is apparent that pre-registration contracts have been simplified and members and companies are able to formulate self regulatory mechanisms as in the case of Eley versus Positive security Life Insurance as contained in the Articles of Association. Nonetheless, these articles may appear a bit infringing and bound to manipulation. This seems to justify the legality and usefulness of regulatory bodies such as ASIC, (Ernst & Young, 2009).

 
 
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Part 9.4AA of the Corporations Act 2001 sanctions ASIC to issue contravention notices to divulging entities in case of a suspected violation of the continuous disclosure provisions, (T. Ciro & C. Symes, 2009). This continuous disclosure provisions demand that disclosing parties should make available information that a member would expect to have in material effect in regard to the price or value of their securities. This legislative system aims at promoting a heightened culture of conformity with the continuous disclosure provisions. Moreover, this system makes it possible for ASIC to pursue more flouting.

With the growing number of criticism regarding Section 131 of the Corporations Act, some remodeling and restructuring initiatives have been put in place. These initiatives are meant to fill the loopholes that may be existing in the current form of the Act, (Ernst & Young, 2009). On this note, a number of recommendations have been made.

Recommendations

One of the recommendations is that parent entities within a consolidated group should no longer have to come up with detached consolidated financial and parent entity statements. The Regulations of the Corporation would set down the full parent entity financial statements and be substituted by a summary data which is made up of:

  • Total shareholders’ equity and current and total liabilities
  • The parent entity’s current and total assets
  • The parent entity’s net profit after tax and total retained earnings
  • Particulars of any assurances entered into by the parent entity in relation to the debts of its ancillaries

Another recommendation made was in regard of enhancing transparency and integrity of these companies. These proposals are aimed at enhancing the lucidity and utility of disclosures as contained in the directors’ report. Some of these utilities and lucidities include lengthening the condition to divulge an appraisal of operations and financial condition to all listed entities.  This is in regard to the fact that only listed public companies are obligatory to make these disclosures currently, (Ernst & Young, 2009).

Finally, some stakeholders also raised their apprehension concerning some of the discrepancies between the regulator-determined disqualification system found under the prudential Acts and that of the court-based disqualification system which is found under the Corporations Act. To alleviate these concerns, some stakeholders have suggested that the prudential Acts should be revised so that they could reinstate the optional ineligibility powers which are currently held by the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) with a disqualification process based in court and found on sections 206G and 206C of the Corporations Act.

Conclusion

The statute law has been deliberately drafted in so many areas as though it is a code with the aim of doing away with any law like those which have existed before or coming up with totally new laws that would fill the space void of any pre-existing laws, (E. Boros & J. Duns, 2007). A good example of this is the share transaction which acts as the statutory derivative action Judges have also been called upon to come and interpret some of the statutory laws and define their provisions in some case laws.

In this regard, once a company has been registered, it begins to have a form of its own separate legal existence. This legal existence is totally independent of the people who found it, inputted their capital in it or even from the directors, managers and employees. However, before a company or an organization begins to exist, there are a number of policies and rules which are formulated by its leaders that would in turn govern the structure and existence of the company or organization. These are pre-registration contracts. It has been observed that, basing in the examples above, that common law would make it simpler for the promoter, the company and the third party when making contracts let alone on matters of contractual liability. This in turn triggered the formulation of Section 131 of the Corporations Act which contains the guiding principles of such ventures. The framework of the Australian corporate law is strongly embedded in this Act hence helped in the regulation and control of infringements associated with pre-registration contracts.

   

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