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

Before Lumen Ltd was incorporated, its promoter, Asha, signed a contract with Brightside Printers for printing brochures, writing 'for and on behalf of Lumen Ltd (in formation)'. Lumen Ltd was later incorporated and did not adopt the contract. Who is liable on the contract?

Asha is personally liable. A company cannot be bound by or ratify a contract made before it exists, so the promoter who purported to act for it normally bears personal liability unless the company later enters a new contract.

  1. ALumen Ltd automatically, as it benefits from the brochures
  2. BNobody, because a non-existent company cannot contract and agents cannot be liable
  3. CAsha personally, because a company cannot ratify a pre-incorporation contract and she acted as the purported agentCorrect
  4. DBrightside Printers must bear the loss

Explanation

A company cannot be bound by a contract made before it exists, and it cannot ratify it afterwards. The person who purports to contract on its behalf is normally personally liable. Option A is wrong because Lumen Ltd was not in existence and did not adopt it by a new contract.

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