pre incorporation contract and liabilities of promoter

1. What are Pre-Incorporation Contracts?

Contracts made on behalf of the Company before its Incorporation – If the company takes some benefit from a contract made before its formation, the contract is not binding on the Company.

2. Whether Promoters are liable?

It may be argued that, the pre-incorporation contract is entered into by the promoters on behalf of the company. But here also, there is a catch. The promoters, while entering into the contract, act as agents of the company. But when the principal, i.e. the company is itself not in existence, how can it appoint an agent to act for it? So, the promoters, themselves and not the company, become personally liable for all contracts entered into by them even though they claim to be acting for the prospective company.

The specific performance of a contract may be enforced against the company, when the promoters of a company have, before its incorporation, entered into a contract for the purpose of the company and such contract is warranted by the terms of the incorporation.

In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High Court extended the scope of this principle through its decision. In this case, promoters had agreed to purchase some properties for and on behalf of the company to be promoted. On incorporation, the company assumed possession and constructed structures upon it. It was held that even in absence of conveyance of property by the promoter in favour of the company after its incorporation, the company’s title over the property could not be set aside.

3. What if contracts are entered BEFORE Certificate of Commencement is issued?

Contacts made after incorporation but before obtaining the certificate to commence business – provisional contracts are not binding on Company until the company is entitled to commence business on the grant of the Certificate.

4. What if contracts are entered AFTER getting certificate of COmmencement?

Contracts made after obtaining the Certificate of Commencement – contracts which are intra vires or within the powers of the Company will be valid and binding.