PRE-INCORPORATION CONTRACTS IN RELATION TO THE COMPANIES ACT OF 2008

Before incorporation (that is registration with the companies and intellectual property commission), a company does not exist and it cannot perform juristic acts. In, addition no one can act as the company’s agent, because an agent cannot act for a non-existent principal. However, the legislature has foreseen that it may be necessary from a business perspective for a person to conclude a contract for a company that is not in existence yet and has therefore included Section 21 into the Companies Act 71 of 2008 which is the enabling provision for the conclusion of pre-incorporation contracts.

A pre-Incorporation contract is a contract that is entered into by a person who is acting on behalf of a company that does not exist. The person entering into the agreement has the intention that once the company comes into existence the company is to be bound by the provisions of the pre-incorporation contract.

The only formal requirement for the conclusion of a pre-incorporation contract is that it must be reduced to writing. The Companies Act provides that if the board of directors of the company has neither ratified nor rejected a particular pre-incorporation contract made or done in the name of the company within three months after the date on which the company was incorporated, the company will be regarded as having ratified that agreement. In the event that the company is not incorporated, or if incorporated but refuses to adopt and ratify the agreement, the agent in terms of the Companies Act is jointly and severally liable with any other person for the liabilities created as provided for in the pre-incorporation contract.

Parties to a contract enter into an agreement with the intention that the end result envisaged is the exchange of something of value usually money, at least in most instances. The same end result is worked towards in a pre-incorporation contract; however the achievement of this result will not be possible if the contract does not make provision for a special clause dealing with the pre-incorporation aspect.

There is no correct way to phrase such a clause, but to ensure that the contract will be legally enforceable the construction of the clause is important.

The following aspects should be addressed in the clause dealing with the incorporation of the company:

  1. There must be an undertaking given by the agent acting on behalf of the company to be form that the company will be incorporated within a specific timeframe.
  2. An undertaking that the company will be bound by the contract once incorporated.
  3. In the event of the company is incorporated but refuses to adopt and ratify the agreement or rejects it conditionally, partially or completely who is to be held liable?
  4. Who will be liable as purchaser if any of the above conditions are not fulfilled?

While the purpose of having such a clause in a contract is to protect the seller, by ensuring that there is a legal subject (i.e. Company or Agent) that will be had liable as purchaser.  The true intention of the Section 21 of the Companies Act 71 of 2008 is to provide a legal basis for companies that are not yet incorporated to engage in business transaction before, it is legally in existence.

For more information on this or any other legal related queries please contact us at 033 392 8000

By: Jershwin Khan – Attorney & Conveyancer

2 replies
  1. Louis
    Louis says:

    Question
    A, B & C started a business making picture frames, their company(Real Time Pvt ltd) was incorporated on 25 May 2017.
    The company adopted The Articles and added an article stating that the directors had no authority to enter into any legal obligation committing the company to spend in excess of $50 000 without prior approval of the Shareholders

    1. On 16th May A had entered into a contract with Dice ltd for the purchase of a New cutting machine for Realtime’s business on behalf of realtime.
    The contract provided for payment of the $40000 purchase price by monthly instalments.
    Realtime has subsequently been using the machine and has paid the instalments due at the end of May and June.

    At a board meeting on 4 June 2017, it was pointed out that the cutting machine was too expensive and was not needed.
    They decided to stop using it and would not pay any more instalments.

    Discuss whether Realtime or any other person is bound by the Contract, if so on what basis.

    Reply
    • Randles
      Randles says:

      Good Day,

      Thank you for your enquiry on our article!

      Please note that our articles are for information purposes only and to do not establish a client relationship nor constitute legal advice.

      In order to ensure that you receive tailored advice in response to your query, please contact us to make an appointment with one of our legal practitioners who will assist further.

      Kind Regards,
      The Randles Team

      Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *