The Companies Act 71 of 2008, defines a pre-incorporation contract as being one that is ‘entered into before the incorporation of the company by a person who purports to act in the name of or on behalf of the company with the intention that the company will be incorporated and thereafter be bound by the agreement.’
With Section 21 of the Companies Act (2008), the previous requirement (of the Companies Act 61 of 1973) that the Memorandum of Association contain as one of its objects that the specific contract be ratified / adopted, and also that the contract be registered with the Registrar, have been abolished.
However, assuming that the contract is acceptable to the Company , within 3 months after the date on which a company was incorporated, the board of the company by way of a directors’ resolution may completely (or partially) ratify the pre-incorporation contract. But failure to do so will result in the company being deemed to have ratified the contract.
Section 21(2) also provides that a ‘person who [enters into a pre-incorporation contract] is jointly and severally liable with any other such person for liabilities created … in the contract …’ if the company is not subsequently incorporated, or after incorporation rejects any part of the contract.
It is therefore important for anyone who is entering into such pre-incorporation contracts, either on a company’s behalf, or who is providing goods or services to the company yet to be formed, to be aware of the provisions of the Companies Act 2008. Consulting an attorney to understand the implications both for yourself, and for an entity on whose behalf you are contracting is advisable.
Further, it is important for a new company, once it has been incorporated, to consider carefully any pre-incorporation contracts, and by way of directors’ resolution, to tie up the loose ends which may exist, without delay.