The distribution of liability in terms of pre-incorporation contracts

Abstract

This dissertation deals with the aspect of pre-incorporation contracts and the uneven distribution of the liability in instances where a pre-incorporation contract is not ratified by the directors, whether partially or fully, or where the company is not incorporated. The legislature went from one extreme to the next in its attempt to correct the disparity regarding who bears the liability in these transactions.

Under the previous Companies Act 61 of 1973, in cases of non-incorporation of a company or non-ratification of a pre-incorporation contract, the third party bore all the risk and liability when these contracts fell through. This position was unfairly skewed in favor of the promoter and the pre-incorporation company, as they were left with the option of contracting with various persons and not having to honor their obligations when the company was indeed incorporated. This left the third party with no sustainability and assurance.

Legislature shifted from a position in law where the third party bore all the liability in these instances to a position to where the promoter bears all the liability, and the company is not even considered regarding bearing some of the liability. This great disparity needs to be addressed in our law.

Under the new Companies Act 71 of 2008, legislature shifted the liability onus completely onto the promoter who now is placed in the position where he would bear the full liability in these instances. This new position again does not promote equality or fairness as the third party and company now bear no responsibility. The promoter is in effect forced to bear the liability for a pre-incorporation company that has mandated him to act on their behalf, and in most cases are not related to the company itself.

There needs to be a proper control mechanism and/or distribution of liability which would require a fact-based inquiry as to who is responsible for the non-incorporation of the company and/or non-ratification of the concluded contract, especially in instances where the promoter is completely independent of the company.

The objective of my research is to conduct an investigation into the essence of a pre-incorporation contract, under the old and the new Companies Act, together with the essential elements thereof to find a workable solution to a variety of the problems we face in the practical aspects of the conclusion of these types of contracts.

There will be a specific concentration on the liability aspects in cases of non-ratification and non-incorporation to equalize the playing field of all the relevant parties. After having ascertained the proper position under South African law, I will turn to comparative research regarding how foreign jurisdictions are addressing the problems that we face, to shape and produce a workable proposal for these instances.