PERSONAL LIABILITY OF "DIRECTORS" OF NON-EXISTENT COMPANIES.

Transcription

1 PERSONAL LIABILITY OF "DIRECTORS" OF NON-EXISTENT COMPANIES. In Black v. Smallwood and Cooper1 the plaintiffs contracted to sell their land to a company called Western Suburbs Holdings Pty. Ltd. The defendants signed the contract on behalf of the company as directors. At the time that the contract was signed Western Suburbs Holdings Pty. Ltd. had not been incorporated, and was not incorporated until more than six weeks later. The plaintiffs brought a suit for specific performance against the defendants, who denied that any contract had been made between the plaintiffs and themselves. Jacobs J. held that the defendants could not say that they did not intend to assume any personal liability and that the contract must be regarded as between the plaintiffs and the two defendants; he therefore granted a decree of specific performance. It is submitted with respect that this decision was wrong and that there was no cqntract between the plaintiffs and the defendants. In Kelner v. Baxter2 three persons who signed a contract of sale on behalf of a company which had not yet been incorporated were held to be personally liable on the contract. The Court of Common Pleas (Erle C.J., Willes, Byles, and Keating JJ.) held that where a person purports to sign a contract as an agent, but has no principal in existence at the time, he is personally liable on the contract. However, in Kelner v. Baxter the defendants signed the contract as agents of the non-existent company, and not as directors like the defendants in Black v. Smallwood and Cooper. The importance of this distinction is shown by the case of Newborne v. Sensolid> where the plaintiff signed a contract as director of a company which had not yet been incorporated: it was held that he could not sue on the contract personally. The plaintiff in Newborne v. Sensolid, like the defendants in Bldck v. Smallwood and Cooper, signed not as agent of the nonexistent company, but as the company itself; and the company not then being in existence, the contract was nugatory. Jacobs J. thought that it was not open to him not to follow the decision of the Court of Appeal in Newborne u. Sensolid, but distinguished the facts in Newborne u. Sensolid from those in the case before him on the grounds that in Newborne u. Sensolid the person who 1 [I9641 N.S.W.R (1866) L.R. 2 C.P [1954] 1 Q.B. 45.

2 signed on behalf of the non-existent company was the plaintiff, whereas the persons who signed on behalf of the non-existent company in the case before him were the defendants. Jacobs J. denied that it made any difference whether a person who signed a contract on behalf of a non-existent company did so as an agent or as a director; he held that the true distinction between Kelner v. Baxter and Newborne v. Sensolid was that in Kelner v. Baxter the persons who signed on behalf of the non-existent company were the defendants, while in Newborne v. Sensolid it was the plaintiff who signed on behalf of the non-existent company, and said:-4 "Now, the reasons which could lead to such a conclusion could be various and it may be true to say that there is a body of reasoning in the judgment of Parker J., and in the judgments in the Court of Appeal which would lead to the conclusion that there would be no difference whether the person signing be plaintiff or defendant. With great respect to their Lordships I cannot accept that reasoning; I do not think that Kelner v. Baxter was simply a case where, on a true construction of the contract, the agent intended a personal liability, nor do I think that, generally speaking in the English Law, a difference in legal liability arises depending upon whether a written contract is expressed in the form: "A" as agent for "X" Limited, and "X" Limited with a subscription "A" or "A director". It must be borne in mind that, except in special circumstances, a person contracting as agent is presumed not to intend to make himself personally liable. In my view a distinction must be drawn between the position of a plaintiff and the position of a defendant. Where the person who signed as agent is the plaintiff, the defendant is entitled to say: 'I never contracted with you, I intended to contract with "X" Limited and I cannot have a different contracting party forced upon me'. On the other hand, when the agent is sued on the contract, it seems to me that the other contracting party is entitled to say: 'Since you contracted on behalf of a fictitious principal you must be presumed to have intended to make yourself personally liable, otherwise our solemn dealings were a farce; even though I intended to contract with a non-existent person, I can elect to treat the contract as one with you personally'. It is true that if it is made clear that the agent accepts no personal liability, whether or not the company is in existence, 4 [I9641 N.S.W.R. 1121, at 1123.

3 then there will be no room for the imposition of a personal liability upon him. Such a case would be a rare one, but the possibility of such case points to the principle, which in my view, is applicable, namely the principle of estoppel. The defendant in such case cannot be heard to say that he did not intend to assume any personal liability, when the effect of such an assertion would be to destroy the possibility of the f i i contract and relationship which the other party intended." It is submitted that Jacobs J. was wrong both in his reasoning and on the authorities. In Newborne v. Sensolid Parker J. made it clear that he distinguished that case from Kelner v. Baxter on the grounds that the defendants in Kelner v. Baxter signed as agents, whereas the plaintiff in Newborne v. Sensolid signed as a director, and said:--6 "Mr. Pearl, however, argued, and it was an argument which impressed me, that the principle in those cases to which I have referred had no application here. In those cases there was an agent undertaking to do certain things himself as agent for somebody else. In the present case, however, unlike Kelner v. Baxter and Co. v. Vigers Brothers, there is no signature by anybody at all as agent. To bring this case within the principles of those cases the contract, it seems to me, would have to read: 'I, Leopold Newborne, on behalf of the company agree to sell, and have sold to you...' and so on, and signed 'Leopold Newborne, by authority of and as agent for the company'. In other words, the agent would be contracting to do certain things, albeit as agent.... But that is not this case." The judgment of Parker J. was expressly approved by the Court of Appeal (Lord Goddard C.J., Morris and Romer L.JJ.), and Lord Goddard C. J. said :-6 "What we cannot find in this case is that Mr. Newborne ever purported to contract to sell either as agent or as principal. The contract was one which he was making for the company, and although Mr. Diplock has argued that in signing as he did Mr. Newborne must have signed as agent, since the company could only contract through agents, that was not really the true position.... It is a case in which the company is contracting and the company's contract is authenticated by the signature of I 5 [1954] 1 Q.B. 45, at Ibid., at 51.

4 one of the directors. This contract purports to be a contract by the company; it does not purport to be a contract by Mr. Newborne." In support of his decision Jacobs J. cited Summergreene v. Parker7 and Kings Norton Metal Co. v. Eldridge.8 It is submitted that these cases do not in any way assist his argument, and are, indeed, irrelevant. In Summergreene v. Parker the plaintiff, an estate agent, was employed by the defendant to sell her business on commission. He obtained an offer, which the defendant accepted, from two persons who purported to be acting as trustees of a company "to be formed". The defendants refused to complete the sale and the company was never formed. The plaintiff sued for his commission. The Full Court of New South Wales, reversing the decision of the trial judge, held that on the principle of Kelner v. Baxter the two "trustees" were liable on the contract and that therefore the plaintiff could recover his commission. The High Court (Latham C.J., Williams, Webb and Fullagar JJ.) reversed this decision on the ground that the offer made by the "trustees" was too uncertain to constitute a binding contract. The question of the personal liability of the "trustees" under the rule in Kelner v. Baxter did not therefore arise, and Fullagar J. said:-d "I do not myself think that Kelner u. Baxter... affords any assistance in the present case." The case of Kings Norton Metal Co. v. Eldridge is of even less assistance. In that case the plaintiffs sold goods to a rogue who was trading under the assumed name of Hallam & Co. and who resold them to the defendants, who bought them bona fide and for value. The Court of Appeal held that as there was no real firm called Hallam & Co. known to the plaintiffs, the contract was not void for mistake but merely voidable for fraud. The question of agency did not arise. Jacobs J., in the course of his judgment, based the personal liability of the defendants on the principle of estoppel. However, in Kelner u. Baxter, the Court of Common Pleas (Erle C.J., Willes, Byles, and Keating JJ.) made no reference to the principle of estoppel, and decided the case on the ground that when an agent contracts on behalf of a non-existent principal he is personally liable; while in Newborne v. Sensolid Parker J. expressly denied that Kelner v. Baxter was decided on the basis of estoppel and said:-lo 7 (1950) 80 Commonwealth L.R (1897) 14 Times L.R (1950) 80 Commonwealth L.R. 304, at [I Q.B. 45, at 47.

5 "... it is plain that this principle, that the agent is liable, is not based on breach of warranty of authority, because, as I have said, the principal is not in existence; it is not bksed on any question of estoppel; but it is based on this principle, that it is only by holding him personally liable that any effect can be gven to the contract." And even if the decision in Kelner v. Baxter had been based on estoppel, it is submitted that that prinicple would have been of no assistance to Jacobs J. in Black v. Smallwood and Cooper. The only representation made by the defendants in that case which could possibly ground an estoppel was that a company existed, so that they were estopped from denying the existence of the company: but the company in fact did not exist and estoppel cannot create a non-existent entity, nor can it create a liability. A more promising line of attack would be one based on breach of an implied warranty, although this would involve differing from Newborne v. Sensolid, which Jacobs J. does not overtly profess to do: even then, however, the only remedy available to the plaintiffs would have been damages, not specific performance. Support for the proposition of Jacobs J. that a distinction must be drawn between the position of a plaintiff and that of a defendant can be found in the case of Hollman v. Pullin.ll In that case the defendant agreed to work as a medical officer for a medical association, one of the terms of the agreement being that on leaving the service of the association he could not practice as a medical practitioner within a certain area. The plaintiff signed the agreement on behalf of the association which, at the time he signed the document, had not yet been formed. When the defendant later left the association's employment and entered into practice within the prohibited area, the plaintiff sued for an injunction. Vaughan Williams J. dismissed the action and said:--l2 "It must not be assumed that the question admits of the same solution whether the supposed agent is suing or is being sued. It might well be that an agent who without any real principal induced another to accept a contract might find it difficult upon the facts to escape personal liability as himself the contractor, and yet if he himself were endeavouring to sue on the same contract he might find the difficulty reversed when he endeavoured 11 (1884) Cab. & E Zbid.. at 257.

6 to enforce it against one who denied that he ever entered into such relation with him personally." In Hollman v. Pullin, however, the plaintiff signed as agent, not as director; moreover, it was a case at first instance, and the view expressed by Vaughan Williams J. is directly contrary to that expressed by Parker J. in Newborne v. Sensolid in a judgment expressly approved by the Court of Appeal: it is also directly contrary to the later decision of Pickford J. in Harper 3 Co. v. Vigers Brothers,18 a decision which was approved by Parker J. in Newborne v. Sensolid. In that case the plaintiffs entered into a contract with the defendants, professing to act "as agents": they did not in fact have any principals, and it was held that they could sue on the contract themselves. Furthermore, it is submitted, Hollman v. Pullin is of dubious authority as it appears to be based on a complete misconception of Kelner v. Baxter. In Hollman v. Pullin Vaughan Williams J. said :-" "... [it was] maintained... that it was a general principle of law that wherever an agent or a representative affected to conclude a contract on behalf of an alleged principal, and no such principal existed, the agent was in law himself the contracting party; and for this [was] cited the authority of Kelner v. Baxter. There is however no authority for laying down such a proposition as a rule of law." With respect to the learned judge it is precisely this proposition which was laid down by the Court of Common Pleas in Kelner v. Baxter. In that case Erle C.J. said:-l5 "The cases referred to in the course of the argument fully bear out the proposition that, 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 Byles J. said:-16 "The true rule, however, is... that persons who contract as agents are generally personally responsible where there is no other person who is responsible as principal." In Black v. Smallwood and Cooper Jacobs J. expressed the view that the question before him was one of considerable general import- 1s [I K.B (1884) Cab. & E. 254, at (1866) L.R. 2 C.P. 174, at Zbid., at 185.

7 ance. It is submitted that its practical importance is probably restricted to cases where the remedy of specific performance is available: for even although "directors" of non-existent companies who sign as directors and not as agents are not liable personally on the contract, nor for breach of warranty of authority, yet they may be liable in damages either for fraud or for negligent misrepresentation under the principle in Hedley Byrne v. Heller.17 W. E. D. DAVIES." 17 [1963] 3 Weekly L.R. 101, [1963] 2 All E.R LL.B. (Wales), of Gray's Inn, Barrister-at-Law; Senior Lecturer in Contract and Mercantile Law, University of Western Australia,