Pre-incorporation contracts and the personal liability of the signatory

6th October 2015

Section 51 of the Companies Act 2006 regulates contracts entered into by or on behalf of a company before the company has been formed. It provides that, subject to agreement to the contrary, the person purporting to act as the company’s agent will be liable on the contract.

This section replaced a similar provision in section 36(C)(1) of the Companies Act 1985.

In Royal Mail Estates Ltd v Maple Teesdale Borzou Chaharsough Shirazi, [1] the court considered what was meant by “agreement to the contrary”.

In the case, the company (the Company) had purportedly entered into an agreement with a third party to purchase a property. The contract contained various restrictions on assignment, including a provision that stated “the benefit of this Contract is personal to the Buyer”.

The contract was signed on behalf of the Company by a firm of solicitors. At the date of this contract the Company had not yet been incorporated. When the third party sought to enforce the contract against the solicitors in reliance on section 36(C)(1), the solicitors argued that the above clause constituted an “agreement to the contrary” for the purpose of section 36(C)(1).

The court rejected this submission. It ruled that there could only be a contrary agreement within the meaning of the section if, upon a construction of the relevant wording, objectively the parties had intended that the contract would not take effect as one made with the agents – in other words, did the parties intend to exclude section 36(C)(1)?

The wording in question fell short of that threshold. The fact that the solicitors and the third-party seller did not even know that the Company was not yet incorporated meant they could not have agreed that section 36(C)(1) would not apply. The actual intention of the wording in question was more likely to prevent or restrict a third party from becoming a third-party purchaser by way of assignment or sub-sale in circumstances where the original contracting party was the Company.

This decision sets a very high hurdle for anyone wanting to rely on the “agreement to the contrary” wording in section 51 of the 2006 Act (section 36(C)(1) of the 1985 Act). Indeed, it seems a prerequisite that the parties knew the company was not formed. The result is that anyone signing on behalf of a company needs to ensure he or she makes appropriate checks that the company has been duly formed and is continuing its corporate existence.

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[1] [2015] EWHC 1890