Buying on behalf of a company still to be formed

Posted On Monday, 15 October 2012 11:46 Published by eProp@News
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It often happens that an offer to purchase is signed by a member of a company while waiting for that company to be formed. This is allowed but the agreement must be formally accepted by the company or it will be null and void....

In the case Topaz Sky Trading 217 (the seller) and Jozistat (Pty) Ltd (the buyer), a case mentioned in a recent Smith Tabata Buchanan Boyes law update, because Jozistat had not yet been incorporated, the agreement of sale was signed by Daya – acting on behalf of the company. It then transpired that the outstanding rates bill had not been paid by Topaz which is required to effect transfer on a property, and Jozistat brought an application to court for an order compelling Topaz to pay the outstanding amount.

Topaz however, cited that the company had not ratified or adopted the agreement once it had been incorporated. This is a legal requirement of Section 35 of the Companies Act 1973, which says,

"Any contract made in writing by a person professing to act as an agent or trustee for a company not yet incorporated shall be capable of being ratified or adopted by or otherwise made binding upon and enforceable by such company after it has been duly incorporated as if it had been duly incorporated at the time when the contract was made and such contract had been made without its authority: provided that the memorandum on its registration contains as an object of such company the ratification or adoption of or the acquisition of rights and obligations in respect of such contract, and that such contract has been lodged with the Registrar together with the registration of the memorandum and articles of the company."

In this case Jozistat did not provide for the ratification or adoption of the property sale agreement in its memorandum and so fell short of the Companies Act requirements which then caused the agreement to be nullified.

The new Companies Act (of 2008) also has provision for agreements signed before the company has been incorporated. It places personal liability on the person who signs the agreement and also states that pre-incorporation agreements must be ratified as soon as the company is incorporated.

To put it simply, the question here is whether a person can purchase a property in the name of the company still to be formed and act on behalf of that company legally.

"Yes, you can, as long as you lodge the memorandum and acknowledge that you will be personally liable. You must, however, be aware of the Capital Gains implications in doing so," said Steward.

"Buying property as a company could be a safe way of investing in property as a group or syndicate, as long as all the paperwork is completed properly."

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