Meaning
The statutory provision under United Kingdom law that imposes personal liability on anyone who purports to make a contract on behalf of a company before it has been incorporated. Under UK Companies Act Section 51, the promoter is personally bound by the contract and entitled to its benefits unless there is an express agreement to the contrary. This statutory rule protects counterparties who enter into agreements with unformed businesses by ensuring that a human being remains liable if the company is never registered.
Statutory Default
The automatic application of personal liability creates a significant risk for organizers who sign contracts before completing corporate registration. Under UK Companies Act Section 51, this liability persists even if the startup is later incorporated and attempts to adopt the contract. Courts enforce this provision strictly, holding that subsequent incorporation does not automatically release the promoter from their original obligations.
Exclusion Clause
Incorporating specific language that overrides the statutory default is the primary method for protecting organizers during pre-incorporation negotiations. Parties can negotiate a contract that explicitly excludes the application of UK Companies Act Section 51 by stating that the promoter bears no personal responsibility. This agreement to the contrary shifts the risk to the counterparty, who must wait until the company is formed to enforce the agreement.
Novation Requirement
Executing a new contract after incorporation is the most reliable method to release the promoter from statutory liability. Because a company cannot ratify a pre-incorporation contract under English common law, the parties must use a novation to replace the promoter’s agreement with a new corporate contract. This procedural step ensures that the startup assumes the liabilities, fulfilling the requirements of the transaction and releasing the founder from all personal exposure.
It is a critical closing condition in UK venture capital transactions, as investors require all founders to be completely discharged from early supplier and lease agreements before funding is completed.
