Company law revision question and answer

Mr and Mrs Karanja, who intended to form a limited liability company known as Central Construction Company Ltd, approached Jijenge Bank for a loan to purchase office furniture and stationery. A loan of Sh.1 million was given the bank. Subsequently, the company was incorporated. However, the business did not flourish and the company was unable to pay the loan as and when the installments fell due. When the bank sent a demand notice to the company, Matata, a shareholder who opposed the demand notice, said that he company was not liable to repay the loan. Mr and Mrs Karanja, now want to alter the objects clause in the memorandum of association to include a clause authorizing the company to effect the payment but Matata is still opposed to the proposal.

Discuss the legal position of the bank and the validity of the proposed alteration.

– This problem is based on pre-incorporation contracts. In this case the borrowing contract is between Mr and Mrs Karanja and Jijenge Bank. The proposed company, Central Construction Co. Ltd is not involved, and cannot therefore be held liable on the contract. At common law a pre-incorporation contract is generally unenforceable or against the company. Mr and Mrs Karanja are personally liable on the contract. This position is consistent with the decision in Kelner v Baxter.

– Matatas contention is therefore sustainable since a pre-incorporation contract cannot be ratified the company after incorporation. It was so held in Natal LandCompany Ltd v Pauline Colliery Syndicate.

– Central Construction Co Ltd cannot be burdened with obligations contracted before it was incorporated.

– Of equal importance is the fact that the company has not after incorporation entered into a new contract similar to the previous agreement. The bank has an action against Mr and Mrs Karanja for the amount due.

– The proposed alteration of the objects clause to provide for repayment of the amount the company is invalid and cannot withstand judicial scrutiny even if passed the majority.

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