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Need urgent help in law may 2013 suggested answer

Rohit (CA-Final) (1485 Points)

24 July 2013

As per Munish Bhandari Sir Book, answer for both case is comapny is liable.

But as per ICAI suggested answer announced today, answer is 1. promoter liable 2. Company is liable.

I have doubt in case 1

I think Munish Bhandari Book is correct as it is mentioned that company has adopted the contract after incorporation so liability of promoter should come to an end.

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8 Replies

Mayank Mall (CA-Final) (316 Points)
Replied 25 July 2013

Donno abt the Suggested Answers, but i did wrote the answer as per Munish Bhadaari Sir's

PSPSPS (Practicing) (1344 Points)
Replied 26 July 2013

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].

PSPSPS (Practicing) (1344 Points)
Replied 26 July 2013

Based on The Words & Meaning of the Question ICAI is absolutely Correct

Read the Question carefully. Opening words of the Question itself makes it Amply clear that the Co is in the Process of Incorporation & that means its Not yet Incorporated ( Not come Into existence.)

Attached above Forum Post will give you all your answers & a Justification to the Suggested Answer Given by ICAI to the Question.

FRIENDS PLS NOTE & SEE THIS IS WHERE THE REAL DIFFERENCE LIE BETWEEN THE ICAI STUDY BOOKS & PVT AUTHORS BOOKS. ICAI & LEARNED PEOPLE ISSUING STUDY BOOKS AT ICAI ARE FAR FAR MORE BETTER THAN ANY OF THE PVT AUTHORS

( PLS DONT TAKE THIS COMMENT AS MY DISLIKE TO ALL AUTHORS. BUT ALWAYS TRY & USE BOOKS OF ONLY THOSE AUTHORS AS RECOMMENDED BY ICAI. YOU WILL GET A LIST OF ALL SUCH AUTHORS FOR RELEVANT SUBJECTS ON ICAI SITE. & BE SURE THAT WILL HELP YOU MORE)

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Bhaskara (Student) (294 Points)
Replied 26 July 2013

PSPSPS

is right frds , suggested answer published by BoS has a logic and sufficient reason to understand the case better.

siddharth jain (ca- ipcc) (197 Points)
Replied 27 July 2013

I think pspsps is right.

Abhilash Noudu (.) (50 Points)
Replied 28 July 2013

This is the point givev in study material:

"A pre-incorporation contract can be enforced against the company if it is warranted by the terms of incorporation and it is adopted by the company and communicated in acepptance{sections 15 and 19 of the specific Relief Act,1963}.In such a case the directors have no discretion in the matter"

So in the given question it is mentioned that the company has adopted the contract and as the que. is silent it is assumed that the companty has communicated its acceptance.Acc. to this the company is bount by the contract and the promoters are relieved from their liabilities.

Ratification is something which automatically binds the company to the contract which happens in case of provisional contracts.So if a contract is adopted by the company ,the company itself will be liable.

1 Like

Mayank Mall (CA-Final) (316 Points)
Replied 29 July 2013

This is not the complete part, the entire section states that the company can adopt pre-incorporation contracts and thus the company thereby relieves the promoters off their liability, incase the company does not adopt the contract then the promoters are held liable for the same......A company can enter into new but not ratify the contract is true and fine.....

"A pre incorporation contract is one which is purportedly made by or on behalf of a corporation at a time when the corporation has not yet been incorporated. Because the corporation named in the promoter's contract has not been formed at the time the contract is made, the corporation when formed is not bound by the contract. However, adoption of the contract is anticipated by the parties to the contract. If the corporation in fact adopts the contract, then it will assume those rights and liabilities set out in the contract" ---- SOURCE

Mayank Mall (CA-Final) (316 Points)
Replied 29 July 2013

Also, the contract cannot be Ratified because it means changing the agreed terms and conditions to a contract which is senseless as of a per-incorporation contract due to change in parties, thus preferable is-to enter into a whole new contract to avoid certainties assumable....