Sections of the Corporations Act You May Have Missed #005

Did you know it is possible to enter into a contract with a company prior to its registration? In our fifth edition of Sections of the Corporations Act You May Have Missed, we look at Part 2B.3 of the Corporations Act 2001 (Cth) (the Act) which deals with contracts before registration.

Pursuant to section 131(1) of the Act, a company is bound by a contract and entitled to its benefits, if:

1.  a person enters into a contract on behalf of or for the benefit of a company before it is registered;
2.  the company or a company reasonable identifiable with it, is registered and ratifies the contract.; and
3.  the company is registered or ratifies the contract either:
   (a) within the time agreed to by the parties of the contract; or
   (b) within a reasonable time after entering into the contract, if there is no agreed time.

Section 131(1) requires that the person who entered into the contract indicate that it did so not for itself but for the unincorporated company (B J McAdam Pty Limited v Jax Tyres Pty Limited (No 3) [2012] FCA 1438).

Ratification of the contract can either be express by unequivocal language or conduct such as signing board minutes stating that the company ratifies the contract or implied by conduct where the implication can reasonably drawn by the other party (Aztech Science v Atlanta Aerospace (Woy Woy) [2005] NSWCA 319).

What happens if the company does not register itself or ratify the contract?

Under section 131(2), if the company fails to register itself or registers itself but fails to ratify the contract within the agreed time or a reasonable time, then the agent who entered into the contract on behalf of the company is liable to pay damages to the other party to the contract (White Pointer Investments Pty Ltd v Creative Academy Group Pty Ltd [2023] NSWSC 817).

The amount of damages payable is the amount the company would have had to pay to the other party had it ratified the contract but then failed to perform it all.

If such proceedings are brought to recover damages because the company is registered but does not ratify the contract, the court has power to anything it considers appropriate in the circumstances including ordering that the company do any of the following as outlined in section 131(3):

1.  pay all or part of the damages that the person is liable to pay;
2.  transfer property that the company received because of the contract to a party to the contract; and/or
3.  pay an amount to a party to the contract.

What happens if the company ratifies the contract but fails to perform?

If the company ratifies the contract but fails to perform all or part of it, then under section 131(4) the court also has the power to order that the agent pay part or all of the damages the company is ordered to pay.

Release from Liability

Under section 132 of the Act, the agent can be released by the other party from all or part of their liability under section 131 to the other party by signing a release.

However, despite any rule of law or equity, the agent does not have any right of indemnity for their liability under Part 2B.3 even if they were acting or purporting to act as trustee for the company.

Takeaway

While you can enter into a contract with a company prior to its incorporation, any person entering into this contract on behalf of a pre-registered company should be aware that they may be liable for damages if the company is not ultimately registered, does not ratify the contract or fails to perform its obligations. You should carefully consider whether it is more appropriate to wait and enter into the contract after the company is incorporated.