THE NEW COMPANIES ACT - PART VI: COMPANY CONTRACTING BEFORE IT IS INCORPORATED Pre-incorporation contracts and the Companies Act 71 of 2008 This is the sixth in a series of notes in which we guide you through the essentials of the new Companies Act, with specific emphasis on aspects that will affect typical property transactions. The focus in this insert is on provisions dealing with agreements entered into before the company is incorporated, for example, the purchase of immovable property on behalf of a company to be formed. Introduction It may be necessary for partners planning to set up a prospective business in a company, to enter into one or more contracts on behalf of the company before the company is incorporated. Under the previous Companies Act of 1973, a pre-incorporation contract was valid if • it was in writing; • when the company was registered, the company's memorandum of association stated that the ratification of the contract was one of the objects of the company; and • the pre-incorporation contract was lodged with the Registrar of Companies at the same time as the company's memorandum and articles of association were lodged. Section 21 of the new Act allows pre-incorporation contracts Section 21(1) of the new Companies Act allows a person to enter into a written contract in the name of a company to be incorporated. It requires only that “a person may enter into a written agreement in the name of, or on behalf of, an entity that is contemplated to be incorporated in terms of this Act, but does not yet exist at the time.” The only legal formalities for a valid pre-incorporation contract under the new Act are therefore that the contract must be in writing and must be entered into in the name of or on behalf of the company still to be formed. (There is therefore no requirement that the company’s founding documents, when it is formed, must state that one of the company's objects is to ratify the contract; and there is no requirement that the pre-incorporation contract must be lodged at the CIPC, the new companies registration office, together with the company's formation documents.). 1 // 2 1 // 3 Requirements Section 21(4) of the new Act however determines that within 3 months after the date on which the company is incorporated, the Board of Directors may completely, partially or conditionally ratify or reject any pre-incorporation contract. Such ratification is retrospective, i.e. from the date that the agreement was entered into. If the Board has neither ratified nor rejected the pre-incorporation contract in this period, the company will be deemed to have ratified the agreement (Section 21(5)). Validity after ratification To the extent that the pre-incorporation contract has been ratified (whether actually or deemed as per s 21(4) or 21(5)), the agreement is enforceable against the company as if the company itself was the party to the agreement at the time it was entered into. Liability if pre-incorporation agreement not ratified or not fully ratified The person who signed the pre-incorporation agreement on behalf of the company (usually referred to as a ‘promoter’) will not be liable for the obligations incurred by the company in terms of the agreement if the agreement is ratified in full. However, the promoter remains jointly and severally liable with the company or its Board of Directors for liabilities in the pre-incorporation contract if the company is not incorporated or if, after being incorporated, the company rejects any part of an agreement or action. 2 // 4 The person signing on behalf of the company to be formed therefore becomes personally liable if: • the contemplated entity is not subsequently incorporated; or • after being incorporated, the company rejects any part of such an agreement or action. Can you exclude such liability? Due to the risk of personal liability, a person will understandably not without more, enter into such a transaction. Anyone with the intention of entering into a pre-incorporation contract, should best consult with his attorney to protect his rights. The liability in Section 21(2) is "as provided for in the pre-incorporation contract", thereby allowing and granting room to qualify the signatory’s liability. Types of loans that are allowed 3 // 4 2 // 2 Subject to certain requirements*, a Board of Directors may, in terms of Section 45, authorise the provision of direct or indirect financial assistance by the company to a • 3 2// //3 2 • • director or prescribed officer of the company or of a related or inter-related company; related or inter-related company or corporation; member of a related or inter-related company or corporation; or