PRE-

INCORPORATION
CONTRACT
INTRODUCTION

• Contracts made before the incorporation of company is called pre-incorporation

contracts. Contracts made after incorporation, but before the company becomes entitled
to commence business are called provisional contracts. Provisional contracts are no
more valid as provisions relating to commencement of business have been omitted by
Companies (Amendment) Act, 2015. The contracts after the incorporation should be
within the purview of Memorandum of Association.
• Companies Act 2013 provides for conversion of public companies to private companies
vice versa, conversion of one person company into public/private Company, conversion
of Section 8 companies (companies for charitable purpose) into any other class of
companies. Companies (Incorporation) Rules 2014 provides details of the procedural
aspects.
• Preliminary contracts are contracts purported to be made on behalf of a
company before its incorporation. Before incorporation, a company is non-
existent and has no capacity to contract.
• Consequently, nobody can contract as an agent on its behalf because an act
that cannot be done by the principal himself cannot be done by him through an
agent. Hence, a contract by a promoter purporting to act on behalf of a
company prior to its incorporation never binds the company because at the
time the contract was concluded the company was not in existence. Therefore
it has no legal existence. Even if the parties act on the contract it will not bind
the company. [Northumberland Avenue Hotel Co., (1886) 33 Ch.D.16 (CA)].
• Even after incorporation such a purported contract cannot be ratified
by the company (Kelner v. Baxter (1866) L.R. 2 C.P. 174]. The persons
purporting to act as agents on behalf of the company would be
personally liable. In Kelner v. Baxter three persons A B and C purported
to enter into a contract as agents on behalf of a company before its
incorporation for the purchase of certain goods from Kelner and signed
it : “A, B and C, Directors”.
 CONTRACTS MADE AFTER INCORPORATION
OF BUSINESS
• A company can do all such acts, as by its Memorandum, it is expressly or
impliedly authorised, to do. Any purported act, which is not so authorized, is
ultra vires the company, and the company cannot enforce it, nor can the other
party enforce it against the company. Such a contract cannot be ratified even if
every member of the company assents to it, as it is void ab initio. This rule is
commonly known as the Doctrine of Ultra Vires. ‘Ultra vires’ means "beyond the
powers".
• The powers of the company are derived from its Memorandum of Association
and the statute constituting it. Consequently, only those contracts which are
intra vires or within the powers of the company will be valid and binding.
 COMMENCEMENT OF NEW BUSINESS BY AN
EXISTING COMPANY
• A company cannot commence any business other than those stated
under “objects” clause of memorandum without obtaining the prior
approval of the shareholders in general meeting by a special resolution.
• Section 4(1)(c) requires all companies to state in their memorandum
the objects for which the company is proposed to be incorporated and
any matter considered necessary in furtherance thereof.
CONTD.

• According to section 13(1), a company may, by a special resolution and after

complying with the procedure specified in this section, alter the provisions of its
memorandum. It means that a company can change its objects by passing a
special resolution. Further section 13(6)(a) provides that a company shall, in
relation to any alteration of its memorandum, file with the Registrar the special
resolution passed by the company under section 13(1) in Form no. MGT 14.
• As per section 13(9), the Registrar shall register any alteration of the
memorandum with respect to the objects of the company and certify the
registration within a period of thirty days from the date of filing of the special
resolution in accordance with section 13(6)(a).
 COMMON SEAL

• Companies (Amendment) Act, 2015, has diluted the mandatory

adoption of common seal. Section 12(3)(b) provides that every
company shall have its name engraved in legible characters on its seal,
if any. A company may or may not have a common seal.
• The company may contract under its common seal, if any and in case,
the company does not have a common seal then according to the
requirements of that particular section the contract shall be validated.
 CONVERSION OF COMPANIES ALREADY
REGISTERED
• Section 18(1) of the Companies Act, 2013 provides that a company of any class
registered under this Act may convert itself as a company of other class under
this Act by alteration of memorandum and articles of the company in accordance
with the provisions of Chapter II of the Act (Incorporation of Companies).
• Where the conversion is required to be done under this section, the Registrar
shall on an application made by the company, after satisfying himself that the
provisions of this Chapter applicable for registration of companies have been
complied with, close the former registration of the company and after registering
the documents referred to in section 18(1), issue a certificate of incorporation in
the same manner as its first registration. [Section 18(2)]
 WHETHER PRE-INCORPORATION CONTRACTS ENTERED
BY PROMOTERS ARE BINDING ON THE COMPANY?

• The promoters enter Pre-incorporation contracts on behalf of the

company. However, the promoters act as agent of the company who
represents the company’s interest while at the time of registration, and
the principal is not in existence. At the time of execution of contracts,
the company is not in existence; therefore, the contracts entered by
the promoters are not bound by the company. Section 15 and 19 of the
Special Relief Act, 1963 explain the validity and enforceability of the
pre-incorporation contracts.
 WHAT HAPPENS WHEN THE PRE-INCORPORATION
CONTRACT IS MADE IN THE NAME OF THE COMPANY?

• A company comes into existence only after completion of the incorporation

process. Before incorporation company is an artificial person. Before its
incorporation, a company cannot execute any agreement or contract or be a
part of any contract. Therefore, if the contracts are entered in the name of the
company, they are not valid due to their non-existence. Also, the
enforceability of these contracts can be questionable and may also be
denied.
• It is better to enter into a contract as a promoter of the company with the
condition as to the incorporation of the company. The company can enforce
these contracts if they are accepted.