Whilst it is a generally accepted principle that a company does not exist as a legal entity until such time that it has been incorporated, for all intents and purposes however, prior to incorporation someone will be required to act on behalf of the company.
In order for the process of incorporation to be completed various formalities of incorporation need to be attended to, and in getting through such rigours of incorporation various contracts must be entered into with third parties. Given the fact that prior to completion of the incorporation process 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 individual who entered into these contracts on its behalf arises.
In order to address such issues the Companies Act 71 of 2008 (“Companies Act”) makes provision for the regulation of pre-incorporation contracts. Section 1 of the Companies Act defines a pre-incorporation contract as a written agreement entered into before the incorporation of a company by a person who purports to act in the name of, or on behalf of, the purposed company with the intention or understanding that the purposed company will be incorporated, and will thereafter be bound by the agreement.
Section 21 of the Companies Act sets out various provisions relating to pre-incorporation contracts. Section 21(1) of the Companies Act states that a person may enter into a written agreement in the name of, or purport to act in the name of, or on behalf of, an entity that is contemplated to be incorporated in terms of the Companies Act, but does not yet exist at the time.
Section 21(2) of the Companies Act provides that, an individual who does anything contemplated in subsection (1) is jointly and severally liable with any other such person for liabilities created as provided for in the pre-incorporation contract while so acting, if the contemplated entity is not subsequently incorporated, or after being incorporated, the company rejects any part of such an agreement or action.
Section 21(4) of the Companies Act stipulates that within 3 months after the date on which a company was incorporated the board of that company may completely, partially or conditionally ratify or reject any pre-incorporation contract or other action purported to have been made or done in its name or on its behalf.
The Companies Act goes on to further state in Section 21(5) that if, within three months after the date on which a company was incorporated, the board has neither ratified nor rejected a particular pre-incorporation contract, or other action purported to have been made or done in the name of the company, or on its behalf, as contemplated in subsection (1), the company will be regarded to have ratified that agreement or action.
To the extent that a pre-incorporation contract or action has been ratified or regarded to have been ratified, section 21(6) of the Companies Act states that, the agreement is as enforceable against the company as if the company had been a party to the agreement when it was made, and also that the liability of a person under subsection (2) in respect of the ratified agreement or action is discharged.
Lastly, section 21(7) of the Companies Act states that, if a company rejects an agreement or action contemplated in subsection (1), a person who bears any liability in terms of subsection (2) for that rejected agreement or action may assert a claim against the company for any benefit it has received, or is entitled to receive, in terms of the agreement or action.
The Companies Act therefore sets out various formalities which need to be complied with before pre-incorporation contracts will be valid and enforceable. The Companies Act furthermore provides protection to third parties contracting with the to be formed company by providing personal liability for such individuals in terms of section 21(2).