Answer to Question #284878 in Accounting for Bea

Question

Edward is the owner of Scissor-hands (Pty) Ltd, a very successful hairdressing business. Edward is considering expanding his business and starting another company. He has already entered into a new lease agreement with a third party for premises for his new company. He is unsure about the requirements of the Companies Act regarding pre-incorporation contracts.

REQUIRED

Explain to Edward the Companies Act requirements concerning pre-incorporation contracts. 

Answer 1

1)A pre-incorporation contract is intended as a temporary agreement on legal arrangements prior to the actual act of incorporation. 

2)Pre-incorporation contract becomes legally enforceable against the company.

3)Promoters are generally held personally liable for pre-incorporation contract

4)The promoter will be liable for breach of contract.

5)A promoter is not forbidden to make profit but to make secret profits. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principle's consent

6)The pre-incorporation agreement outlines who will own what and how profits will be split for all parties involved.

7)A promoter is neither a trustee nor an agent of the company which he promotes because there is no trust or principal in existence at the time of his efforts

As a company is artificial person that is unborn unless the registration process is completed, it cannot enter execute any agreement before incorporation. Therefore, these contracts entered by the promoters are made in their own name. Hence, these contracts are known as pre-incorporation contract or promoter’s contract. Such contracts are inevitable for company registration and therefore are also recognized by Companies Act and also by Specific Relief Act