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

Before Nova Co was incorporated, its promoter Hugo signed a lease for office premises in the name of 'Nova Co, a company to be formed'. Nova Co was later incorporated and began using the premises. The landlord now sues for unpaid rent. Under the usual rule on pre-incorporation contracts, what is the position?

Hugo is likely personally liable. A company cannot ratify a contract made before it was incorporated, so Nova Co is bound only if it makes a new contract or novation after incorporation. Simply using the premises does not automatically bind it.

  1. ANova Co is automatically bound because it later took the benefit of the lease
  2. BHugo is likely personally liable, and Nova Co is not bound unless it enters a new contract or adopts the lease by a new agreementCorrect
  3. CNobody is liable because a non-existent company cannot be a party to a contract

Explanation

A company cannot ratify a contract made before it existed. The promoter is normally personally liable, and the company is bound only by a new contract after incorporation. Using the premises does not itself make it bound, and the promoter's liability means the third option is wrong.

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