The process of establishing a business concern is quite rigorous and would definitely involve third parties. The formal registration of a proposed business entity is one hurdle a businessperson would have to cross. Corporate registration with the relevant government agency is not only essential for any business but is also a mandatory requirement of the law. The idea of forming a company is usually conceived by a person or group of persons who in furtherance of this idea take the necessary practical steps to set up the entity. For example, they may have to source for funds, find directors, acquire properties, prepare the prospectus and may also have to pay for the printing and all other incidental expenses. The law regards such persons as promoters of the company.
A promoter is any person who undertakes to take part in forming a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose, or who, with regard to a proposed or newly formed company, undertakes a part in raising capital for it. Promoters may have to enter into agreement or contract with the third parties on behalf of the proposed company. These types of contracts are called pre-incorporation contracts.
Nature of Pre-Incorporation
Pre-incorporation contract is slightly different from ordinary contract. Although, bilateral in nature, pre-incorporation contract has the features of tripartite contract. In this type of contract, the promoter furnishes the contract with interested person; and it would be bilateral contract between them. But the remarkable part of this contract is that, this contract helps the prospective company, who is not a party to the contract. Given the fact that prior to incorporation, a company does not yet exist in the eyes of the law, the conundrum of assumption of liability, and of enforcing contracts, either by the company when formed or by the individuals (promoters) who entered into these contracts on its behalf arises.
Status of Pre-Incorporation Contracts
Prior to the enactment of Companies and Allied Matters Act, 1990 (CAMA), promoters were generally held personally liable for pre-incorporation contracts. A pre-incorporation contract was not binding on the proposed company because there was no principal who was legally in existence on behalf of whom an agent could have contracted. The position was that where a promoter enters into a contract using the proposed name of a company then there is no contract all. However, the current position is as stated by Section 72 of CAMA thus:
- Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound and entitled to the benefit thereof as if it has been in existence as the date of such contract or other transaction and had been a party thereto.
- Prior to ratification by the company, the person who purported to act in the name of or on behalf of the company shall, in the absence of express agreement to the contrary, be personally bound by the contract or other transaction and entitled to the benefit thereof.
From the foregoing, companies are now clothed with the power to ratify any pre-incorporation contract entered on its behalf as if it was the one who signed such contract. Upon ratification, the liability, duties, rights etc arising under such contracts immediately shifts from the promoters to the company. A company can only assume liability or otherwise of a pre-incorporation contract after same has duly ratified. Impliedly, until ratification takes place, promoters remain personally liable for pre-incorporation contracts.
Company formation and all other incidental activities are usually funded by the promoters personally or by any other person(s) at the instance of the promoters. Also, prior to incorporation, there may be need for the promoters, on behalf of the company, to secure office space, purchase office supplies and equipments, recruit personnel amongst others for smooth take off immediately the company is incorporated. Such pre-incorporation activities are usually embarked upon primarily for the benefit of the proposed company. It is therefore incumbent on promoters to ensure that their interests are well protected in the course of setting up the business venture.
As stated above, a pre-incorporation contract is only valid and binding on a company if same has been duly ratified otherwise the promoters stand bound by the terms of such contract in their personal capacities. For a one-man or family business, ratification of pre-incorporation contracts may not pose any challenge unlike a business enterprise consisting of non-relatives or professionals.
To recoup the expenses incurred prior incorporation and to forestall any controversy that may likely arise thereafter, promoters should ensure the company’s Articles of Association, clearly make provisions for ratification of all pre-incorporation contracts entered on behalf of the company. The Articles should specifically list all the pre-incorporation contracts, state the ratifying authority, that is, whether it is the Board of Director or the General Meeting, and prescribe the procedure of ratification.
This article is provided for general information purpose only. It does not constitute legal advice or a legal opinion on any specific facts or circumstances. If you have any enquiries about this article or require further information, please contact the writer – firstname.lastname@example.org.