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Hard2 marksMultiple Choice
The formation and constitution of business organisationsSyllabus DCompany FormationRatification
This question is part of a case study — click to read the full scenario(Case 52)

Section B - Scenario 3

SCENARIO: 'Lunar Logistics Ltd' is a space-freight startup. Before the company is officially incorporated at Companies House, the founders (promoters) sign a £50,000 contract with 'RocketTech' to purchase fuel tanks. The contract is signed 'by John, on behalf of Lunar Logistics Ltd'. Two weeks later, the company is incorporated. The board of directors immediately passes a resolution stating that the company 'adopts and ratifies' the fuel tank contract.

QUESTION: Who was legally liable on the contract at the exact moment it was signed?

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ACCA · Question 53 · The formation and constitution of business organisations

Section B - Scenario 3

SCENARIO: 'Lunar Logistics Ltd' is a space-freight startup. Before the company is officially incorporated at Companies House, the founders (promoters) sign a £50,000 contract with 'RocketTech' to purchase fuel tanks. The contract is signed 'by John, on behalf of Lunar Logistics Ltd'. Two weeks later, the company is incorporated. The board of directors immediately passes a resolution stating that the company 'adopts and ratifies' the fuel tank contract.

QUESTION: What is the legal effect of the board's resolution to 'adopt and ratify' the contract?

Answer options:

A.

It successfully transfers liability from John to the company.

B.

It makes the company jointly liable with John.

C.

It has no legal effect; a company cannot ratify a pre-incorporation contract.

D.

It is valid only if RocketTech agrees to the ratification.

How to approach this question

Recall the common law rule regarding the ratification of pre-incorporation contracts.

Full Answer

C.It has no legal effect; a company cannot ratify a pre-incorporation contract.✓ Correct
A fundamental principle of UK company law is that a company cannot ratify a pre-incorporation contract. Ratification requires the principal (the company) to have existed and had capacity at the time the agent (John) made the contract. Since the company didn't exist, ratification is impossible. To transfer liability, they must create a brand new contract (novation).

Common mistakes

Assuming a board resolution can magically fix a pre-incorporation contract. It cannot.
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