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Date: 2024-12-09

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Objectives
The specific objectives of this research are:

To study the legal status of pre-incorporation contracts under Indian law.
This will provide an understanding of whether such contracts are enforceable or voidable.
To understand the liability of promoters in pre-incorporation contracts. The study will explore the legal consequences for
promoters who enter into contracts on behalf of a company that has not yet been incorporated.
To understands the role of ratification in making pre-incorporation contracts binding on the company.
The research will investigate how and to what extent ratification affects the enforceability of these contracts.
To research the statutory framework governing pre-incorporation contracts in India.
This objective aims to identify the legal provisions that govern pre- incorporation contracts, particularly under the Companies
Act, 2013.
To judge the judicial interpretation of pre-incorporation contracts in India.
This will involve reviewing key case laws to understand how Indian courts have dealt with pre-incorporation contracts.
To compare the Indian legal approach with international standards regarding pre-incorporation contracts.
The objective is to identify differences in the treatment of pre-incorporation contracts across various jurisdictions.

Major Findings
Promoters remain personally liable for pre-incorporation contracts as the company does not exist at the time the contract
is made.
Indian courts have adopted a strict approach in limiting the enforceability of such contracts unless the company formally
adopts or ratifies them post- incorporation.
The Companies Act, 2013 does not explicitly address the issue of pre- incorporation contracts, leading to reliance on
judicial precedents.
There are no clear provisions in the Indian legal framework that allow a company to assume liability for pre-incorporation
contracts without formal ratification.
Pre-incorporation contracts are generally not binding on the company
unless they are ratified by the company after incorporation

Conclusion
The study concludes that pre-incorporation contracts are not automatically binding on a company post-incorporation. Such
contracts are unenforceable unless ratified by the company once it is legally established. Promoters remain personally liable
for these contracts unless there is an explicit ratification by the company. The Indian legal framework, while not explicitly
addressing pre-incorporation contracts, relies heavily on judicial interpretation to decide the enforceability of such
agreements.

Suggestions
1.Amendment of the Companies Act, 2013 to include specific provisions dealing with pre-incorporation contracts could
provide more clarity.
2.Clear statutory provisions for the liability of promoters in cases where no ratification takes place would help ensure better
legal certainty.
Encouraging corporate governance frameworks that address pre- incorporation contracts could minimize risks for
companies and third parties.

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 Plagiarism Scan Report
Date: 2024-12-09

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Introduction
The concept of pre-incorporation contracts in corporate law is a vital and intriguing area of study. These contracts are
entered into by promoters on behalf of a company that is yet to be legally formed. Such contracts raise significant legal
questions, particularly about whether they bind the company once it is incorporated. The question of whether these
agreements are enforceable, and to what extent they create rights and obligations for the company post-incorporation, has
been a subject of considerable debate in corporate law.
The introduction of this research will provide an overview of pre- incorporation contracts, relevant legal provisions, the
historical evolution of the concept, and its current application in Indian corporate law. The focus will be on determining
whether these contracts are binding on the company post-incorporation or if they are voidable or unenforceable.
Pre-incorporation contracts are vital during the formation stage of a company. These agreements, made by promoters or
representatives on behalf of a company before it is legally incorporated, aim to ensure that essential arrangements are in
place for the company’s operations. However, as the company does not exist as a legal entity before incorporation, pre-
incorporation contracts present legal challenges, particularly in determining their enforceability and binding nature.
Promoters typically enter into such agreements in good faith, intending to facilitate the company’s initial operations. These
contracts may involve the acquisition of assets, leasing office premises, or entering into preliminary agreements with
vendors. Yet, since the company is not a recognized legal entity at the time of these agreements, it lacks the legal capacity
to be a party to a contract. This raises critical questions about the validity of such contracts and the liability of promoters
who act on the company's behalf.

Under Indian law and common law principles, a company cannot automatically be held bound by pre-incorporation
contracts. According to legal precedent, as established in the English case Kelner v. Baxter (1866), only the individuals
signing the contract are liable unless the company, after incorporation, expressly adopts or ratifies the agreement. Indian
law follows similar principles under the Indian Contract Act, 1872, and through judicial interpretati
Title : Pre incorporation of contract company
Pre-incorporation contracts are agreements made by individuals, commonly referred to as promoters, on behalf of a
company before it is formally incorporated. These contracts are critical for securing the resources and arrangements
necessary for the company’s future operations. However, since the company does not legally exist before incorporation,
such contracts pose unique legal challenges regarding their enforceability and binding nature.
A company, under law, becomes a separate legal entity only after its incorporation. Until then, it has no legal personality and
thus cannot directly enter into or be bound by contracts. Despite this limitation, promoters often negotiate and sign
agreements in the name of the company or for its benefit. These contracts are essential for establishing the company's
groundwork but raise questions about their validity and whether they can bind the company post-incorporation.
Problems
* Lack of Legal Existence of the Company: Since a company is not a legal entity until incorporation, it cannot be a party to a
contract or directly enforce any agreement.
* Promoters’ Personal Liability: Promoters who enter into pre-incorporation contracts are typically held personally liable for
obligations arising under these agreements unless there is an explicit novation or adoption of the contract by the company
post-incorporation.
* Absence of Automatic Ratification:Pre-incorporation contracts are not automatically binding on the company once it is
incorporated. The company must expressly ratify or adopt these contracts, failing which the agreements remain
unenforceable against it.
* Ambiguity in Terms: Pre-incorporation contracts sometimes lack clarity in defining terms or assigning responsibilities,
leading to disputes when the company later assumes operations.

* Conflict of Interest: Promoters may enter into contracts that serve their interests rather than the future company’s,
potentially resulting in disputes or legal complications.
Rationale
The exploration of pre-incorporation contracts is crucial because they play an essential role in enabling the early stages of a
company’s operations. Promoters frequently enter into such agreements to secure vital resources—like office spaces,
equipment, and business partnerships—before the company is formally incorporated. However, since the company is not a
legal entity at the time these contracts are signed, questions arise regarding their enforceability and whether the company
will be bound by them. This research seeks to address these legal ambiguities, helping to clarify the potential risks for
promoters and third parties involved in such contracts.

Hypothesis

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The primary hypothesis of this research is that pre-incorporation contracts are not automatically binding on the company
under Indian law, as the company does not exist as a legal entity at the time these contracts are made. This hypothesis is
based on the principle of privity of contract, which states that only parties to a contract can be bound by its terms. Since the
company is not a legal entity before incorporation, it cannot be considered a party to pre-incorporation agreements, and
therefore, cannot be bound by them unless expressly ratified post-incorporation.

Matched Sources

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