Photo by Phil Desforges on Unsplash

Entering contracts before Australian company registration

17 January 2020

Here's what you need to know about the legal position for contracts you enter into on behalf of an Australian company before its registered.

So, in a nutshell - are they valid?

Yes.

And, this means, if you enter into a contract on behalf of a company before it is registered, the company will be bound by the contract and entitled to its benefit. 

But beware, because if you don’t register the company or the company or the contract is not officially consented to by its directors (or agents) then the person(s) that entered into the contract on behalf of the company will be liable to pay damages to each other party to the contract: s. 131 Corporations Act 2001 (Cth), reproduced below.

CORPORATIONS ACT 2001 - SECT 131

131 Contracts before registration

(1)  [Pre-registration contract 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.

(2)  [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.

(3)  [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.

(4)  [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.

While the person that entered into the contract can be released from liability, they won't be entitled to an indemnity. 

This means, if a third party makes a claim, the person(s) that entered the contract on behalf of the pre-registered company may have to cover the loss and damage suffered by the other parties: section 132 Corporations Act 2001 (Cth).

So, the moral of the story is to register a company first before you enter into contracts on behalf of the company. 

See section 132 below. 

CORPORATIONS ACT 2001 - SECT 132

132 Person may be released from liability but is not entitled to indemnity

(1)  [A party to contract may release 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.

(2)  [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.

Do you have questions or comments about signing contracts on behalf of an Australian company? Be sure to leave them below. 


​​



Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia.

Click Here to Leave a Comment Below 0 comments

Leave a Reply: