Buying property as a trustee for a company to be formed

If you want to use a company as a vehicle to own a property don’t do it via a shelf company.

Shelf company

The documents of a shelf company typically consist of a certificate of incorporation, a one page memorandum of association and a page recording that the table B articles of association (with minor amendments) are applicable.

s 35 of the Companies Act 61 of 1973 deals with power as to pre-incorporation contracts: Any contract made in writing by a person professing to act as 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 lodgment for registration of the memorandum and articles of the company.

The problem with signing an agreement as trustee for a company to be formed and then buying a shelf company is that the shelf company existed at the time of signing of the sale agreement. Therefore the memorandum of association will lack an objects clause to enable it to adopt and ratify the agreement as a pre-incorporation contract.

Forming a company after conclusion of the sale agreement

Even if a company is formed after the conclusion of an agreement, it is unlikely that the memorandum will contain the powers prescribed in s 35 of the Companies Act 61 of 1973.Henochsberg on the Companies Act comments that if the requirements of s 35 are not observed, a purported ratification or adoption is without effect.

‘The contract is void not only by reason of the fact that the company was without capacity or power to make it but by reason of the additional fact that the statutory requirements for its effective ratification or adoption were not observed.’

How often do contracting parties consider the implications of non-compliance with s 35?

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