Defective Incorporation

Defective Incorporation

1. Issue arises when Ks are created before the articles are filed – existence of corp does not begin until articles of incorporation are filed.

2. Liability for pre-incorporation transactions:

a)     All persons purporting to act as or on behalf of a corp., knowing there was no incorporation, are jointly & severally liable for all liabilities created while so acting. 

Exceptions to Defective Incorporation: De Jure; De Facto; Estoppel

1. De Jure

2. De Facto

3. Estoppel

De Jure

A corporation that results from the incorporators full satisfaction of the statutory requirements of establishing a corp. Since you were in full compliance, cannot argue no corp.    

De Facto

Corp arising from good faith attempt to comply with the statutory requirements of establishing a corp (protects someone who unsuccessfully incorporated – should consider whether person was a sophisticated client or made innocent mistake)

De Facto: Requirements

Good faith in claiming to be and in doing business as a corp & bona fide effort to incorporate.

Applies if party who defectively incorporated can show

(1)   The existence of law authorizing incorporation;

(2)   An effort in good faith to incorporate under the existing law, and

(3)   Actual use or exercise of corporate powers.

(a)   TEST: Did someone purport to be corporate KNOWING they were not?

Estoppel

Corp by estoppel occurs when a third party has dealt with the purported corp on the basis and belief that the company was in fact a corporation.

a)     Third party (creditor) will be estopped from denying the enterprise’s corporate status.