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

Zara is organising the creation of a new company, Tidewater Ltd. She negotiates a premises lease and signs it in the name of 'Tidewater Ltd' before the company has been incorporated. Under the general rule applied in the LW Global syllabus, who is bound by the lease at the time it is signed?

Zara is personally liable. A company does not exist before incorporation, so it cannot enter contracts. Someone who purports to contract on its behalf, such as a promoter, normally carries the liability personally unless the contract is structured otherwise.

  1. ATidewater Ltd, because it will benefit from the lease once formed
  2. BNobody, because a company that does not yet exist cannot be a party and Zara cannot be bound
  3. CZara, who can be personally liable on the lease because the company did not exist when it was signedCorrect
  4. DThe future shareholders of Tidewater Ltd, in proportion to their holdings

Explanation

A company has no legal personality until incorporation, so it cannot be a party to a contract made before then. A person who purports to contract on behalf of a non-existent company is generally personally liable on it. Option B is wrong because the promoter normally takes on the liability.

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