Establishing a new company in Lesotho often involves making crucial business decisions and entering into agreements even before the company is formally registered. These preliminary agreements are known as pre-incorporation contracts, and understanding how they are treated under the Lesotho Companies Act is essential for any entrepreneur, investor, or service provider engaging in startup transactions.
At Mayet & Associates, our experienced business lawyers in Maseru assist clients with the legal structuring of start-up ventures, including advising on the risks and enforceability of pre-incorporation contracts in Lesotho.
What Is a Pre-Incorporation Contract?
A pre-incorporation contract is an agreement entered into on behalf of a company before it has been officially incorporated. These contracts are often used to secure office leases, services, suppliers, intellectual property rights, or equipment for the business in anticipation of registration with the Registrar of Companies in Lesotho.
The concern, however, is that at the time the contract is made, the company does not yet exist in law. As such, it cannot be bound by or enforce the contract unless it is later ratified.
Legal Framework under the Lesotho Companies Act
The Companies Act of Lesotho provides clarity and flexibility regarding the enforceability of pre-incorporation contracts. Here are the key provisions every businessperson should understand:
1. Ratification Is Permitted
A pre-incorporation contract can be ratified (i.e., formally adopted) by the company after it is incorporated. The Act allows this to occur either:
- Within the time period specified in the contract; or
- If no time period is specified, within a reasonable time after the company’s incorporation.
Ratification must be done in the same manner that a company enters into contracts generally, such as through a board resolution or by a duly authorised officer.
2. Implied Warranties by Promoters or Founders
The Act imposes an implied legal warranty on any person (such as a founder or promoter) who signs a pre-incorporation agreement on behalf of the company. This includes a warranty that:
- The company will be incorporated within a specified or reasonable time; and
- The company will ratify the contract within a specified or reasonable period after incorporation.
If these conditions are not met, the promoter can be held personally liable for breach of warranty and may be ordered to compensate the other party for damages equivalent to a breached contract by the company.
3. Legal Remedies If the Company Fails to Ratify
If the company is incorporated but chooses not to ratify the contract, the other party may approach the High Court of Lesotho for relief. The Court may:
- Order the company to return any property (movable or immovable) received under the contract;
- Grant other remedies in favour of the aggrieved party;
- Validate the contract in full or in part, if it is just and equitable to do so.
This offers protection for third parties and suppliers who have performed their obligations in good faith.
4. Substitution Cancels Personal Liability
If the company enters into a new contract after incorporation on substantially the same terms as the pre-incorporation agreement, this action effectively discharges the promoter’s liability under the original pre-incorporation contract.
This means that formalising the agreement post-registration protects both the company and the individual who acted on its behalf.
5. Judicial Discretion to Award Damages
Where a pre-incorporation contract has been ratified, and a dispute arises, the Court may, on its own or on application, award damages, compensation, or other relief as it deems fair and just. This ensures equitable outcomes in commercial disputes involving pre-incorporation arrangements.
Why You Need a Commercial Lawyer in Lesotho
Many entrepreneurs and foreign investors entering the Lesotho market are unaware of the risks of signing contracts on behalf of unregistered entities. Failure to properly structure or ratify pre-incorporation contracts can lead to:
- Personal liability for founders or directors;
- Loss of property or contractual rights;
- Legal disputes and invalid agreements.
At Mayet & Associates, our company registration lawyers in Lesotho work with startups, NGOs, and corporate clients to:
- Draft legally sound pre-incorporation contracts;
- Advise on ratification procedures;
- Register companies with the Registrar of Companies;
- Protect promoters from unintended personal liability.
Conclusion: Legal Protection Starts Before Incorporation
If you’re in the process of starting a business in Lesotho, do not wait until incorporation to seek legal advice. Pre-incorporation contracts can bind you personally unless correctly managed and ratified. With guidance from our experienced legal team, you can confidently enter agreements that safeguard your commercial interests from day one.
Contact Mayet & Associates today for legal assistance with pre-incorporation contracts, company formation, and commercial transactions in Lesotho.