AN ASSIGNMENT SUBMITTED IN PARTIAL FULFILMENT OF THE COURSE: CORPORATE LAW 1
ASSIGNMENT TOPIC: CRITICALLY EXAMINE THE EXTENT TO WHICH A COMPANY IS BOUND TO A PRE-INCORPORATION CONTRACT SUBMITTED BY:
EYESAN ORITSEMOLEBI MATRIC NO:
10/0399 SUBMITTED TO:
MR. ABANGWU NZERIBE
COURSE CODE: ACCT307
DATE: 25TH OF NOVEMBER 2012
The formation of a legal entity or a company is in simple words a matter of legal formality. A contract is that legal obligation by which a legal entity ascertains its legal status. Contracts can be considered as the basis of these formalities. As the formation of these contracts involve various discussions at different stages by more than one person pre-incorporation contracts become inevitable. A company normally will not be able to enter into a contract without coming into existence. Usually a pre-incorporation contract comes into existence prior to the formation of a company. The simple reason behind a pre-incorporation contract is that before incorporation a company a company does not have any legal existence, and if the ‘association of persons' enters into an agreement in the name of company before incorporation; the agreement would be void ab initio. It would be a matter of inconvenience that ‘an association of persons' cannot perform any official business operation in the name of company before its incorporation or the issue of certificate of commencement of business. Therefore the promoter can enter into a business or agreements on behalf of the association of persons or prospective company. A pre-incorporation agreement is entered into by the corporate promoters, who form the company by filing its Articles of Incorporation. Since the corporation has not been formed yet, it cannot be a party to the agreement. If the corporation is not formed or if it fails to adopt the agreement, the promoters can be held personally liable for any breach of the agreement. Under the strict principles of contract law, the promoter is solely liable for the breach of contract. The reason behind is that the promoter is party who enters into the contract, and not the company. The rule of privity of contract keeps away the company from pre-incorporation contract. But recent development in corporate law and contract law makes the company liable for pre-incorporation contract. The promoters of the company may enter into contracts on behalf of the proposed entity which they may refuse to approve or consent once it is incorporated. These contracts include: * Pre-incorporation contracts
* Provisional contracts, and
* Residuary contracts.
WHAT IS A PRE-INCORPORATION CONTRACT?
A pre-incorporation contract is a contract entered into on behalf of the company before incorporation of the company or during the incorporation of the company. Therefore this is contract which is entered into when the Company is in the process of being incorporated but is not yet completed. PRE-INCORPORATION CONTRACTS UNDER THE COMMON LAW
A company becomes a separate entity only by incorporation and it is only after incorporation that it can exercise the functions of a legal person as contained in Section 37 of the CAMD. Prior to its incorporation, a company doesn’t exist and bears no capacity to contract. Therefore, nobody can contract as agent on its behalf because an act which cannot be done by the principal himself cannot be done by him through an agent. A company cannot be liable on or entitled...