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Bluebook 21st ed.

Abhiijit Debnath, What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?, 5 INDIAN J.L. & LEGAL RSCH. 1 (2023).

ALWD 7th ed.

Abhiijit Debnath, What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?, 5 Indian J.L. & Legal Rsch. 1 (2023).

APA 7th ed.

Debnath, Abhiijit. (2023). What Is the Status of Pre-Incorporation Contracts in India
with Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?. Indian Journal of Law and Legal Research, 5, 1-7.

Chicago 17th ed.

Abhiijit Debnath, "What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?," Indian Journal of Law and Legal Research 5 (2023): 1-7

McGill Guide 9th ed.

Abhiijit Debnath, "What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?" (2023) 5 Indian JL & Legal Rsch 1.

AGLC 4th ed.

Abhiijit Debnath, 'What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?' (2023) 5 Indian Journal of Law and Legal Research 1

MLA 9th ed.

Debnath, Abhiijit. "What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?." Indian Journal of Law and Legal Research, 5, 2023, pp. 1-7. HeinOnline.

OSCOLA 4th ed.

Abhiijit Debnath, 'What Is the Status of Pre-Incorporation Contracts in India with
Respect to Validity and Enforceability? How Does It Compare with the English Law
Position?' (2023) 5 Indian JL & Legal Rsch 1 Please note: citations
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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

WHAT IS THE STATUS OF PRE-INCORPORATION

CONTRACTS IN INDIA WITH RESPECT TO VALIDITY AND
ENFORCEABILITY? HOW DOES IT COMPARE WITH THE
ENGLISH LAW POSITION?

Abhijit Debnath, O.P. Jindal Global University

ABSTRACT

The paper examines the validity and enforceability of pre-incorporation

contracts in India. The paper begins by discussing the concept of pre-
incorporation contracts and how they differ from ordinary contracts. It
highlights the absence of a clear definition of a promoter in various statutes
and laws.

The paper then explores the position of English law regarding pre-
incorporation contracts, emphasizing that a newly incorporated company
cannot assume liability for such contracts. It discusses relevant case laws,
including Kelner vs. Baxter, Phonogram vs. Lane, and Newborne vs.
Sensolid, which establish that promoters are personally liable for breaches of
pre-incorporation contracts in England.

Next, it delves into the stance of Indian law on pre-incorporation contracts.

It examines cases like Seth Sobhag Mal Lodha v. Edward Mills Co. Ltd and
CIT v. City Mills Distributors (P) Ltd, which initially held that pre-
incorporation contracts were not enforceable unless the company was
registered. However, subsequent cases considered the provisions of the
Specific Relief Act, 1963, which allow for specific performance and relief
against parties involved in pre-incorporation contracts.

The paper highlights the different ways in which Indian law recognizes the
assumption of liability by a newly incorporated company, including novation
of contract, express ratification, and acceptance of benefits. It also discusses
the broadening scope of novation based on principles of equity, as seen in
Weavers Mills Ltd. v. Balkies Ammal.

Furthermore, the Indian position is compared with English law, emphasizing

that Indian law provides more avenues for a company to assume liability for

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

pre-incorporation contracts. It mentions the role of the Specific Relief Act

and unilateral ratification in Indian law, contrasting them with the English
system's reliance on novation.

In my opinion, Indian law is more advanced in dealing with pre-

incorporation contracts compared to English law. However, the paper
acknowledges the need for a specific statutory provision to clarify the legal
framework further.

In conclusion, pre-incorporation contracts are valid and enforceable in India.

I suggest that the Indian legislature should introduce a statutory provision in
the Companies Act to alleviate the burden on the courts and provide a more
comprehensive legal framework for pre-incorporation contracts.

Introduction

Before a company is incorporated, the functioning of the company needs to be promoted. Such
agreements entered on behalf of a company that is not incorporated or a prospective company
is called a "pre-incorporation contract". It includes commercial transactions or related promises
meant for the benefit of the future company. It is different from an ordinary contract in the
sense that the beneficiary in a pre-incorporation contract is a company which does not exist at
the time of executing the contract. Since an unincorporated company is not recognised in the
eyes of the law, it is not legally possible for them to enter into contracts. Thus, these contracts
are executed by the promoters of the company.

To understand the liability of the promoter in the case of a pre incorporation contract the
definition of the promoter from the various statutes could be referred to. However, there is no
clear definition of a promoter. The definitions of promoter provided by Section 62 of the
Companies Act, SEBI Regulations 1997, SEBI Regulations 2011 and even Companies Act
2013 do not help us understand the liability of a promoter with respect to a pre incorporation
contract.

This paper seeks to examine the validity and enforceability of pre incorporation contracts of a
company in India. The paper will first address the framework of pre incorporation contracts in
England. Then it will address the status of pre incorporation contract in India. It then briefly
compares the two frameworks which are followed by my personal opinion and conclusion.

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

English Law Position

English Law does not allow a newly incorporated company to assume the liability of the
promoter for the pre incorporation contracts entered into by them. In other words, ratification
of a pre incorporation contract by the company is barred, since even for ratification the
company must have had legal capacity when the contract was executed, which is absent when
it comes to a pre incorporation contract.1

If the promoter appears to act for the unincorporated company, then he will be held personally
liable. But if the contract is executed in the name of the unincorporated company and the
promoter just authorizes the signature, the promoter is not liable in case of a breach by the
company. 2 This is because both parties knew that the promoter was not the one who was
entering into the contract.

In Kelner vs. Baxter,3 the promoter executed a contract on behalf of the unincorporated
company. The promoter signed the contract on behalf of the proposed company and in the name
of the company. But the company was not formed and the other party approached the Court to
enforce the contract. The Court held that at the time the contract was executed, the company
did not exist, thus the contract was inoperative unless the promoters were said to be personally
liable. Both parties knew that the company was proposed to be formed, thus the common
intention was to hold the promoters personally liable in case the company is not formed. It
further said that the rights and obligations created by a contract cannot be transferred to a third
party.

In Newborne vs. Sensolid,4 the Court observed that the directors authenticated the signature of
the company and did not act as agents of the company. The contract was thus rendered void.

In Phonogramvs. Lane,5 the Court held that the promoters were personally liable for the breach
committed by the company. It further added that as the company did not exist when the contract
was executed there was never a contract and the promoter cannot say that this is his contract.

1 Joseph Savirimuthu, Pre- incorporationcontracts and the problem of corporatefundamentalism: are

promotersproverbiallyprofuse? 24 COMPANY LAWYER 196, 196- 209 (2003)
2 ARDEN & PRENTICE ED., BUCKLEY ON COMPANIES ACT (
17 th ed., LexisNexis, 2009)
3 Kelner v Baxter (1866) LR 2 CP 174
a Newborne vs. Sensolid [1954] 1 QB 45
5 PhonogramLtd v Lane [1982] 1 QB 938

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

The fact is that the promoter executed a contract for a company that did not exist.

Therefore, the English Law position is that a company is not bound by contracts executed by
the promoters. Even after incorporation, a company cannot ratify the contract because there is
no principal-agent relationship as the principal did not exist at the time the contract was
executed. The promoters of the company will be held personally liable for the breach
committed by the company. English law does not allow ratification of a pre incorporation
contract as the company lacked the legal capacity to execute the contract.

Although, the doctrine of persona ficta in England allows for novation of contract to replace
the company as a party to the contract in place of the promoter but unilateral ratification is still
not permitted.

What is the stance of Indian law?

The position of Indian law with respect to Pre incorporation contracts has continuously evolved
over time.

In Seth Sobhag Mal Lodha v. EdwardMills Co. Ltd,' the Court said that unless the firm is
registered and the plaintiffs have been shown as partners of the firm, the suit against the
company to enforce the pre incorporation contract will be wholly inoperative.

In CIT v. City Mills Distributors (P) Ltd7 , the Supreme Court of India held that since the
assessee company did not exist when the income was earned, thus, it is not liable to pay tax on
such income.

But the above mentioned cases have had their fair share of criticisms and have even been
overruled by subsequent cases that the Court has dealt with involving similar facts. This is
because the Courts in the above cases have failed to take account of the Specific Relief Act,
1963. The relevant provisions of the Specific Relief Act, 1963 are Section 15(h) and Section
19(e).

Section 15(h) of the Specific Relief Act, allows the plaintiff to obtain the specific performance
when the promoters of the company have entered into a contract for the purposes of the

6 Seth SobhagMal Lodha v. EdwardMills Co. Ltd 1972 42 CompCas 1 Raj

? CIT v. City Mills Distributors (P) Ltd 1996 SCC (2) 375

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

company before the incorporation of the company. The only requirement is that the company
is required to accept the contract and such acceptance has to be communicated to the other
party. Section 19(e) provides for relief against the above mentioned parties and persons. As per
the aforementioned provisions for a pre incorporation contract to be valid, it should have been
executed for the future company and must have been warranted by the terms of the
incorporation. The acceptance of the contract by the company should be communicated to the
third party.

The subsequent decisions that Courts have dealt with have taken into account the Specific
Relief Act. In Vali PattabhiramaRao v. Sri RamanujaGinning, 8 the Court held that a company
after coming into existence by incorporation may by a letter approbating accept the acts of the
promoter. The promoter can also give his right to sue to the company by way of mentioning
the same in the article or terms of association. This can also be done either by principle of
adoption or a novation of contract by a substituted application.

It is evident that the doctrine of novation of contract with respect to pre incorporation contracts
is recognised by the Indian law. It allows the company to replace the liability of the promoter
with that of its own. So the contract shall now be looked at as if the company itself executed
the contract and not the promoter. Although, lately the Courts have increased this ambit.

Besides the novation of contract, express ratification and acceptance are not the only ways in
which the company can assume the liability of the promoter. If the company utilizes the benefits
of a pre incorporation contract, then the contract cannot be said to be void and claims can be
made on such a contract. The Supreme Court of India has said that the term "warranted by the
terms of incorporation" as mentioned under the Section 15(h) and Section 19(e) of the Specific
Relief Act must not involve anything ultra vires of the object of the company. An express
condition need not be articulated in the articles of the company to accept a pre incorporation
contract. A company can simply declare ownership of the property under the contract for the
purposes of satisfying the provisions of the Specific Relief Act. By accepting the benefits of
the contract, the company must accept the burden of the contract as well.

In Weavers Mills Ltd. v. Balkies Ammal,) the Madras High Court broadened the scope of the
principle of novation. Here, the promoters of the company had acquired certain properties for

8 Vali PattabhiramaRao v. Sri Ramanuja Ginning 1986 60 CompCas 568 AP

9 Weavers Mills Ltd. v. BalkiesAmmal AIR 1969 Mad 462

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

the company. Once the company was incorporated, it erected structures on the said properties.
The Court in this case applied the principle of equity and held that even though the properties
have not been expressly conveyed by the promoter to the company, the fact that the company
is enjoying the benefits of the acts of the promoters can make the company liable.

According to Ramaiyya's commentary,1 0 under Section 230 of the Indian Contract Act, a
promoter cannot be held liable under a pre incorporation contract since, under Section 230, an
agent is not personally bound by the contract entered for his principal. So once the company is
incorporated, the promoter cannot sue and cannot be sued if the company refuses to ratify his
contract. In case of non ratification by the company, it is possible that the Indian Courts will
follow the approach of the English law and make the promoter personally liable for the contract.

Yet after so many case laws involving diverse facts, the status of the promoter's liability in
such a contract is not settled. This is because of the lack of statutory enactment and overruling
judicial verdicts time and time again.

Comparison of Indian position with the English Law Position

Because of the provisions of the Specific Relief Act and unilateral ratification being allowed,
the position of Indian law is different from the English Law position. Unlike, in the UK in
India, a company is only required to convey the acceptance of the liability of the promoter to
the other party and no express consent of the other party is required to assume liability.

It is only in terms of novation of contract to make the newly incorporated company a party to
the contract and replace the promoter, where the Indian and English law are on the same page.

While in England the only way the company can assume the liability of the pre incorporation
contract is by novation of contract thereby replacing the promoter such that the company
becomes a party to the contract.

In India, a company can assume the liability of the pre incorporation contract by way of
novation of contract as well as express ratification, i.e., it may unilaterally accept the contract
and such acceptance has to be conveyed to the other party. Liability can also be assumed by

10
A. RAMAIYA, GUIDE TO COMPANIES ACT ( 17 th ed., 2010)

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Indian Journal of Law and Legal Research Volume V Issue 11 1ISSN: 2582-8878

using the benefits of the contracts executed by the promoters.

To date, English Courts follow the rule laid down by Kelner vs. Baxter, which goes on to show
how outdated their laws are. Although they did come up with the Contracts (Rights of Third
Parties) Act 1999 which provided some relief but did not provide any solution as such.

Personal Opinion and Conclusion

I believe that Indian law with respect to pre incorporation contracts is much more advanced
than its English counterparts. Unlike in the English system, there are multiple ways as
mentioned above in which a newly incorporated company can assume the liability of the
promoter for the pre incorporation contracts executed by him. The legal framework in India is
more innovative than English law. The only reason why there is a discrepancy in the Indian
laws regarding pre incorporation contracts in India is that there is a lack of statutory provision.

To sum it up, Pre Incorporation Contracts are valid in India. They are enforceable in a Court
of law and are much more advanced than the English laws. The only issue is that due to a lack
of specific statutory provision (say in the Companies Act) the Courts have to dwell on the legal
aspect of the contract. The Legislature can reduce the burden on the Courts by coming up with
a statutory provision as soon as possible.

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