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ACCA Applied Skills · Corporate and Business Law (Global) · The formation and constitution of a company

A promoter, Farid, incurs costs of 5,000 in preparing documents to form Gale Ltd before it is incorporated. After incorporation, which statement is correct about recovering the costs from the company?

Farid has no automatic right to be repaid. A company is not liable for expenses incurred before it existed, so he can recover them only if the company later agrees to pay or a valid contract provides for it. Benefit to the company does not create the right.

  1. AFarid has no automatic right to be paid by the company unless it agrees to pay him after incorporation or a valid contract provides for itCorrect
  2. BFarid can recover the costs from the company as of right, because he acted for its benefit
  3. CFarid can recover the costs only if the promoters are also directors

Explanation

A promoter has no automatic right to be reimbursed for pre-incorporation expenses, since the company was not his principal when they were incurred. Payment depends on a binding agreement made after incorporation, or a provision in the articles or elsewhere. Benefit to the company does not create a right, and being a director is irrelevant.

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