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Entering contracts before Australian company registration
Updated: 24 January 2022
Entering into a contract before Australian company registration is known as a pre-registration (or pre-incorporation) contract.
Are these types of contracts valid? The short answer is yes.
Should you sign one?
We’ll cover what you need to know before you sign one below.
What is a pre-registration contract?
To better understand the concept of a pre-registration contract, let’s look at a hypothetical example.
Example
Jenny Hanson wants to start a company called Hanson’s Homewares. She intends to sell homewares and incorporate the company under the Australian Corporations Act 2001 (Cth).Before she registers and incorporates the company, Jenny finds the perfect property to set up her shop. The owner will give her a good price, but she has to sign a two-year lease straight away.
So Jenny signs the contract on behalf of Hanson’s Homewares Pty Ltd even though she has not yet set up the company. Another example is that Jenny finds a good homewares supplier that meets her needs. She signs a contract in the non-existent company’s name for them to supply her shop.
When you do this on behalf of a company, you are bound by the contract.
If you do not understand corporate law, you at least need to understand Section 131 of the Corporations Act. Be aware that, if for some reason you do not register the company or the directors (or agents) do not consent to the contract, you will be liable to pay damages to the other party.Corporations Act, Section 131
Before entering into a pre-registration contract, it is wise to understand what it means. Section 131 says that
- Pre-registration of a contract is binding. If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:
- Within the time agreed to by the parties to the contract; or
- If there is no agreed time—within a reasonable time after the contract is entered into.
- Liability for non-performance. The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it:
- Within the time agreed to by the parties to the contract; or
- If there is no agreed time—within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.
- Recovering against pre-registration company. If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following:
- Pay all or part of the damages that the person is liable to pay.
- Transfer property that the company received because of the contract to a party to the contract.
- Pay an amount to a party to the contract.
- Non-performance of pre-registration contract. If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay.
If you entered into a pre-registration company, you can be released from liability but you will not be entitled to indemnity. So if a third party makes a claim, you may have to cover the loss and damages of the other parties as per Section 132 of the Corporations Act.
Corporations Act, Section 132
A person may be released from liability but is not entitled to indemnity:
A party to a contract may release the company from liability. A party to the pre-registration contract may release the person from all or part of their liability under Section 131 to the party by signing a release.
No indemnity against company. Despite any rule of law or equity, the person does not have any right of indemnity against the company in respect of the person's liability under this Part. This is so even if the person was acting, or purporting to act, as trustee for the company.
Knowing all this would you still enter into a contract on behalf of a company that does not yet exist? Probably not.
It is wise to set up the company before signing anything on its behalf.
If you have any questions or comments about signing contracts on behalf of an Australian company before registering it, leave them in the comments section. Alternatively, contact me directly for more information.