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The formation and constitution of business organisationsThe formation and constitution of business organisationsPre-incorporation contracts
This question is part of a case study — click to read the full scenario(Case 52)

Section B - Scenario 3

GreenCanopy is a newly formed Non-Governmental Organisation (NGO) dedicated to reforestation. The founders want to incorporate the organisation to protect themselves from personal liability, but they do not intend to distribute any profits to members; all funds will be reinvested into planting trees.

Which of the following is the most appropriate business vehicle for GreenCanopy?

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

Section B - Scenario 3

GreenCanopy is a newly formed NGO. The founders submit their registration documents to Companies House. They begin signing contracts for tree saplings in the name of 'GreenCanopy Ltd' three days before the Registrar issues the Certificate of Incorporation.

Who is legally liable on these contracts?

Answer options:

A.

GreenCanopy Ltd, because the registration documents had already been submitted.

B.

The founders personally, as they are acting as promoters for an unformed company.

C.

No one, the contracts are void and unenforceable.

D.

GreenCanopy Ltd, but only once the Certificate of Incorporation is issued.

How to approach this question

Apply the rules regarding pre-incorporation contracts under Section 51 of the Companies Act 2006.

Full Answer

B.The founders personally, as they are acting as promoters for an unformed company.✓ Correct
Under Section 51 of the Companies Act 2006, a contract that purports 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 promoters). The promoters are personally liable on the contract. The company cannot simply adopt the contract after incorporation; a new contract (novation) is required.

Common mistakes

Believing the company automatically takes over the contracts once incorporated.
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