Section 45 of the Companies Act 2014 deals with “pre-incorporation” contracts, i.e. contracts purported to be entered into by or on behalf of a company before it is incorporated. It provides, amongst other things, that prior to such ratification (if any) by the company, the agent who purported to act in the name or on behalf of the company shall, in the absence of express agreement to the contrary, be personally bound by the contract and entitled to the benefit of it. The UK High Court in Royal Mail Estates Ltd v Maple Teesdale Borzou Chaharsough Shirazi considered the UK equivalent of section 45 which also provides that any agent who acts on behalf of the company pre-incorporation will be personally bound, unless there is a contrary agreement.
The Court considered whether a person purporting to act as a pre-incorporation company’s agent (in that case, in a contract to purchase property) had a valid agreement to the contrary, so that the agent would not be personally liable on that contract.
The Court held that the law firm which signed on behalf of the company was liable to the third party seller for the contract. The relevant clause stating “the benefit of this Contract is personal to the Buyer” was held to be insufficient for the parties to have intended that the contract would not take effect as one made with the agents.
To complicate matters, neither the purchaser’s solicitor nor the third party seller knew that the purchasing company had not been incorporated. Therefore it would appear to be a prerequisite that the parties know the company is not incorporated for them to expressly agree that the relevant section does not apply.
As a result of this, any agent should ensure that the company is incorporated before executing any documents on that company’s behalf. Otherwise, specific references to the non-incorporation of the company must be made where the agent knowingly decides to proceed with execution before the company is incorporated to ensure that the counterparty explicitly foregoes the protection of section 45. A subsequent agreement releasing the agent from liability may also be used.
Contributed by Adam Synnott
