COMPANY LAW
UNIT-2 FORMATION OF A COMPANY
PRE-INCORPORATION CONTRACTS
Before a company commences business, it has to enter into several contracts and incur
several initial expenses to get started.
Contracts which are entered into by promoters with parties to acquire either some property or
right for and on behalf of a company which is yet to be formed are called as ‘pre-
incorporation contracts’ or ‘preliminary contracts’.
An agreement made by a person for a company which is not yet into existence at the time of
signing of such agreement is called a pre-incorporation contract.
The person who enters into a pre-incorporation agreement is usually called the Promoter.
Promoter is a person who initially gets the idea of the formation of a company.
The Companies Act however defines promoter as a person who is so named in the prospectus
of the company, who has control over the affairs of the company and according to whom the
directors of the company act.
Legal status of Pre-incorporation contract
Legal status of a pre-incorporation contract is not at all easy to define in specific terms. If
considered as per the definition of contract under the Contract Act, it is necessary to have at least
two parties to constitute a valid contract so as to enter into a contract with each other. As the general
principle is that no contract exists if one party to the contract is not in existence at the time of
entering the contract. This in turn leads to that a company cannot enter into a contract before it
comes into existence. A company is said to be existing only after it has been duly incorporated. This
is one such facet of a pre-incorporation contract
However, it may be argued that, the pre-incorporation contract is entered into by the promoters on
behalf of the company, representing the company. But here too, there is a catch. The promoters enter
into the contract as agents of the company. The question which arises is if the principal i.e. the
company, itself, is not into existence, how can it have authority to appoint agents to act on behalf of
it?
So, its the promoters, and not the company, who become personally liable for all contracts entered
into by them even though they claim to be acting for the prospective company.
But, u/s 230 of the Indian Contract Act, an agent does have authority to personally enforce contracts
entered by himself on behalf of the principal and he also is not personally bound for them if it is
very clearly stated by him about his being not liable under the contract. So if this principle is
applied, the contract becomes in fructuous as neither of the parties is liable under the contract.
However, u/s 15 (h) and 19 (e) of the Specific Relief Act of 1963, lies the solution to our problem.
According to Section 15(h) of the Specific Relief Act, specific performance of a contract can be
obtained by any party or a representative on behalf of the principal, when the Promoters of a
company enter into a contract before the company’s incorporation and when such a contract is
warranted under the company’s incorporation terms.
Similarly, under Section 19(e) of the Specific Relief Act if the newly incorporated company has
accepted the pre-incorporation contract and has communicated its acceptance to the other party,
relief against parties can be claimed under subsequent title.
Therefore, pre-incorporation contracts can be enforced in India by:
(i) Incorporating the contract in the terms of incorporation,
(b) By entering into a new contract with the other party or the Promoter,
(c) By expressly or impliedly accepting the benefits of the pre- incorporation contract.
These provisions, in a way deviate from the common law principles to some extent, which make
pre-incorporation contracts valid under section 15. Except as otherwise provided by this Chapter,
the specific performance of a contract may be obtained by–
(a) any party thereto;
(b) the representative in interest of the principal, of any party thereto
In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High Court extended the
scope of this principle through its given decision. In this case, the promoters had agreed to purchase
some properties for and on behalf of the company which was yet to be incorporated. After
incorporation of the company, the company assumed possession of the properties and constructed
some structures on the property. It was held that even in absence of conveyance of property by the
promoter in favor of the company after its incorporation, the company’s title over the property could
not be set aside.
