“Companies to be formed”- are they on the shelf?

“Earlier this year, the Durban High Court discussed the meaning of the words “company to be formed” in a sale agreement. Three businessmen decided to purchase immovable property which would eventually fall under the name of a newly-registered company. The businessmen therefore signed the contract of sale in their capacity as directors for a “company to be formed”.

After signing the agreement, however, the businessmen decided that it would be easier to use a shelf company to take transfer of the property instead of waiting for a new company to be registered. A shelf company is a company that is already incorporated but has not yet engaged in business transactions or activities. They are described as having a ‘clean’ balance sheet and are available ‘off the shelf’ as a juristic entity. In order to save time, the businessmen acquired a shelf company and became its directors. The price of the immovable property was then secured and the purchasers took occupation.

Before the transfer of the property had taken place, however, the seller decided that it no longer wished to proceed with the sale. The seller claimed that the agreement with the purchasers was not valid nor binding because the company was already in existence when the agreement was signed. The seller argued that the businessmen sought to conclude a pre-incorporation contract and instead used a shelf company which was already incorporated and so it did not qualify as a purchaser in terms of the agreement.

The purchaser, on the other hand, argued that the contract envisaged that the rights and obligations be taken up either by a company already incorporated (like a shelf company) or by one not yet incorporated. They argued that the words “to be formed” did not necessarily mean that a new company must be incorporated.

Judge Olsen agreed and found that the words “to be formed” must be read to mean that the company stepping into the shoes of the purchasers should not have been involved in any previous business transactions. This would be the case for both shelf and newly-incorporated companies. Judge Olsen therefore ruled that the sale agreement was valid and binding.

Read the judgment here: http://www.saflii.org/za/cases/ZAKZDHC/2015/20.html