Companies Act - Pre Incorporation or Preliminary Contracts

Introduction

It's possible (Extremely possible) that before company is incorporated, some promoters of Company enter into contracts with vendors or some other parties, and company is incorporated after such contracts are executed.

What is the nature and validity of such contracts after incorporation?
Can these contracts be enforced against Company after incorporation?
If there is any liability, who will pay for them ?

Well, let's discuss about Pre Incorporation or Preliminary Contract and try to answer above questions?

Pre Incorporation or Preliminary Contracts

What are these contracts ?

These are contracts entered into by promoters, on behalf of company and before incorporation of Company.  

Why would someone would do such contracts ?

Say you are promoter. You don't have registration certificate, but you want to buy office or some raw materials and what not, you essentially need to acquire some property or right for your company. You don't want to wait for that entire document heavy registration process. So you go for contract.

Can these contracts be adopted after incorporation ?

Yes, Section 15 and 19 of Specific relief act have provisions in this regard. Below are requirement for adoption of preliminary contract:

  • Promoters have entered into contract
  • Promoters entered into contract on behalf of company
  • Contracts should fall into or have some link with object of the company.
  • Contract should be accepted by company
  • Such Acceptance MUST be communicated to other party

Nature and validity of Such contract 

First, if Company adopts the Contract as stated above, it will be binding on Company.Promoters will not be personally liable. (Natal Land & Colonisation Company Ltd Vs Pauline Collery & Development Syndicate Ltd)

Second, if Company DONT adopt a contract, then it will not be binding on Company. Any liability which arises will be upon Promoters. (Kelner v. Baxter)

Even if Contract specifically state that "to-be-formed" company will be liable, Company will not liable if it don't adopt a Contract.

Even if Company takes benefits out of Contract before incorporation, it would still not be binding if Company don't adopt the contract.(English & Colonial Produce Co  Ltd)

Conclusion

Preliminary Contracts are entered into by Promoters for acquiring property or right for company. If Company adopts such contract, such contracts will be binding on Company as well as third party.

If such contracts don't have any link to Company's object, then Promoter will be personally liable. 





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