INTRODUCTION
There are several steps one must take before starting a company. Pre-incorporation contracts refer to agreements entered into by a person on behalf of a company when the company has not yet been formed. These contracts are governed by the Companies Act 2006 which states that “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has an effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.”
A pre-incorporation contract is essentially hence an agreement signed by an individual for a company that does not legally exist at the time of the agreement. The person responsible for entering such an agreement is called a promoter. A promoter is someone who conceives the idea of forming a company and makes important decisions for it.
LEGAL STANDING OF PRE- PRE-INCORPORATED CONTRACTS
The Legal standing of pre-incorporated contracts is very complicated. Under the Indian Contract Act, a valid contract requires the existence of at least two parties at the time of its formation. This poses an issue with pre-incorporation contracts since a company, being a legal entity, exists only after it is formally incorporated. Consequently, a company cannot technically enter into a contract before its incorporation. This is one of the biggest challenges associated with understanding the nature of pre-incorporation contracts.
Promoters, however, often enter into contracts on behalf of a company that is yet to be formed, claiming to represent the company. This brings up a significant question: how can promoters act as agents of a company that does not even exist yet? Agency law stipulates that an agent acts on behalf of a principal (i.e., the company) does not exist at that time, it cannot authorize anyone to act on its behalf. As a result, the promoters themselves become personally liable for the contracts they enter into, even when they do so in the name of the proposed company.
Section 230 of the Indian Contract Act provides that an agent is not personally bound by the contracts they made on behalf of a principal, provided it is expressly stated that they act as an agent and not in their capacity. Meanwhile, Section 15 (h) Specific Relief Act, 1963 permits the enforcement of such contracts if they align with the terms and conditions outlined during the incorporation of the company and if they are also adopted by the company. Section 19(e) of the same Act provides that a company can enforce a pre-incorporation contract if it accepts the agreements and communicates this acceptance to the other party.
In Weavers Mills Ltd. V Balkies Ammal the Madras High Court, promoters agreed to buy some property for and on behalf of the company which was yet to be incorporated. After the incorporation of the company, the company assumed possession of the property and built something on it. It was decided that even in the absence of conveyance of the property by the promoter in favour of the company after its incorporation, the company’s title over the property could not be set aside.
ROLE OF PROMOTERS IN PRE-CONTRACTUAL AGREEMENTS
As stated in Section 2 (69) of the Companies Act 2013, promoters are persons specified in the report or listed in the annual return. The persons mentioned are those specified in section 92. Everyone shall receive instructions from the Board of Directors, provided that he/she does not perform any further service. The role of the promoter as mentioned above is to control certain preconditions for the future work of the company, such as: signing the contract, using the farms, obtaining financing, and obtaining the necessary resources. However, considering that the company cannot enter into contracts at this stage, the sponsors usually enter into these agreements in their capacity. Sections 15(h) and 19(e) refer to the sponsors. Under Section 15(h), contracts can be entered into on behalf of the corporation before the corporation is formed, and the corporation can accept the contract after the corporation is formed. The bonds are then allowed to be held against the corporation. Promoters (who are not yet affiliated with the corporation but represent it in their capacity) often enter into these contracts, but they are still independent in the part contract if the unincorporated corporation does not accept or consent to the contract after the formation. These provisions allow courts to enforce pre-incorporation agreements because sponsors acting on behalf of the corporation can accept the corporation’s actions. The acceptance or approval of such agreements. Promoters are legally liable for pre-incorporation agreements unless a third party exempts or approves the sponsor from liability.
LIABILITY IN PRE-INCORPORATION CONTRACTS
The promoter is usually the person who takes responsibility for the establishment of the company, such as entering into contracts that are important for future businesses. However, the most important issue that arises about the pre-establishment of agreements is the role of the promoters in entering into contracts on behalf of a company that is not yet established. Since the company does not exist when the contract is signed, it cannot be a party to the contract. Therefore, depending on the specific terms of the contract, the promoter will be legally responsible for the performance of its obligations under the said contract.
Promoters can be held legally responsible for any breach of contract or anything that results from the failure of the company while the contract is in force. Therefore, it is important to understand the changes defined in terms of the promoter’s responsibilities and to consider the work of third parties. The sponsor remains legally liable for the guarantee of the contract. The sponsor is responsible for fulfilling the obligations under the contract. This is because the failure to conclude a contract does not mean that the company has no legal liability to third parties who are parties to the contract, or the interest of the third party because the third party expects the contract to be valid when entering into the contract.
The rules follow this study and the practices in every decision are based on certain rules and administrative procedures. The company takes time and is subject to the Contract. The approval process usually involves the company indicating its acceptance of the contract made and agreeing to assume the role of promoter, all the details of the contract, and the identity of the initiator of the contract. The Special Law allows the contractor to agree without specifying how this will affect him personally. Personal liability continues. Courts will consider many factors, including the sponsor’s intentions and morals. The principle of novation, whereby a new contract is made between a company and a third party to replace the old contract, may also come into play. The second risk can only be eliminated if the promoter undertakes to exempt the promoter from liability.
A specific clause states that the promoters have no personal liability about the contract and that the contract will be subject to incorporation at a later date. However, this does not eliminate the promoters’ liability if the company fails to take care to ratify the contract after it has been created.
CONCLUSION
In the end, pre-incorporation agreements serve as a basic framework between the two parties. From clearly stating the meaning of different terms, to the contacts of the two parties, their context, the kind of deal they have with each other, its benefits to the company, responsibilities, and liabilities of both parties.
Along with that it also clearly mentions the promoter, the promoter’s liability throughout the agreement, and any loss the promoter may incur while performing contractual work for the company. All the non-liability points of agreement between the two parties and a lot more.
It provides the two parties with their roles and boundaries that they may not breach, while also clearly documenting all the exchanges happening between the two parties. Promoters must draft these contracts with utmost detail, clearly outlining terms, obligations, and provisions for adoption by the future company.
Apart from this, what makes this agreement important is its legal backing. The Companies Act 2013and the Indian Contract Act 1872 guarantee that this agreement is legal and enforceable by law. Any discrepancies or activities that go beyond this agreement can be persuaded legally by the affected party.
The Specific Relief Act 1963 even provides remedies in case of breaches of this agreement. This agreement helps safeguard the interests of both parties and limits the amount of liabilities on the promoter itself, making the process of business clear, transparent, and efficient.
Author(s) Name: Vanshika Chauhan (Bharti Vidyapeeth New Law College, Pune)
