Examination Timing: 00H00M30S
Last month, Jake, a cycling enthusiast, incorporated an online bicycle accessories shop. He is the sole director, and he and his friend are the only shareholders. Prior to the incorporation of the company, Jake negotiated a contract with a provider of cycling clothing. The contract was signed by Jake in his own name, on behalf of the company, before the receipt of the certificate of incorporation.
With whom, if anyone, does the benefit of the contract reside?
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According to common law and the Companies Act 2006, a company cannot be bound by contracts made before it comes into existence (i.e., before it is incorporated). Any contracts made on behalf of a company that is not yet incorporated are typically considered to be entered into by the individual who signed the contract. In this case, Jake signed the contract in his own name, on behalf of the company that was not yet incorporated. Therefore, he is personally bound by the contract and entitled to its benefits and liabilities. Once the company is incorporated, it may choose to adopt the contract, but until then, the contract resides with Jake alone.
Key Point: Under the Companies Act 2006, pre-incorporation contracts are binding on the person who purports to act on behalf of the company. The company, once incorporated, is not automatically bound by these contracts but may choose to adopt them. This principle ensures that individuals cannot bind non-existent entities, protecting both parties in a potential contract.
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