Medium2 marksMultiple Choice

Corporate and Business LawSection BSyllabus DBusiness OrganisationsMTQ

This question is part of a case study — click to read the full scenario(Case 52)

SCENARIO 3: HarvestDrone Ltd and CropYield PLC wish to form a joint venture to develop AI-driven tractors. They want the new entity to have limited liability, but they want to maintain absolute secrecy over the joint venture's financial accounts, preventing competitors from seeing their R&D spend.

Which business structure should they choose to achieve BOTH limited liability and complete financial secrecy?

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ACCA · Question 54 · Corporate and Business Law

SCENARIO 3: HarvestDrone Ltd and CropYield PLC wish to form a joint venture to develop AI-driven tractors. They form 'AgriAI Ltd'. Before AgriAI Ltd is officially incorporated, a director of HarvestDrone signs a contract for tractor parts 'on behalf of AgriAI Ltd'.

Once AgriAI Ltd is incorporated, how can it take over the legal liability for this pre-incorporation contract?

Answer options:

By passing an ordinary resolution to ratify the contract.

By passing a special resolution to adopt the contract.

By entering into a novation agreement with the supplier and the promoter.

The liability transfers automatically upon the issuance of the certificate of incorporation.

How to approach this question

Identify the legal mechanism required to transfer liability for a pre-incorporation contract.

Full Answer

C.By entering into a novation agreement with the supplier and the promoter.✓ Correct

Because a company does not exist before incorporation, it cannot have an agent acting for it, and therefore it cannot ratify or adopt a pre-incorporation contract. The only way for the newly formed company to take over the contract is through 'novation'—a tripartite agreement where the original contract is cancelled and a new, identical contract is formed between the new company and the third party, releasing the promoter from personal liability.

Common mistakes

Using the terms 'ratify' or 'adopt', which are legally incorrect in the context of pre-incorporation contracts.

Question 53 All questions Question 55

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