Skip to content

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

Priya signs a contract to buy equipment, stating that she is acting 'on behalf of Zenith Ltd, a company to be formed'. Zenith Ltd is not yet incorporated. In the usual rule applied in common law company law systems, who is liable on the contract at the time it is made?

Priya is personally liable. A company does not exist before incorporation, so it cannot be a party to a contract made for it, and the promoter who purports to contract on its behalf is normally held personally liable on that contract.

  1. AZenith Ltd, because the contract was made in its name
  2. BNobody, because a company that does not exist cannot be a party
  3. CPriya personally, because the company did not exist when she contractedCorrect
  4. DThe equipment seller only, because it accepted the risk

Explanation

A company has no legal personality before incorporation, so it cannot be bound by or take the benefit of a contract made for it. The person who purports to contract on its behalf is usually personally liable. Option B is wrong because the promoter is generally liable rather than the contract being void.

Did you get it right without looking?

One question tells you little. A timed set on The formation and constitution of a company shows your real accuracy, how long you take and where you lose marks.

Practise The formation and constitution of a companyFree diagnostic mock

More The formation and constitution of a company questions