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pre-incorporation contracts under the new Companies Act

by default - Posted 06 October 2009

A pre-incorporation agreement is an agreement concluded on behalf of a legal entity (eg. a Company) that is still to be formed.    S35 of the Companies Act 61 of 1973 allows for a person to act as an agent of a company that doesn’t yet exist and for companies to conclude pre-incorporation agreements.

The requirements are:

-          The agreement must be in writing;

-          The memorandum of association of the company on its registration contains as an object of the company the adoption or ratification of the agreement;

-          The person who concluded the agreement professed to act  as an agent of the company;

-          2 copies of the agreement must be lodged with the Registrar of Companies with the application for registration of the Company.

 S35 does not determine the nature of the rights and obligations of the agent.  The agent , acting on behalf of the company to be formed,  is not bound to the other contracting party if the company is not formed or if the company refuses to ratify the agreement.    Hence the reason for inserting a clause in a pre-incorporation agreement specifically holding the agent personally  liable should the company a) not be incorporated or b) the company refuses to ratify the agreement.

S21 of the new Companies Act 71 of 2008 changes the current position.   It provides that a person (“promoter”) may enter into a written agreement in the name of, or purport to act in the name of a company to be incorporated and the Board may ratify or reject the pre-incorporation agreement within 3 months of incorporation.  If the Company does nothing, it is deemed to have ratified the agreement and the promoter is not personally liable ito the agreement.  However, if the company is not incorporated or, after being incorporated, it rejects the agreement, the promoter is automatically personally liable ito the agreement entered into.

For more information, contact Nicci on (021) 465 9175.