A surprisingly common problem arises where business is moving quickly, a deal is signed, and only later does someone realise that the company named in the contract did not yet exist.
The important and key question, for both litigation and insolvency, then arises – who is actually on the hook should a debt become due?
A pre-incorporation contract may look like a company debt, but in law it often is not. For insolvency purposes, that distinction is critical. A winding-up petition depends upon a clear, undisputed debt due from the company itself.
What is a pre-incorporation contract?
A pre-incorporation contract is a contract made before a company has been incorporated. In simple terms, if the company was not yet on the register at Companies House, it did not yet have legal personality and could not itself be a contracting party.
In law, a company does not exist until it is formed and registered. So, if a contract is signed too early, the company may not be bound by it at all. Instead, the person who signed the contract may be personally liable.
This is not a new rule. In Kelner v Baxter (1866), the court held that where a contract was made before the company existed, the individuals involved could be liable. The same principle was applied in Phonogram Ltd v Lane [1982] QB 938, and it now sits alongside section 51 of the Companies Act 2006.
Why does this matter in insolvency?
Because insolvency remedies depend on there being a genuine, undisputed debt owed by the right legal person.
A winding-up petition is a remedy against a company. If the alleged debt arises only under a pre-incorporation contract, the first question is whether the company ever became liable for it.
Usually, the answer is no, unless there was some later step after incorporation, such as:
- a new contract entered into by the company; or
- a novation, by which the company assumes liability and the original contracting party is substituted.
A company cannot simply “ratify” a pre-incorporation contract in the ordinary agency sense, because it did not exist when the contract was made. That long-standing point is illustrated by authorities such as Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45.
So can a winding-up petition be based on a pre-incorporation contract?
Usually not against the company, unless there is clear evidence that, after incorporation, the company entered into a fresh binding arrangement or there was a valid novation.
If there is no such later agreement, the debt will generally be treated as the debt of the individual promoter or signatory, not the company, however each matter is fact specific. In that situation:
- a winding-up petition against the company would ordinarily be inappropriate; and
- Part 7 proceedings to establish and recover the debt from the individual are likely to be the more appropriate route.
There is also a practical insolvency point. Even where a company is arguably liable, the court will not permit the winding-up jurisdiction to be used as a pressure tactic for a debt that is genuinely disputed on substantial grounds. If liability depends on resolving contested issues about incorporation, novation, or who actually contracted, that is often a strong indicator that ordinary civil proceedings should come first.
Takeaway for businesses
Before threatening insolvency action, check:
- whether the company existed when the contract was signed;
- who signed the contract; and
- whether the company later entered into a fresh agreement.
If the answer to the third question is “no”, the safer view is often that the company is not the debtor, and a Part 7 claim against the relevant individual is likely to be the proper course.
Should insolvency proceedings be pursued, then the petitioner must be warned that there may be significant cost implications should the issue of a pre-incorporation contract be brought by the alleged debtor.