This is a new section.
SECTION 37.
Question proposed : " That Section 37 stand part of the Bill. "
I want to raise, if I may, some points on Section 37. This is a new section and the principle behind it is recommended by the Committee. I think we are all agreed that it is highly desirable, but I personally feel that if a company is going to take over and ratify a contract made by some other person for it, before it is incorporated, there should be something expressly in the memorandum authorising it so to do, or some reference in its memorandum to the contract or declaring that XYZ is the company's agent. I am a little bit worried also about the position in that, up to this, there have been a good many private companies which were, perhaps, formed without adequate legal advice and in reference to which the principle incorporated in the contract was taken up or was ratified over. The effect on these companies is probably void and whether we ought to do anything to solve that messing that there has been in certain cases I do not know, or whether we should do something to rectify the messing I have seen from time to time is another problem, but I would strongly urge on the Minister that if a company wants to take up a contract made before it came into existence, there should be something in the memorandum saying that one of its purposes was to adapt a contract made on such and such a date or take over a contract made by XYZ in anticipation of its incorporation. It is left very much at large as it is.
Deputy Sweetman's point is certainly valid in regard to what might be called sizeable contracts. There is the question of small incidental contracts. Would you wish to adopt those ? It might be such a small thing as a bill for advertising. That would seem a little trivial to incorporate in the memorandum. You might also get caught with the practical snag that you might want to enter into the contract and, while you were having the memorandum printed, or something——
You include that.
In regard to what I call a sizeable commercial transaction, I do not see how you make the distinction. There are two types of contract here. There is the transaction for the purpose of the business of the company. If the company was formed to do constructional work and the promoters, because of the state of the market, decided to buy a large quantity of steel—that might be wise—before the incorporation of the company, that is the type of contract eminently of the type Deputy Sweetman has in mind. There is a very strong case to include that in the memorandum. On the other hand, there might be the question of a quite small advertisement for some purpose or even a bill for a block, or something like that.
Deputy de Valera is thinking of specifying each of these contracts or transactions in the memorandum.
That is what I thought.
Could Deputy Sweetman's point not be got over by having a more general phrase ?
In that case, you do not want the section at all because everybody would invariably put in this clause in every memorandum drafted. It would automatically go in.
You could do it in two ways. You could say " if authorised by the memorandum " or " unless prohibited by the memorandum " and, in the second case, you would not have to put anything new into your memorandum when drafting it. The company then may take over these contracts.
Under the law as it stands, a company cannot contract until it is in being, until the legal person is there. The question then is: can it ratify a transaction ? That implies that the person by whom the contract was ratified was an agent. Can you have an agent ? That is the whole case for the section. I think this is a prudent section. It is one that will avoid doubts later but whether you can have that in the memorandum is another matter. Deputy Sweetman's point is that the section as it stands may be just a little too sweeping and practically any kind of contract could be ratified.
I can see Deputy Sweetman's point: there might be some major liability of which the subscribers might not be aware.
Is that met by the fact that the contract would have to be disclosed in the prospectus ?
It would be. Can you therefore make the distinction in your contract between what might be called a contract for the purposes of the company's businesses and a contract incidental to the formation of the company ?
It would be very, very difficult to distinguish. You always put in the memorandum as one of the powers the power to pay for the incorporation of itself, for very obvious reasons.
I cannot see whom we are trying to protect by this reference to the memorandum. I can appreciate Deputy Sweetman's point about companies formed hitherto, but subsection (3) specifically states " This section shall not apply to a company incorporated before the operative date ". In view of that, it does not affect any existing companies. In regard to a new company, anyone dealing with a new company should be aware and, technically speaking, is deemed, I suppose, to be aware, of the new Companies Act of 1963, and will thereby be surely put on notice that the company has a right to do this. This is a public company and an investor invests on the strength of the prospectus rather than on the strength of the memorandum and articles. It is in the prospectus you set out the assets and liabilities of the company.
That is a good point. That does not, of course, affect a private company, but a private company is too small.
A private investor in a private company should have private knowledge and, if he has not, he should have his head examined.
I wonder is subsection (2) interfering in any way with the principle of the law of agency. If an agent contracts for an undisclosed principal, he is liable on the contract personally and the person who contracts with an agent for an undisclosed principal can decide to sue the agent or the principal when the latter becomes disclosed. We are providing in subsection (2) that " prior to ratification by the company the person or persons who purported to act in the name or on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract. . . ." Is it implied that, once it is ratified by the company, he is no longer personally employed ? If that is so, would it mean that the person who contracted with another, not knowing he was an agent for a company that was being formed, could not subsequently sue the person who entered into the contract but would be bound to sue the company ?
Under subsection (1), the contract is purported to be entered into by a person on behalf of the company. Must you not disclose, therefore, that you are acting on behalf of——
Not necessarily, because " prior to ratification by the company the person or persons who purported to act in the name or on behalf of the company ". A person could purport to act in the name or on behalf of the company. I wonder is it clear that this section applies to someone who says : " I am acting for a company which will incorporate this " and does not apply to a person who merely enters into a contract and does not disclose that he is acting on behalf of a company which is going to be incorporated.
Until someone issues a writ against him and then he can disclose liability.
He can say : " I am acting for a company which is going to be incorporated ". This might lend itself to fraud if this interpretation is correct, in that it would permit a person to get out of an obligation simply by saying that he was entering into a contract on behalf of a company : " You cannot sue me ; you must sue the company ". I am somewhat doubtful about the wording of the section. Perhaps the Minister would have a look at it.
It is the meaning of the words " purporting to be entered into by a company prior to its formation or by any person on behalf of the company. . . ." Does that " purporting " refer to the person who enters into the contract, the agent vis-�-vis the company or the agent vis-�-vis the other contracting party? In the first case, it is the relationship between the agent and his company and, in the second case, it is a question of saying : “ I am doing a on behalf of a company we are about to form ”. That would be the point.
Reading the section now, and having heard Deputy Costello, I am not at all too happy myself about the wording of the subsection.
The ambiguity arises in regard to the word "purporting ", as to whether that refers to the relationship of principal and agent, regarding the agent as the agent of the company, or the relationship of the two immediately contracting parties.
You could put in a saver and say it does not affect the rights of a person contracting with a person who purports to enter into a contract.
That is not so easy because, once it is ratified, the liability still attaches to the agent. He no longer gets clear.
That is the ordinary law of agency. If you enter into a contract, and you enter into it without disclosing that you are acting for a principal, the person can decide to sue you or the principal, when he gets to know about it.
That is so, but in the formation of a company, you have a very specific set of circumstances here and a company is a peculiar kind of party here. It was not in existence before. The principal was not in existence at the time the contract was made and it seems to me fair that a person who duly contracts on behalf of a company should be able to pass all the responsibilities to the company from the moment of ratification.
The agent will, of course, have his rights against his principal, but the person dealing with the agent should be protected.
But that will hamstring agents. Take the solicitor who is very often an agent of a very particular sort in the formation of a company. I can think of a number of cases where it might be very embarrassing if some person decided to sue the solicitor and not the company.
The solicitor signs Gerard Sweetman, in trust."
Is the section agreed ?
Subject to consideration of a saver in subsection (2) for a person who would have rights against a principal.
Against an agent.
Against an agent rather, as well.
On Section 37, the first line refers to " any contract or other transaction purporting to be entered into by a company prior to its formation." I suppose those words are intended to mean if a company entered into a contract before in fact it was incorporated? It would not be a company at that stage ?
No. It only purports to enter into a contract at that stage.
I do not see how it can.
Would it not tidy up that point to say " any contract or other transaction entered into on behalf of the company prior to its formation. "
The company is not there. It has not got offices and so on.
Actually, " by a company prior to its formation or," would not appear to be relevant.
The trouble is in the word " by "—" by a company prior to its formation. "
If you omitted " by a company prior to its formation or, " that might be sufficient.
Yes, I think so. I shall bring in an amendment to delete these words.
Does " any person " include more than a person? Does it include a firm ?
I should say it would.
I think that would be the Interpretation Act view of " person. "
Question put and agreed to.