A pre-incorporation contract is an agreement that is made by a person at the behest of a company or corporation that does not exist at the time of signing such agreement. These agreements are entered into as there are preliminary contracts and expenses incurred before an organization takes form.

Why should a company enter into pre-incorporation contract?

Pre-incorporation Contract The promoter is obligated to bring the company in the legal existence and to ensure its successful running,; and in order to accomplish his obligation he may enter into some contract on behalf of prospective company. These types of contract are called ‘Pre-incorporation Contract’.

What is the effect of pre-incorporation contract?

The company cannot be sued on the preliminary Contracts even though when it comes into existence and takes the benefit thereof. The company cannot be sued for those expenses, which are incurred before its incorporation because it was not in existence when the expenses were actually incurred.

What are the requirements of a pre-incorporation contract?

The only legal formalities for a valid pre-incorporation contract under the new Companies Act are thus that the contract must be in writing and must be entered into in the name of or on behalf of the company still to be formed.

Who is liable for pre-incorporation contract?

Promoters
Promoters are generally held personally liable for pre-incorporation contract. If a company does not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the common law principle would be applicable and the promoter will be liable for breach of contract.

What is the validity of pre-incorporation contract?

In order for a pre-incorporation contract to be valid, it must be entered into by the promoters of the company, in their capacity as promoters of the company that they intend to create.

Can a company enter into contracts pre-incorporation?

Before a company is incorporated, it cannot enter into commercial contracts. A contract entered into by a party on behalf of a company, where that company has not yet been formed, is called a pre-incorporation contract.

Who is liable for pre-incorporation contracts?

The Court held that the promoters are personally liable for the pre-incorporation contracts. In Weavers Mills Ltd. v. Balkies Ammal AIR 1969 Mad 462 case, promoters had agreed to purchase some properties for and on behalf of the company to be promoted.

Can a company enter into contracts pre incorporation?

What does it mean to have a pre incorporation contract?

A pre-incorporation contract refers to a contract where one party of the contract is a company that is yet to be incorporated. The key issue in this case is whether either Lead Balloon or Jeremy will be bound by the pre-incorporation contract.

How does a novation change a pre incorporation contract?

The novation provides an opportunity to replace the liability of the promoters with that of company. In simple words, the contract would be reconstituted in a manner that contracting party was the company and no longer the promoters.

Can a company sign a contract before incorporation?

As a company is artificial person that is unborn unless the registration process is completed, it cannot enter execute any agreement before incorporation. Therefore, these contracts entered by the promoters are made in their own name. Hence, these contracts are known as pre-incorporation contract or promoter’s contract.

When does a company become bound by a pre-registration contract?

The statutory law has a different approach. Unlike the common law Section 131(1) states that the company becomes bound by the pre-registration contract if the company ratifies the contract within in the reasonable time after the incorporation.