i. Nyasha’s Liability and the Company’s Remedies
This advice will consider Nyasha’s personal liability for pre-incorporation contracts and the remedies available to Mutirikwi Blue Harvest (Pvt) Ltd (‘the Company’) for her breaches of duty as a promoter.
Nyasha’s Personal Liability to Mushandike Estates
The primary issue concerning Nyasha’s personal liability is her role in concluding the lease agreement with Mushandike Estates before the Company was incorporated. At common law, a person contracting on behalf of a non-existent company is personally liable, as the company cannot be a principal to the contract (Kelner v Baxter (1866) LR 2 CP 174). This position has been codified and modified in Zimbabwe by the Companies and Other Business Entities Act [Chapter 24:31] (COBE Act).
Section 32(1) of the COBE Act states that a person who enters into a written contract in the name of, or on behalf of, a company before it is incorporated is personally liable on that contract. This statutory provision makes Nyasha personally liable for the ten-year lease she signed. However, section 32(2) allows the company, after its incorporation, to adopt the pre-incorporation contract. If the company adopts the contract, then under section 32(4), the company becomes bound by it, and the person who made the contract (Nyasha) becomes an agent of the company, and is jointly and severally liable with the company for any obligations.
In this case, the Company’s board resolved to ‘adopt and ratify’ all pre-incorporation agreements, and the Company subsequently occupied the land and paid rent. This conduct likely constitutes adoption of the lease under section 32. Therefore, while Nyasha is not absolved of liability, her liability is now joint and several with the Company. Mushandike Estates can sue both the Company and Nyasha personally for the arrear rent and damages.
Remedies for the Facilitation Fee and Inflated Price
Nyasha acted as a promoter of the Company. Promoters stand in a fiduciary relationship to the company they are forming (Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218). This relationship imposes duties of good faith, including a duty not to make a secret profit and a duty to disclose any personal interest in a transaction with the company.
Nyasha breached these duties in two ways. Firstly, she accepted a secret 'facilitation fee' of US$15,000 from Tevenga Refrigeration, which she did not disclose. This is a classic breach of the no-secret-profit rule. The Company is entitled to the equitable remedy of an account of profits, meaning it can compel Nyasha to pay over the US$15,000 she received.
Secondly, she arranged for the purchase of equipment at a price she knew was 25% above market value. This is a breach of her duty to act in the best interests of the company and to avoid a conflict of interest. The Company has two potential remedies here. It may seek to rescind the contract with Tevenga Refrigeration, although this may be barred if the Company has affirmed the contract or if it is impossible to restore the parties to their original position (e.g., if the equipment has been used). Alternatively, the Company can sue Nyasha for damages for breach of her fiduciary duty, which would amount to the excess price paid (the 25% mark-up). The fact that the board later passed a general resolution to 'adopt' agreements does not protect Nyasha, as the ratification was not based on full and frank disclosure of her interest (Gluckstein v Barnes [1900] AC 240).
ii. The Company’s Liability for the Lease and Feed-Supply Agreements
The critical issue here is whether the Company is bound by the lease and the oral feed-supply agreement concluded by Nyasha prior to its incorporation. At common law, a company could not ratify a contract made before its existence. However, section 32 of the COBE Act provides a statutory mechanism for a company to become bound by such agreements through adoption.
For adoption to be effective, the company, once incorporated, must take some action to bind itself to the terms of the agreement. In this case, the board passed a resolution in October 2024 to ‘adopt and ratify all agreements concluded on its behalf by the founders prior to incorporation’. The effectiveness of this general resolution is questionable. A ratification should ideally be made with full knowledge of the material facts of the contracts being adopted. A blanket, uninformed resolution may not be seen by a court as a valid exercise of the directors’ duties and therefore may not effectively bind the company to all unknown agreements.
However, a company can also adopt a pre-incorporation contract through its conduct. In relation to the lease with Mushandike Estates, the Company took occupation of the land and paid rent for over a year (from June 2024 to August 2025). This conduct is strong evidence of an implied adoption of the lease agreement. By acting in accordance with the lease terms, the Company has demonstrated its intention to be bound by it. Therefore, it is highly likely that the Company is bound by the lease and liable for arrear rent.
The position regarding the oral feed-supply agreement with Runde Feeds is different. Although it was covered by the general board resolution, the Company’s conduct points away from adoption. The Company only took feed until February 2025, a period of less than a year. By stopping performance of the agreement, the Company demonstrated an intention not to be bound by the two-year term. While Runde Feeds could argue the board resolution was a valid adoption, the Company can counter that the resolution was too vague to be effective and that its subsequent conduct in ceasing to take feed demonstrates that it did not, in fact, adopt the contract. Given the cessation of performance, it is arguable that the Company is not bound by the two-year exclusive supply agreement, though it would be liable for any feed it actually received.
References
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218.
Gluckstein v Barnes [1900] AC 240.
Kelner v Baxter (1866) LR 2 CP 174.
Zimbabwe. (2019) Companies and Other Business Entities Act [Chapter 24:31].
