UNIT 5

PRE-INCORPORATION CONTRACTS

Pre-incorporation contracts are agreements entered into by the promoters of a company on behalf of the company that is yet to be formed. These contracts are crucial in the initial stages of a company's formation as they enable the promoters to secure necessary resources and commitments before the company is legally established. Under Nigerian law, pre-incorporation contracts pose a unique challenge since a company, not yet in existence, cannot be a party to a contract. However, the Nigerian Companies and Allied Matters Act (CAMA) 2020 addresses this issue to some extent. See section 72 of CAMA 2020 which provides the legal framework for pre-incorporation contracts and it states that any contract or transaction purported to be entered into by a company prior to its formation may be ratified by the company after its incorporation. Once ratified, the contract is as effective as if the company had been in existence at the time the contract was made.

CONDITIONS FOR RATIFICATION

For a pre-incorporation contract to be validly ratified, it must have the following conditions:

1. Company must be incorporated: this is where the company must have been duly incorporated under the provisions of CAMA 2020.
2. Express ratification: this is where the company must expressly ratify the contract. This can be done through a resolution passed by the board of directors or any authorized body of the company.
3. Time frame: this is where the ratification must occur within a reasonable time after incorporation.

PROMOTER'S LIABILITY

Before the company ratifies the pre-incorporation contract, the promoters are personally liable for the obligations under the contract. This is because the company, not being in existence, cannot bear any liabilities or rights arising from the contract. See the case of Eke v. Odili (1990) 5 NWLR (Pt. 149) 209 where the court held that promoters who enter into contracts on behalf of a proposed company are personally liable if the company fails to ratify the contract after incorporation.

CONSEQUENCES OF NON-RATIFICATION

If a company fails to ratify a pre-incorporation contract, the contract remains unenforceable against the company. The promoter, having assumed the obligations, may be personally liable to the third party. The third party can then seek remedies against the promoter. See the case of Tika-Tore Press Ltd v. Abina (1973) 4 SC 63 which underscores the principle that unless a company ratifies a pre-incorporation contract, the promoter remains liable for any breach of contract.

BENEFITS OF PRE-INCORPORATION CONTRACTS

1. Securing resources: this is where they allow promoters to secure essential resources and commitments needed for the company's operations.
2. Attracting investors: this is where they help in demonstrating to potential investors that the company has viable business prospects.
3. Smoother transition: this is where they facilitate a smoother transition from the promotional stage to the operational stage once the company is incorporated.

CHALLENGES OF PRE-INCORPORATION CONTRACTS

1. Promoter's liability: this is where promoters may be personally liable if the company does not ratify the contract.
2. Uncertainty: this is where is always a risk that the company may refuse to ratify the contract, leaving the promoter exposed.
3. Legal complexities: this is to ensure that contracts are drafted in a manner that allows for future ratification can be legally complex.

CONCLUSION

Pre-incorporation contracts are a vital tool for promoters in setting up a company. However, they come with significant risks and liabilities. Nigerian law, through CAMA 2020, provides a mechanism for these contracts to be ratified by the company once incorporated, thereby transferring the rights and liabilities to the company. It is crucial for promoters to be aware of these provisions and to ensure that pre-incorporation contracts are carefully drafted to facilitate future ratification and limit personal liability.