Company law

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umesh (Querist)
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27 August 2013 Before incorporation of a company ,promoter made many contracts with oters.after incorporation ,Does company accept those contracts or not?

Ajay Mishra

Ajay Mishra (Expert)
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28 August 2013 Hi

Pre-incorporation contracts are contracts purported to be made on behalf of a company prior to its incorporation. Prior to its incorporation, a company doesn’t exist and bears no capacity to contract. Therefore, nobody can contract as agent on its behalf because an act which 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 it 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)] Thus, even if the company takes some benefit from a contract which is made before its incorporation, the contract is not binding on the company [In Re. English and Colonial Produce Co. (1906) 2 Ch. 435 (C.A.)]. A company is not entitled to take the benefit of a pre-formation contracts made by its promoters. [Natal Land Co. v. Pauline Colleiry Syndicate Ltd., (1904) A.C. 120; also see: Newborne v. Sensolid Ltd., (1950) 1 All ER 708 (C.A.)]. A company cannot ratify a pre-incorporation contract, but it is open to it to enter into a new contract after its incorporation to give effect to a contract made before its formation [Howard v. Patent Ivory Co. (1888) 38 Ch.D].

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Ajay Mishra

Ajay Mishra (Expert)
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28 August 2013
A company being a separate legal entity can contract only through its agents. Sometimes contracts are entered into on behalf of a company even before it is duly incorporated. Such contracts will not be binding on a company unless it becomes capable of contracting by incorporation. In Kelner v. Baxter, (1866) LR 2 CP 174, it was held that “two consenting parties are necessary to a contract, whereas the company, before incorporation, is a non-entity”.

When a company is being incorporated, the promoters, purporting to act on behalf of such company, enter into contracts such as for purchase of property, or for securing the services of managers or other experts. Such contracts are obviously made before the formation of the company.

There are three instances, in case of a public company, where contracts are entered into as follows:

(a) Contracts entered into on behalf of the company prior to its incorporation, which are called as Pre-incorporation contracts;

(b) Contracts entered into after the incorporation but before obtaining the certificate of commencement of business, which are called provisional contracts; and

(c) Contracts entered into after obtaining the certificate of commencement of business.

Since a private company can commence its business immediately after obtaining a certificate of incorporation, the question of provisional contracts in case of a private company does not arise.

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