Accounting Treatments for identifiable intangible assets
unincorporated company, that particular contract will most likely be ruled by the courts as invalid.
The common law also takes into account, the contractual rights of third parties with reference to the intentional matters of the parties that are involved in a pre-registration contract, according to Davies (1999, p.142). As a result, there were difficulties for the opposing contracting party, under the common law rule. This is particularly demonstrated in Black v Smallwood (1966) 117 CLR 52, where a contract was entered into by Robert Smallwood and contained his signature under the name of “Western Suburbs Holdings Pty.ltd”. The company was not registered, however this was unknown to Black, as he assumed that the company was registered. Therefore, Black sued Smallwood on the grounds of specific performance of the contract that they entered into. The High Court determined that Smallwood and his partner; J.Cooper did not act as principals or agents for the unincorporated company, which meant that they were not liable to the contract.
The case of Newborne v Sensolid (Great Britain) ltd (1954) 1 QB 45 also generated a similar outcome. In this case, a contract for the sale of goods by Leopold Newborne (London) Ltd was signed by “Leopold Newborne”, which was the name of the man who intended to be a company director. By the time that the goods were delivered to the market, the market collapsed, and the buyers refused to accept the delivery. The court found that the contract was signed when the company remained unincorporated. It was then determines that Newborne was not liable as he had no intention of entering into the contract as a principal or an agent. The only party that appeared to enter into the contract was the company itself and therefore, Newborne was simply authenticating the expression of its will. This meant that a person could not enter into a legally binding contract on the behalf of a company, in the belief that it would be registered.
The introduction of Section 131 of the corporations act has been a replacement of the common law view of pre-registration contracts. According to Pentony, Graw, lennard and Parker (1999, p.577), Section 131(1) states that if a person enters into a contract on the behalf of an unincorporated company, then that company and the individual will be bound by that contract, once the company is registered and the contract is approved within a certain period of time. This was highlighted in the case of Bay v Illawarra Stationery Supplies Pty.Ltd (1986) 4 ACLC 429, where Bay; who was an accountant and being one of four promoters of a company, entered into a pre-registration contract for office supplies on behalf of the proposed company. When the proposed company did not consent to the contract, the suppliers took legal action against all four promoters under Section 131(2), because Bay was acting as a trustee for that company. The NSW Supreme Court ruled that only [next page]