Pre-incorporation contracts: personal liability of the person acting (CA 2006 s.51)
Imogen and Rafael plan to run a kitchen showroom through a new private company, Brightwater Kitchens Ltd. Before the company is registered at Companies House, Imogen signs an order with a supplier for display units worth £18,000, signing "for and on behalf of Brightwater Kitchens Ltd". Nothing in the order deals with who is to be liable if the company has not been formed. The company is incorporated three weeks later, but no new contract is made with the supplier, which has not been paid. Assume the law of England and Wales applies.
Who is liable to the supplier under the order?
Choose one answer to see the reasoning.
Worked answer
Correct answer B: Imogen personally, because the contract takes effect as one made with the person who purported to act for the company.
THE RULE TO REMEMBER
A contract made for a company not yet formed takes effect, subject to contrary agreement, as one made with the person purporting to act for it, who is personally liable (CA 2006 s.51).
Pre-incorporation contracts: personal liability of the person acting (CA 2006 s.51)
Section 51(1) Companies Act 2006 deals with contracts that purport to be made by or on behalf of a company at a time when it has not been formed. Subject to any agreement to the contrary, the contract has effect as one made with the person purporting to act for the company or as its agent, and that person is personally liable on it. Imogen signed the order on behalf of Brightwater Kitchens Ltd before it was incorporated, and the order contains nothing excluding her personal liability. The contract therefore takes effect as Imogen's own contract and she is liable to pay the £18,000. Incorporation does not transfer the contract to the company: if the company is to take it over, a new contract (a novation) with the supplier is needed, and none was made here. Rafael did not purport to make the contract, so s.51 does not make him liable.
Why A is wrong: Incorporation does not make a company party to a contract made before it existed; s.51 puts the liability on the person who acted.
Why C is wrong: Section 51 prevents the contract failing; it takes effect as a contract with the person who acted for the company.
Why D is wrong: Liability under s.51 falls on the person purporting to act for the company; Rafael took no part in making the contract.
Why E is wrong: A company cannot ratify a contract made before it was formed; it would need a new contract with the supplier.
A little more practice done.
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