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When your word is your bond:
High Court upholds personal liability for promoters of unincorporated companies
Property investors often incorporate new companies for specific transactions. And it is not unusual for investors to enter into sale and purchase agreements on behalf of a transaction-specific company that is yet to be incorporated. In that instance, the latest Auckland District Law Society standard form sale and purchase agreement provides that the person signing for the unincorporated company will at all times remain personally liable.
The issue of personal liability in these circumstances has recently been argued in the High Court. The court considered whether these agreements can be enforced against the individual who signs on behalf of an unincorporated entity, where that entity has subsequently defaulted.
In Brown v Kang, an unincorporated company had entered into a sale and purchase agreement. The deposit of $250,000 was to be paid in three instalments. The purchaser did not pay the third instalment and the vendor cancelled the agreement. The purchasing company was subsequently incorporated, and the director denied personal liability, on the basis that the company was responsible for that third instalment.
The court disagreed. Even though the company was subsequently incorporated, the individual director remained liable for payment of the third instalment of the deposit. The court noted that a deposit operates as a guarantee by the purchaser that they intend to meet their obligations. If they default on those obligations, the deposit is forfeit. In this case, the court agreed that the guarantee must have come from the director personally.
With property markets under significant strain both globally and locally, the case provides a salutary warning to purchasers to ensure that they are aware of the potential ramifications of using special purpose vehicles for transactions. If that vehicle is not incorporated at the time it enters into the sale and purchase agreement, the promoter of the company can expect to be personally liable for any default.
* Josh McBride acted for the successful plaintiff in this case.
