A separate legal identity is the primary characteristic of the corporate structure, enabling it to enter into contracts with parties and own assets in its name. The legal identity of a company is obtained after its incorporation and registration in India. More often, however, it is noted that promoters enter into a contract with third parties even before the registration of Pvt ltd in India, whether for the registration itself or otherwise. Here, we are discussing whether or not these agreements made on behalf of the promoters are valid. In legal terms, such contracts are known as the promoter's contract or pre-incorporation contract. Promoters are the individual who is required to promote a business to the operational level to ensure that it runs successfully. The promoters, therefore, enter into various contracts required to promote the business. These agreements also include those executed with the company registration professionals or those that are imperative to float the company.
Since a company is an unborn artificial person, it can not enter into any agreement before incorporation unless the registration process is completed. These contracts entered into by the promoters are therefore concluded on their behalf. Therefore, these contracts are referred to as the pre-incorporation contract or the contract of the promoter. Such contracts are inevitable for the registration of companies and are therefore recognized by the Companies Act and the Specific Relief Act as well. The contracts are entered into by the promoters on behalf of the company during the execution. Although to represent its interest, the promoters act as agents of the company while registering, the principal does not exist. The contracts entered into by the promoters are not, therefore, binding on the company or a third party. The validity of the pre-incorporation contracts and their enforceability are always in question. The solution lies, however, in Sections 15 and 19 of the Specific Relief Act, 1963.
Section 15(h) provides that, when pre-incorporation contracts are entered into by promoters for the company and subject to the terms of incorporation of the company, the company may request specific performance from a third party. This condition can only be applied if, following its incorporation, the company has expressly demonstrated acceptance of such contracts and communicated the same to the third party concerned (i.e. the other party). Specific performance may be enforced against the company under similar circumstances by the other party to the Specific Relief Act contract u/s 19(e). Therefore, for the company to enforce the contract against the other contracting party, the members must ratify the contract, followed by a notification of acceptance to the other contracting party. The company may not benefit from such contracts unless the contract is accepted by the company, and the promoters would be personally liable for the contracts.
In the event that the company does not accept the aforementioned contract at its meeting, the contract is binding on the proponents, and both the proponents and the other parties may request specific performance against each other.
As stated, the ratification of contracts for their enforcement by the company is inevitable. The promoters can follow either of the methods mentioned below for such acceptance or ratification:
Typically, contract novation means substituting the existing contract with a new contract either between the same parties or different parties; the discharge of the old contract is the prime consideration. The new contract would bind the parties upon completion of the novation of the contract. The novation offers an opportunity for the promoters to replace their liability with that of the company. In simple words, the contract would be reconstituted in a way that the company and not the promoters were the contracting party.
Pre-incorporation agreements, however, may seem to be without legal status and value at first, but they are very important and legally valid as well as enforceable.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
