Promoter liability and protection of third party rights in terms of pre-incorporation contracts under South Africa’s Companies Act 2008

Abstract

Protecting the interests of a promoter, third-party, and a company in pre-incorporation contracts can be a complex issue as it involves legal considerations and potential conflicts of interest. The challenge arises because, before a company is incorporated, it does not have legal personality, which means it cannot ordinarily enter into contracts. At common law, a company cannot be a party to a contract prior to its incorporation because the company comes into existence only upon incorporation. As was underscored in the English case of Kelner v Baxter, if an agent purports to enter into a contract on behalf of a company prior to the formation of the company, the company once formed cannot ratify the contract. This is for the reason that ratification operates retrospectively to the time that the agent entered into the contract and thus to a time at which the company was not yet in existence, which common law cannot comprehend.