FACTS
A Financial Company entered into a contract with a Sole Proprietorship owned by Mr. K, where the Financial Company agreed to loan an amount of 10,000 to Mr. K, payable with interest. While the contract was subsisting, Mr. K entered into a contract with Mr. L, where the former agreed to acquire and take over Mr. K’s Sole Proprietorship which he incorporated into a Limited Liability Company. Mr. K has defaulted in payment of the loan but has notified the Financial Company of the said incorporation of his sole proprietorship by Mr. L into a Limited Liability Company.
ISSUES
- Who should the Financial Company sue?
The Financial Company may sue either of the parties depending on the circumstances. The reason being that a Sole Proprietorship under our current law, may be registered under the Registration Act of 1962, to have exclusive use of business name. Notwithstanding this, a Sole Proprietorship doesn’t have a legal existence separate and distinct from its owner and the person that controls and manage it. It cannot enter into contracts on its own, or sue and be sued in its name, but all these are done in the name of the Proprietor as the individual owner. There is no formal separation of ownership from management. Therefore the owner is at the same time the manager. He may however delegate the task of management to another but subject to the owner’s overall and ultimate control. It lacks the legal capacity to borrow money in its name and its own right. Borrowing is done by the proprietor in the strength of his personal creditworthiness. The proprietor is personally liable for all the debts of the business. The sole proprietor does not enjoy limited liability. The proprietor in the instant matter Mr. k, can therefore be sued by the Financial Company for the default in loan payment but for the following reasons:
- In law what is the legal effect of the said incorporation, of the Sole Proprietorship into a Limited Liability Company, on the liabilities of Mr. K.
The Ghanaian position on pre-incorporation was explained thoroughly in the cases of PHONOGRAM v LANE, where before incorporation, the def contracted with the plf for a loan to finance a group Held- even though the company was known by both parties not to be in existence but only proposed and that it was purported to have been entered into by the def on behalf of the company, the def was personally liable for it. In all cases where a person purports to contract on behalf of a company not yet formed then, unless there is a clear exclusion of his personal liability, he is personally liable on the contract however he expresses his signature. Also it was held in the case of PANGIOTOPOULOS V PLASTICO that a contract made by a promoter or any person prior to the incorporation never binds the company because it has not been formed. This is so even if the parties act on the contract. It can only be bound if after incorporation enters into a new contract to the effect of the previous agreement- The promoter would be personally liable if the contract is not ratified. A company is not bound by a contract purporting to be entered on its behalf by the promoters or other person unless the company after incorporation enter into a new contract to the effect of the previous agreement. According to JADBRANSKA V OYSA, there must be a clear and unequivocal act on the part of the company to constitute ratification. There should be a clear and unequivocal act on the part of the company if ratification is to be inferred-a resolution of the company in a general meeting adopting the contract. The mere letter from the managing director was insufficient to amount to ratification. It is clear from the above analysis therefore that the effect of the said incorporation is that, upon incorporation of the said Sole Proprietorship into the Limited Liability Company, Mr. K can be sued by the Financial Company personally for the loan on condition that the Limited Liability Company has declined to ratify the said loan contract prior to its incorporation. On the other hand, if the Limited Liability Company agrees to ratify the said loan contract, then the Company shall be liable to the Financial Company for the said defaulted loan payment.
- Whether the Financial Company having had notice of the said incorporation has a cause of action against the Sole Proprietor.
As explained earlier, the Financial Company can sue Mr. K for the said loan plus interest provided the new incorporated Limited Liability Company fails to ratify the loan contract as a way of agreeing to take upon itself all the liabilities of Mr. k in respect of his former Sole Proprietorship. This is clearly in accordance with the Companies Act of 1963 (Act 179) which provides under its section 13 that: 13 (1) A contract or any other transaction purporting to be entered into by a company prior to its formation or by a person on behalf of the company prior to its formation may be ratified by the company after its formation. (2) On ratification under subsection (1), the company becomes bound by and entitled to the benefit of that contract or that transaction as if it has been in existence at the date of that contract or other transaction and had been a party to the contract or the other transaction. (3) Prior to ratification by a company, the person or persons who purported to act in the name or on behalf of the company are, in the absence of express agreement to the contrary, personally bound by the contract or the other transaction and are entitled to the benefit of the contract or the other transaction. In all cases where a person purports to contract on behalf of a company not yet formed then, unless there is a clear exclusion of his personal liability, he is personally liable on the contract however he expresses his signature.