Ractificationfor company incorporation Hong Kong transactions
Guide on Ratification of contracts before incorporation with discussion on company’s and personal liabilities
As it has been established in our previous articles that pre-incorporation contracts for company incorporation Hong Kong exist, we will now see, what status such contracts would enjoy after incorporation and how they can come into existence and how will they be exercised.
Authority of Ratification for company incorporation Hong Kong
Section 122 (3) of Cap.622 allows HongKong company incorporation to approve or ratify the pre-incorporation contracts and this ratification can be made by the board of directors of the company. Board of directors will pass a resolution related to approval of pre-incorporation contracts as they are the one can authorise the contracts. Instead of board of directors, any person acting on behalf of them, can also authorise the pre-incorporation contracts. There is the provision that allows promoter to ratify the contract too, provided, that promoter becomes the controller of the HongKong company incorporation after setup and have the authority to authorise contracts on behalf of company.
Process of Ratification
General view on process of ratification before HongKong company incorporationstates it to be under the jurisdiction of law of agency as Section 122 does not provides the way through which ratification could be made to accomplish. There are the examples which shows this ratification to take place through words or conduct, as evident in Aztech Science Pty Ltd case, here ratification of the pre-incorporation transaction happened by the fact that the payment from the director official, following pre-incorporation transaction contract documents.
In another case following Poon YeeKon v New Paradigm E- Technology Ltd, here the plaintiff entered into employment contract with the promoter of the company, yet to be incorporated. Plaintiff was to be the senior staff member of the New Paradigm E- Technology Ltd and were granted 8% of company’s issued share, orally. Plaintiff exercised her duties after incorporation, but the firm could not perform their oral contract and obligations as per the contract. Court held that New Paradigm E- Technology Ltd ratified the contract and wrote letter to plaintiff regarding confirmation of option agreement.
In Fung Pui Yi Irene v Motivics Co. Ltd, situation reported, where promoter of the company signed 3 years tenancy agreement and stated agreement to be Sale and Purchase agreement related to the restaurant business at the premises. After incorporation and commencement of restaurant’s business operation, owner of the commercial property sought legal aide from the Land Tribunal on due payment of three month’s rent. Mr Tan, the director of the company denied company’s involvement in the contract. Land Tribunal pointed contract to be ratified as soon as the company started its operations of restaurant business and by referring to the WhatsApp message of the Mr. Tan to the owner of the commercial property, where he acknowledged company’s liability for the payment of rent, Land Tribunal stated this contract to be intact.
It must be noted that not every act of company amounts to the ratification of pre-incorporation contract as it is much evident in the case of Development Finance Corp of New Zealand v McSherry Export Kilns Ltd, here Quilliam J communicated that: fundamentally there is no ratification unless there is intention to do so, Some deliberate acts of the company might be to confirm something, which would have been imperfect without confirmation, This shouldn’t be confused with ratification of contract.
It was noted in this case that, registration of debentures by the servants of the company was to meet the statutory requirement and does not mean for the purpose of ratification or confirming something.
Implications in Ratification
There is the provision which states that, As the contract was made with the authority of the principal by the promoter, then if principal ratifies it without the consent or involving promoter, then in this case, ratification would take place.
Australian perspective in such ratification, was noted during the prosecution of Kevroy Pty Ltd v Keswick Development Pty Ltd, Lyon J held that, ratification would take place from the date of incorporation and not from the date of contract, before incorporation further he communicated that, in the absence of clear legislation, ratification can operate all together.
Difference between Australian Companies Ordinance and Hong Kong’s ordinance exists, where Australian Section 131 (1) states:
“If a person enters into or act on behalf of company, into contract before its incorporation, then upon incorporation, company is bound to comply with the terms and conditions of contract.”
It seems as if Hong Kong’s legislation is quite similar to the predecessor Australian’s legislation where it imposes personal liability to the person, who acted on behalf of company, to enforce and fulfil terms and conditions of contract.
Mode of Communication related to Ratification of Contract
As the company is open to ratify the pre-incorporation contracts under Section 122 (3), it is equally important to get it communicated to the third-party contract in due time. However, where ratification is to be done through act then formal communication to third party is not needed as they would know about incorporation through the act of the principal. There are provisions to present resolution of ratification in board meetings and get it signed and authorised there, legal perspective does not imply legal requirement regarding communication of ratification to the third party.
Personal and Company’s Liabilities to the Pre-incorporation contracts
Section 122 (2) clearly states that, in case company discontinues the contract made before incorporation then the person who acted on behalf of the company while entering into contract before incorporation, will personally be liable for the contract and fulfilment of terms and conditions of the contract.
It must be noted that subsection 122 (1)-122(2) will hold trigger only if the person stills purports to act for the company as in the case of Bay v Illawarra Stationery Supplies Pty Ltd where court held all four promoters to be personally liable to the contract, as the person acted as an agent of the promoter and in this capacity, he entered into the contract.
It is possible to exclude personal liability, under Express Agreement, for it to exist there must be clear instruction in the contract to exclude personal liability to the person acting on behalf of the company, as per Section 122 (2) of Cap.622.but if person signed the contract with the phrase that “for and on behalf of company” then there would be no personal liability exclusion, awarded.
There is also an alternative to be safe from personal liability by stating option to be assignable and it will lapse if not exercised within certain date. In this way, if company does not ratify the contract then person acted on behalf of company would not be held personally liable.
When company ratifies the pre-incorporation contract, it becomes the party to the contract and the third party can take action against the company if it fails to perform its entitled duties under the contract. There is the provision under Section 122 (4) which states, person would be held personal liable in the case where there is establishment of breach of warranty. Another scenario indicates that, if company becomes insolvent and failure to perform its obligation was due to this insolvency then in this case claimant would not be able to secure damages with regard to breach of warranty, from the person subjected to the personal liability.