Before 'AstroTourism Ltd' is officially incorporated, its founder, James, signs a contract with a marketing agency to build a website. He signs the contract 'for and on behalf of AstroTourism Ltd'.

Under the Companies Act 2006, who is legally liable on this contract?

Answer options:

AstroTourism Ltd is liable once it is incorporated.

James is personally liable.

The marketing agency bears the loss as the contract is void.

James and the newly formed company are jointly liable.

How to approach this question

Recall the rule on pre-incorporation contracts under s.51 of the Companies Act 2006. Promoters are personally liable.

Full Answer

B.James is personally liable.✓ Correct

Under section 51 of the Companies Act 2006, any contract purported to be made by or on behalf of a company before it has been formed has effect as a contract made with the person purporting to act for the company (the promoter). Therefore, James is personally liable.

Common mistakes

Assuming the company can simply 'ratify' or adopt the contract after it is formed. English law does not allow ratification of pre-incorporation contracts.

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Practice the full ACCA LW — Corporate and Business Law Practice Exam 2

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