Question Tag: Company Ratification

i) The question has to do with pre-incorporation contract or other transaction. Any contract or other transaction purported to be entered into prior to its formation, or by any person on behalf of the company before its formation may be ratified by the company after its foundation, whereupon the company shall assume rights and liabilities under the contract or transaction as if it had been in existence at the date of such contract or transaction, and had been a party to it. (2 marks) Before the ratification, the promoter(s) or other persons purporting to act on behalf of the company remains personally liable in the absence of any express agreement to the contract and is entitled to any benefit accruing under the contract or transaction. (1 mark) It may be added that the reason for the promoter’s inability to be regarded as an agent in respect of the pre-incorporation contracts or transaction derives from general legal principle that a person cannot derive the powers and authority of an agent from non-existent principal. (1 mark) In the circumstance of this, the promoters of Adzeku Company contracted with one Ansah Oko prior to the formation of the company. From the facts, the company upon coming into existence ratified the contract the Adzaku Company entered into with Ansah Oko, but immediately went into liquidation. (1 mark) It must be stated that the ratification of the transaction with Ansah Oko took place after the formation of Adzenku Company. It is clear that the promoters after contracting with Oko Ansah had the contract ratified by the company when it finally came into existence, and can, therefore, not be personally liable. The ratification of the contract after the formation exonerated the promoters of any personal liability upon the liquidation of the Adzaku Company Ltd. (3 marks)

ii) A Company limited by guarantee is a non-profit making legal entity. A company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profit other than making profit for the furtherance of its objects. Section 10 of the Companies Act makes it unlawful for a company limited by guarantee to be incorporated with the object of carrying on business for the purpose of making profits. Where a company limited by guarantee engages in or carries a business for the purpose of making profit, Section 10 (2) of the Companies Act provides as follows: (a) “all officers and members of the Company who are aware of the fact that the company is so carrying on a business shall be jointly and severally liable for the payment and discharge of all the debts and liability incurred by the company as a result of carrying on such business. (b) every such officer and members shall be liable to a fine …..” It is, therefore, unlawful for a company limited by guarantee to be incorporated with the object of carrying on business for the purpose of making profits. (2 marks)