The judgment of the New Supreme Court dated 10 September 2025 in Civil Appeal No. 74/2017 revisits and clarifies the operation of Section 15A of the Companies Law, Cap. 113, in the context of pre-incorporation contracts. Although agreements concluded before a company’s formation are common in commercial practice, the legal implications are often underestimated. This decision provides authoritative guidance on the circumstances in which such an agreement may bind the company or, alternatively, impose personal liability upon the individual who executed it.
Factual Background
The dispute arose from a lease agreement signed by an individual for premises intended to be used as a nursery school. The agreement identified the signatory personally as the tenant. There was no reference to a company, nor to the existence of any entity under formation on whose behalf the lease might have been concluded.
Approximately one month later, the signatory and his spouse incorporated a company which began operating the nursery business from the leased premises and subsequently paid the rent through company cheques. The District Court considered that the lease had become binding upon the company by virtue of Section 15A Cap. 113. The New Supreme Court disagreed and overturned the decision.
The Legal Framework
Section 15A Cap. 113 regulates contracts entered into “for or on behalf of” a company prior to its incorporation. The mechanism operates as a statutory exception to the general principle that a non-existent entity cannot be a party to a contract. The provision allows such a contract to become binding on the company once incorporated, but only where specific preconditions are satisfied.
In particular, the contract must be expressly made in the name of, or for the account of, the company yet to be formed, and must be executed by the persons who will become subscribers of the memorandum or by individuals duly authorised by them. Absent these requirements, the agreement remains enforceable only against the individual who signed it.
Findings of the Court
The Supreme Court held that Section 15A had no application to the facts of the case. The lease, on its face, was a contract between the landlord and a natural person. It contained no wording suggesting that the signatory was acting as a promoter, representative, or agent of a proposed company. The intended corporate entity was not identified in any manner within the contract, and the individual signed purely in his personal capacity.
Moreover, the Court observed that the memorandum of association of the subsequently incorporated company bore the signatures of two subscribers, whereas the lease agreement had been signed only by one of them. This discrepancy was significant in light of the statutory requirement that pre-incorporation contracts be concluded by all subscribers or by persons duly authorised by them. The absence of such alignment rendered Section 15A inapplicable.
The Court emphasised that subsequent conduct, such as the use of the premises by the company or the payment of rent with company funds, cannot retrospectively alter the identity of the contracting parties. What governs is the text of the agreement itself. Relying on the principle of pacta sunt servanda, the Court reiterated that contractual rights and obligations derive from the written terms agreed at the time of execution, not from later developments or business practices adopted by the parties.
Decision
The appeal was allowed. The Court concluded that the lease bound exclusively the individual signatory, not the company incorporated afterwards. Consequently, judgment was entered against him for the amount of €51,800, together with statutory interest from 1 January 2015 and legal costs of €3,500 plus VAT.
Legal Significance
The decision is a timely reminder of several long-standing but often overlooked principles of Cypriot corporate and contract law. First, a company acquires legal personality only upon incorporation, and not merely because the parties intend to form one or because it subsequently assumes operational control of the underlying business. Second, pre-incorporation contracts must be drafted with precision. A failure to expressly refer to the under-formation company or to ensure that the persons envisaged as subscribers appropriately execute the agreement will result in personal liability.
The judgment also carries practical implications. Many business arrangements, especially leases, are concluded at a stage when the relevant company has not yet been incorporated. While this is commercially understandable, it carries legal risk. A professionally drafted agreement would ordinarily include clauses clarifying that the contract is executed on behalf of a company under formation, that the company will ratify the contract upon incorporation, and that the individual assumes liability only if incorporation does not occur. The absence of such provisions can expose individuals to significant and unexpected financial liability, as this case demonstrates.
Conclusion
The Supreme Court’s decision underscores the primacy of careful drafting in pre-incorporation transactions. Intentions, assumptions and subsequent corporate activity cannot substitute for clear contractual language. When a company does not yet exist and is not expressly identified in the contract, it cannot later be deemed a party to that contract merely because it took over the business or paid the expenses.
For these reasons, agreements intended to bind a future company must be prepared with appropriate legal guidance from the outset.
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Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Readers are advised to consult with legal professionals for advice specific to their individual circumstances.