Pre-Incorporation Contracts, Promoters, and Secret Commissions
EcoBuild Ltd was incorporated on 1 March 2024. Before incorporation, on 15 February 2024, Fiona signed a contract with Timber Supplies Ltd on behalf of 'EcoBuild Ltd' for €80,000 of timber. The contract stated that Fiona signed 'for and on behalf of EcoBuild Ltd (in formation)'. EcoBuild was incorporated with Fiona and Gary as directors and equal shareholders. At the first board meeting, the directors resolved not to adopt the Timber Supplies contract because the timber was overpriced. Timber Supplies now seeks payment from Fiona personally. Fiona argues that the company is liable because it has taken the benefit of some timber delivered after incorporation. Meanwhile, Gary discovers that Fiona received a €5,000 secret commission from Timber Supplies for placing the order. Gary wants to know if Fiona has breached any duty as a promoter. The company's articles are unamended model articles.
1. Is Fiona personally liable on the pre-incorporation contract? Explain the effect of section 51 of the UK Companies Act 2006 (or section 45 of the Irish Companies Act 2014).
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Yes, Fiona is personally liable. Section 51 UK CA 2006 (Irish s.45) provides that a person who purports to act on behalf of a company before it is incorporated is personally liable on the contract, subject to any agreement to the contrary. The contract expressly stated that Fiona signed 'for and on behalf of EcoBuild Ltd (in formation)', which is a clear indication that the company did not yet exist. The company cannot ratify the contract retrospectively because ratification requires the principal to exist at the time of the contract. Therefore, Fiona is liable to Timber Supplies for the €80,000. The fact that she signed as agent for a non-existent principal does not relieve her; the statute places liability on the agent. Fiona could have avoided personal liability only by including an express exclusion clause or by entering into a novation after incorporation. She did neither. Her argument that the company is liable is incorrect.
2. Does EcoBuild Ltd's acceptance of some timber after incorporation change Fiona's liability? Can the company become liable?
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No, acceptance of some timber after incorporation does not automatically make EcoBuild Ltd liable on the original contract. The company cannot adopt or ratify a pre-incorporation contract; it can only become liable by entering into a new contract (novation) with the supplier, replacing Fiona as the party. The delivery of timber after incorporation may create a separate contract between EcoBuild and Timber Supplies through conduct, or a restitutionary obligation to pay for goods accepted. However, that does not retrospectively make the company liable for the full €80,000 contract. Fiona remains personally liable to Timber Supplies unless Timber Supplies agrees to release her and accept the company in her place. The company's acceptance of some timber might be evidence of a new agreement, but the facts show the board resolved not to adopt the contract. Therefore, the company is not liable, and Fiona cannot avoid liability by pointing to the company's conduct. The supplier's remedy against the company would be limited to the value of goods actually accepted, if any.
3. Discuss Fiona's liability for the secret commission as a promoter. What remedies does EcoBuild Ltd have?
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A promoter stands in a fiduciary relationship with the company before and during incorporation. Fiona was a promoter because she procured the timber contract and arranged the company's formation. As a promoter, she owed duties of good faith, including not to make a secret profit from the promotion. The €5,000 commission from Timber Supplies was a secret profit; she did not disclose it to Gary or to the board. Therefore, Fiona breached her fiduciary duty. EcoBuild Ltd can require Fiona to account for the €5,000 and pay it to the company. The company may also rescind the contract with Timber Supplies if Timber Supplies knew of the secret commission, or claim damages from Fiona if the company suffered loss (e.g., because the timber was overpriced). Gary, as a shareholder and director, can bring a derivative action on behalf of the company to recover the secret profit, or the company can sue directly. The secret commission may also be a criminal offence under anti-bribery laws. Fiona's liability is personal, and the fact that she is a director and shareholder does not excuse the breach. The company can also remove her as a director if the articles permit.