MEANING: The contracts which the promoters enter into the company before incorporation are called pre-incorporation contracts.
POSITION IN ENGLISH LAW: A company cannot enter into a contract before its incorporation because it does not exist at that time as a legal person. Therefore, the company is not bound nor can it get the benefit of the contracts made by its agents on behalf of the company before its incorporation. The company cannot even ratify such contracts although it can enter into a fresh contract after its incorporation.
POSITION IN INDIA: Pre-incorporation contracts are not legally binding upon the company. Two contracting parties are necessary for a contract, whereas the company, before incorporation is non-entity. The corporate is additionally not entitled to sue on a pre-incorporation contract. This position was held in the case of Natal Lands Colonisation Co. v. Pauline Colliery Syndicate (1904). Thus, the company is neither bound by a pre-incorporation contract nor can have the benefit of it. But, this is subject to provisions of section 15(h) and section 19(e) of the Specific Relief Act, 1963.
ADOPTION OF PRE-INCORPORATION CONTRACTS UNDER SECTION 19(e) and SECTION 15(h) OF THE SPECIFIC RELIEF ACT, 1963: Section 19(e) of the Act provides that specific performance may be enforced against a company where its promoters have before its incorporation, entered into a contract for the company and such contract is warranted by the terms of its incorporation, eg, by inclusion in the Articles of Association. The corporate needs to accept the contract after its incorporation and communicate such acceptance to the opposite party to the contract. Section 15(h) of the Act provides that where the promoters of the company have before its incorporation, entered into a contract for the company and such contract is warranted by the terms of the incorporation, the specific performance of the contract may be enforced by the company provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract.
Where the contract does not fall within the purview of these sections the question arises whether they can be enforced by or against the promoter. In such a case the answer depends on how the contract is constructed. If the contract is made on behalf of the company not yet incorporated, the agent might incur personal liability.
LEGAL POSITION:
In Re. English and Colonial Produce Co. Ltd. (1906), a solicitor on instructions of a certain person who later became director of the company, prepared the memorandum and articles of the company. The solicitor paid the registration fees and other incidental expenses of registration. It was held that the company was not bound to pay for the services and expenses of the solicitor as it was not in existence at the time when the expenses were incurred and ratification was impossible.
In Kelner v. Baxter (1866), the plaintiff wanted to sell wine to a company that was to be incorporated, but he entered into a contract to sell the wine to the proposed directors of the company. The proposed directors signed the contract on behalf of the company and took delivery of the wine. It was held that the company was not bound by the contract, but the proposed directors were held personally liable as they contracted on behalf of a principal that was non-existent.
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.
