Validity of Pre-Registration Contracts and Director's Duties in Chip-Eze Pty Ltd

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Contents
QUESTION 1..............................................................................................................................................2
QUESTION 2..............................................................................................................................................4
Reference List.............................................................................................................................................8

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QUESTION 1
The given case scenario is an analysis on the validity of the pre registration contracts,
modification in the constitution and the powers of the minority to deal with the modifications.
The facts simply submitted that Kody and Ryder are friends and wish to start their own business.
They want to name their business as Incredible Gifts Pty Ltd. they wish that the area of the work
of their business is related to crafts and gifts which are to be sold online. On 2nd May 2018 they
visited the office to register their intending name for the company, but, the name was already
found registered. So, they register their company in the name of Astounding Gifts Pty Ltd
wherein they both were shareholders of 45% each.
Now, on 26th April 2018, Ryder on behalf of Incredible Gifts Pty Ltd made a contractual
relationship with Melanie for 12 months wherein Melanie will prepare unique gifts which will be
sold by Incredible Gifts Pty Ltd exclusively @ $5,000. But, a meeting by Kody and Ryder was
conducted on 12th May 2018 (being the majority shareholders of Astounding Gifts Pty Ltd) and
they decided that they no longer wish to continue with the contract with Melaine and refuses to
rectify the contract.
Now, the major concern that is raised here is can Melaine has the power to sue Astounding Gifts
Pty Ltd for the contract that was made by Ryder for Incredible Gifts Pty Ltd when Astounding
Gifts Pty Ltd refused the payment of contract.
At this stage it is important to understand the legal principles that guide pre registration contracts
and their enforceability under the Corporation Act 2001.
In Salomon v A Salomon and Co Ltd (1897) a company is considered as an entity of such a
nature which has the powers of an individual and has the capacity to carry all acts and omission
which is normally carried by a human being. Since a company is artificial in nature thus it
requires directors and officers for its working. (Gillies 2004)
But, before the company registration, the promoters are the persons who carry out all the
necessary acts that are needed for the incorporation of a company and such acts at times require
making contractual relationship with the parties and such contracts are called pre
incorporation/registration contracts. In common law, in Kelner v Baxter (1866) such contracts
have no validity and are considered as not enforceable in law. (Latimer 2012)

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But, section 131 of the 2001 Act has given recognition to such contract but on the condition that
when the contracts are made before the registration of the company, then, such contracts must be
rectified after the incorporation of the company and is held in Aztech Science Pty Ltd v Atlanta
Aerospace (Woy Woy) Pty Limited (2004). When the contract is given approval then such
contract is made with the incorporated company and creates binding relationship with the third
party. If the company does not perform the contract, then, the same is regarded as breach and the
third party can sue the company. However, the formation of the contract with the company
should have taken place before the company’s registration. The contracts which are made after
its registration are not covered by section 131 of the Act Commonwealth Bank of Australia vs.
Australian Solar Information Pty Ltd (1987).
.
Now, the legal principle is applied to the given facts,
It is submitted that Ryder on behalf of Incredible Gifts Pty Ltd has made a contract with Melaine
on 26 April 2018. So, Ryder acting as the promoter of Incredible Gifts Pty Ltd has made a
contract with Melaine and as per Kener v Baxter (1866) the contract is invalid.
But, as per section 131 of the 2001 Act and Commonwealth Bank of Australia vs. Australian
Solar Information Pty Ltd (1987), if Incredible Gifts Pty Ltd give recognition to the contract after
its incorporation, then, the contract can be held to be enforceable with Melaine.
The company was registered on 2n May but in the name of Astounding Gifts Pty Ltd. this new
company has given recognition to the contract with Melaine. It is submitted that the recognition
and approval by Astounding Gifts Pty Ltd is valid as the company was same but was registered
with different name. The directors of Incredible Gifts Pty Ltd were same as that of Astounding
Gifts Pty Ltd. thus, an approval by Astounding Gifts Pty Ltd is nothing but an approval to a pre
registration contract and is valid.
SO, Melaine has every right to sue Astounding Gifts Pty Ltd if the contract is not honored by the
company,
It is also found that Salman was holding 10% shares in Astounding Gifts Pty Ltd and is also the
accountant in the company. But, Ryder and Kody pass a resolution and buy back the
shareholdings of all the shareholders with less the 125 shares.