Sections 159 and 160 of the Companies Act 1997 give the Court a broad discretion to sort out the consequences when a pre-incorporation contract goes wrong.
The starting position
Where a pre-incorporation contract has not been ratified by the company, or validated by the Court under section 159, the company may not enforce it or take the benefit of it.
So the default is unbalanced. The company cannot sue on the contract, and cannot claim the benefit of it — but property may already have passed, money may already have been paid, and work may already have been done. Section 159 exists to unwind or repair that.
Section 159 — failure to ratify
(a) directing the company to return property, whether real or personal, acquired under the contract to that party; or
(b) for any other relief in favour of that party relating to that property; or
(c) validating the contract, whether in whole or in part.
The Court may, where it considers it just and equitable to do so, make any order or grant any relief it thinks fit — and may do so whether or not an order has been made under section 158(2).
Paragraph (a) is restitutionary: give the property back. Paragraph (b) is flexible relief about that property — an account, compensation for use, a lien, a tracing order. Paragraph (c) is the strongest: the Court can simply validate the contract, in whole or in part, so that it binds the company as if it had been ratified.
Section 157(5) expressly contemplates validation as an alternative to ratification: once validated, the company can enforce the contract and take its benefit.
Who may apply, and when
Section 159(1) is available to “a party to a pre-incorporation contract that has not been ratified by the company after its incorporation”. That includes:
- the outside party who supplied goods, land or services and wants them back or wants the contract validated;
- the promoter who signed on the company’s behalf and now faces the section 158(1) warranties; and
- in an appropriate case the company itself, seeking validation so it can enforce a bargain it wants but failed to ratify in time.
The Act sets no time limit on a section 159 application, but delay will weigh against relief in a jurisdiction expressed in terms of what is just and equitable. Where property has been on-sold to a third party, or the position has otherwise changed, the practical choices narrow.
The overlap with section 158 damages
| Section 158 — warranties | Section 159 — Court orders | |
|---|---|---|
| Against whom | The promoter who made the contract | Principally the company; and relief may be shaped to the facts |
| Trigger | The company is not incorporated, or does not ratify, in time | The contract has not been ratified |
| Remedy | Damages measured as against the company on a ratified and cancelled contract | Return of property, other relief about it, or validation |
| Can both run? | Yes — s 159(2) applies whether or not an order has been made under s 158(2) | |
| Discharged by | The company entering a substitute contract after incorporation — s 158(3), which discharges liability including under a damages order | Nothing specific; the Court’s discretion accommodates it |
A party that has already recovered damages from the promoter under section 158(2) and then obtains validation under section 159(1)(c) would otherwise be paid twice. The words “just and equitable” and “any order or grant any relief it thinks fit” give the Court the tools to prevent that — and section 158(3) discharges the promoter altogether if the company enters a contract in the same terms or in substitution.
Section 160 — breach of a ratified contract
In proceedings against a company for breach of a pre-incorporation contract which has been ratified, the Court may — on the application of the company, of any other party, or of its own motion — make such order for the payment of damages or other relief as it considers just and equitable, in addition to or in substitution for any order which may be made against the company, against a person by whom the contract was made.
Section 160 applies where the contract was ratified — and still allows an order against the person who made it, in addition to or instead of an order against the company. So a promoter who assumed that ratification ended their exposure may find otherwise, particularly where the company was incorporated without the means to perform.
Note that the Court may act of its own motion. The plaintiff need not have joined the promoter as a defendant for the question to arise.
Practical guidance
- Ratify on time. The default period is one month after incorporation unless the contract specifies otherwise. A short board resolution at the first meeting solves most of these problems.
- Do not transfer property before ratification if you are the outside party. Section 159(1)(a) exists because people do, and recovering it is slower and dearer than withholding it.
- If the window is missed and the deal is still wanted, the cleanest fix is a substitute contract under section 158(3) — it binds the company and discharges the promoter.
- If the deal is not wanted, apply under section 159(1)(a) or (b) promptly, before the position changes.
- Promoters should not assume ratification ends the matter — section 160 keeps them in the frame.
- Where the company was formed to take over a business, consider whether the arrangement is better handled as an amalgamation or an asset sale by the company after incorporation, avoiding Division 2 entirely.
Sources
- Companies Act 1997 — ss 155–160
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.