Company Promoters and the Enforcement of Pre-Incorporation Contracts

• Jurisdiction: South Africa
• Author: Anthony O Nwafor
• Pages: 66-78
• Published date: 25 May 2019
• Date: 25 May 2019

Company Promoters and the Enforcement of

Pre-Incorporation Contracts

ANTHONY O NWAFOR*

National University of Lesotho

Roma

1 Introduction

It is a well-established principle of law that a company does not exist as a

legal entity until incorporated.

1

For all practical purposes, however, prior

to incorporation someone must act on behalf of the company. Formalities of

incorporation need to be attended to; professionals must be instructed and

paid to prepare the necessary incorporation documents; the business proposal

needs to be appraised and initial f‌inances raised.

2

Getting through these

rigours of incorporation involves entering into contracts with third parties.

These contracts could not only relate to the process of incorporation but could

also further the company’s objects in the memorandum. As the company does

not yet exist in the eyes of the law, there is always the problem of the

assumption of liability and of enforcing the contract, either by the company

when formed or the person who entered into these contracts on its behalf. The

person engaging in these functions for the company under formation is often

associated with the term ‘promoter’ or ‘trustee’. This article seeks, f‌irst, to

identify the promoter of the company and the legal duties of the promoter,

and, second, to investigate the capacity of this promoter and/or the company

when formed to take the benef‌it and assume the liability for a contract

concluded before the company is formed.

2 Who Is a Promoter?

To the uninformed, the idea of a promoter is one whose profession it is to

form bogus companies and foist them on the public to the latter’s detriment

and the promoter’s advantage.

3

This is not surprising, because matters that

come to the courts relating to the formation of companies usually involve

* LLB Hons (Unijos) BL LLM (University of Nigeria) PhD (Unijos). Senior Lecturer, Faculty of

Law, National University of Lesotho.

1

Salomon v A Salomon & Co Ltd [1897]AC 22; Airport Cold Storage (Pty) Ltd v Ebrahim & Others

2008 (2) SA 303 (C) at 305. Section 19(2) of the CompaniesAct 25 of 1967 in Lesotho (‘the Companies

Act’); s 65 of the Companies Act 61 of 1973 in SouthAfrica. But the South African statute contains an

exception in s 31 under which an association formed before 1939 could acquire legal personality if its

object was not the acquisition of gain. See Nelson Mandela Metropolitan Municipality & Others v

Greyvenouw CC & Others 2004 (2) SA 81 (SE); Director: Mineral Development, Gauteng Region, &

Another v Save The Vaal Environment& Others 1999 (2) SA 709 (SCA); Mitchell’s Plain TownCentre

Merchants Association v McLeod & Another 1996 (4) SA159 (A).

2

John H Farrar & Brenda Hannigan Farrar’s Company Law 4 ed (1998) at 46.

3

Paul L Davies, Sarah Worthington & Eva Micheler Gower and Davies’ Principles of Modern

Company Law 8 ed (2008) at 105.

66

(2010) 22 SA Merc LJ 66

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