Explain how a company acquires interest in pre-incorporation contract. (4 marks)
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The promoters of a business may enter into contracts for that business before they complete the incorporation process. In such a situation, the following principles apply.
Section 13 of the Company’s Act 1963 (Act 179)
(1)Any contract or other transaction purporting to be entered into by a company prior to its formation 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 by and entitled to the benefit thereof as if it had been in existence at the date of such contract or other transaction and had been a party thereto.
(2) Prior to ratification by a company the person or persons who purported to act in the name 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 shall be entitled to the benefit thereof. ,
Generally, the promoters will be personally liable for performance obligations under the pre-incorporation contract. Because the corporation does not exist, it cannot perform those obligations.