Section A

Elena is setting up a new company, 'AgriVert Ltd', to operate vertical farms. Before the company is officially incorporated, Elena signs a lease agreement for a warehouse 'for and on behalf of AgriVert Ltd'. Once incorporated, the company decides it does not want the warehouse. Who is legally liable on the lease agreement?

Answer options:

AgriVert Ltd is liable because Elena signed on its behalf.

Elena is personally liable.

The contract is void and neither party is liable.

AgriVert Ltd becomes liable as soon as it is incorporated through automatic ratification.

How to approach this question

Apply s.51 of the Companies Act 2006 regarding pre-incorporation contracts.

Full Answer

B.Elena is personally liable.✓ Correct

Section 51 of the Companies Act 2006 states that a contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and they are personally liable on the contract.

Common mistakes

Believing a company can simply 'adopt' or 'ratify' a pre-incorporation contract once it is formed. It must enter into a brand new contract (novation).

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Practice the full ACCA LW — Corporate and Business Law Practice Exam 5

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