COMPANY FORMATION

Hi! To novate a contract is to ‘renew a contract’. Technically, it’s not a renewal of a previous contract. It’s more a matter of creating a new contract to replace an existing contract.

There are a couple of places in the ACCA law syllabus where I can easily remember the action of novation.

The first is in company formation law where a promotor will possibly enter into a contract pre-incorporation. Then, when a company is formed, the promoter now in the role of a director of the new company, will arrange to create a new contract in the name of the company. In this way, the promoter will escape any further potential liability because the company will have taken over that position.

The second situation is in the area of partnership law where a new partner is to be admitted to the firm possibly in replacement of an existing partner leaving. To avoid (unnecessary?) disturbance, the firm will arrange / agree with its creditors that the new partner will assume full responsibility for the firm’s debts and the old retiring partner will be released from further liability. This will be achieved by way of a contract of novation

All clear?