Security of Transaction after Phonogram
| Date | 01 November 1984 |
| DOI | http://doi.org/10.1111/j.1468-2230.1984.tb01671.x |
| Author | N. N. Green |
| Published date | 01 November 1984 |
SECURITY
OF
TRANSACTION AFTER
PHONOGRAM
THE
precise scope and meaning of section 9 of the European
Communities Act 1972 is a matter for debate.’ In
Phonogram
Ltd.
v.
Lane2
the Court of Appeal had an opportunity to stamp a
degree of certainty onto the law relating to pre-incorporation
contracts under section 9(2) of the Act. This provision, which
implemented Article 7 of the first EEC Directive on company law:
seeks
to
make promoters who enter into contracts with third
parties liable on those contracts unless there is some agreement to
the contrary. However, the decision in
Phonogram
has raised as
many ghosts as it has exorcised. Consequently, we must ask the
question: to what extent has section 9(2) of the European
Communities Act 1972 brought security of transaction4 to pre-
incorporation contracts?
The facts of
Phonogram
are as follows: Brian Lane was to
promote a company with the appropriate name of “Fragile
Management Ltd.” This firm was to manage a pop group called
“Cheap, Mean and Nasty.” To finance the venture Lane induced
Phonogram Ltd.
to
make available about
f12,000
to be paid over
in two roughly equal instalments to a company called “Jelly Music
Ltd.” This payment scheme was an administrative convenience
since Lane was a director of Jelly Music. Phonogram duly paid the
first instalment and included with the cheque a letter of which
Lane was to sign a copy and return it to Phonogram. The letter
thus became a formal contract containing the terms applicable to
the finance agreement. One term required Lane to repay the
money to Phonogram
if
Fragile Management was not formed
within one month of the date of the letterkontract. Fragile
Management never did see the light of day and accordingly the
money became repayable. When repayment failed to materialise
Phonogram commenced legal proceedings for recovery against
Lane.
*
See
Cusroms
and
Excise
Commissioners
v.
Wells
[1982]
1
All
E.R.
(Q.B.D.) where
the promoter-owner
of
a .company was held to be liable to pay tax on transactions
entered into by him on behalf
of
the Company prior to incorporation. The s.9(2) din
however, was not the principal ground
for
the judgment, this was based upon s.33($
Finance Act 1972;
Birar
v.
A1 Sanea and Another,
April
27,
1983 (Q.B.D.) unreported,
discussed later in the text.
1981
3
All
E.R.
132, C.A.
Lee $EC Directive 68/151,
0.1.
S.Edn. 1968 (1) p.41.
The hrase “security
of
transaction” is not orthodox legal terminolog but merely a
succinct iescri tion of an ideal. Support for the notion may be found in tte preamble to
Dir. 68/151/E&C,
O.J.
1968 L65. Para. 2, for exam le, speaks of the “validity
of
obligations” entered into by companies. Likewise, Art.
f
on pre-incorporation contracts,
is found in a section of the directive headed “Validity
of
obligations entered into by a
company.” For a lucid account of the philosophy behind the directive see the submissions
of
Advocate General M. Henri Mayras in
Re
Friedrich Haaga
GmbH
[I9751
1
C.M.L.R.
32 at pp.35, 36.
671
672
THE MODERN LAW REVIEW
[Vol.
47
At first instance Phillips
J.
gave judgment for Phonogram under
section
9(2)
of the European Communities Act
1972.
He refused,
however, to hold that Phonogram had entered into a contract with
Lane personally such as would have made
him
individually liable.
Lane appealed on the basis that the judge had erred in law in holding
him liable to Phonogram under section
9(2).
In the Court of Appeal
counsel for Lane relied on three grounds: first, it was contended that
under the terms of the French language text of the directive
from
which the English provision took its shape promoters were only
personally liable when the company in question was actually
“. . .
en
formation,”
i.
e. actually undergoing the legal process
of
formati~n.~
Thus, since Fragile Management had never reached this relatively
advanced stage, no personal liability could accrue on the pre-
incorporation contract. Lord Denning M.R. simply retorted, “Section
9(2)
is
in
accordance with the spirit and intent of the directive. We
should
go
by our own statute, and not by the directive.”6 Secondly, it
was contended that “purports” in the opening words
of
section
9(2)
(viz.
“where
a
contract purports
. .
.”)
signifies that there must be an
actual representation that the company is already in existence.’ Lord
Denning
M.R.
noted, in rejecting this claim, that a contract can
purport to be made on behalf of
a
company, or by a company, even
though that company is known by both parties not to be formed and
that it is only about to be formed.8 Finally, it was argued that a
company can be “a person” within the meaning of that expression
where it first occurs in section
9(2),
moreover, that Jelly Music Ltd.
was such a company and hence were the real defendants and not
Lane. This somewhat hopeful claim was rejected almost without
comment
from
the Master of the Rolls. It is clear that section
9(2)
was not to be circumvented by recourse to technicalities. Consequently,
a unanimous Court
of
Appeal held Lane liable to repay the money to
Phonogram.
THE
UNDERLYING
PRINCIPLES
This was clearly the correct decision. Nonetheless the approach
adopted indicates that the court failed
to
appreciate the nub of the
principles they handled. Section
9(2)
imposes liability on promoters
of pre-incorporation contracts unless they have, in some way,
contracted out
of
that liability. Yet, despite its European
origins,
the provision is reflective of wider ideals which are firmly established
The French version of
Art.
7
of
EEC
Dir.
68/19
commences with the words, “Si des
actes ont tte accomplis au
nom
d’une socidte
en
formution
. . .”
(emphasis added). But
what if individuals agree to form a company but. take
30
legal ste to achieve that goal?
I1981
3
All
EX.
182. At 36 Lord
Dannrng
M.R.
stated tEt the French text was,
With respect, given that the United Kingdom
is
now
subject
to
all
relevant European
legislation, this comment
is
immaterial
to
the decision and erroneous if it is the basis
of
his decision
on
this, albeit narrow, point.
I‘.
.
.
dra
d
ted with regard
to
a ifferent system
of
mrnpany law
from
that
in
this country.”
’
Ibid.
at p.186.
*
lbid.
To continue reading
Request your trial