Pre incorporation contracts As Per Companies Act 2013-Khanna & Associates

Pre-Incorporation Contracts And The Promoter As Per Companies Act-2013-
Khanna & Associates
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A Complete Guide On Pre-Incorporation Contracts As Per Companies act 2013
PROMOTER
The word ‘Promoter’ has not been defined by the Companies Act, 1956 but a definition of the word promoter has been
added in the Companies Act, 2013. As per Section 2(69) of the Companies Act, 2013, Promoter” means a person –
(a) Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director
or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;
Generally Promoter of a company is a person who does the necessary preliminary work in connection with the
formation and the establishing of the company. It is Promoters only who conceives an idea, develops it, formulates a
scheme or project and takes all the necessary steps for the formation of a company to implement the project or the
scheme.
Before the company is registered by the Registrar promoters continue to be known as promoters. They gather funds for
meeting the expenses in connection with the formation of the company and spend them, which are known and
designated as “preliminary expenses” and a provision is made in the articles of association of the company authorising
the company and its directors to reimburse promoters the preliminary expenses incurred by them, and also a provision
for the formalisation of the contracts which the promoters of the company had entered into with third parties prior to
the company coming into existence. Promoters usually enter into contracts with the prospective directors, solicitors,
bankers, brokers, underwriters, auditors, secretary, manager and with those who offer to sell land, plant, machinery
equipment etc. for implementing the proposed project. Such contracts are known as “promoters’ contracts” which are
not binding on the company because the company had not come into existence when they were entered into with third

parties by the company’s promoters. However, as a matter of practice, the company, on its incorporation enters into
fresh contracts with the third parties on the lines of the promoters’ contracts, which then become binding on the
company
Introducation
Pre-Incorporation Contracts
Companies Act, 2013 does not contain any provisions about Promoter’s Contract. The promoters of a company usually
enter into contracts to acquire some property or right for the company which is yet to be incorporated, such contracts
are called preliminary or pre-incorporation contracts. The promoters .generally enter into such contracts as agents for
the company about to be formed. The legal position is that since presence of two consenting parties is necessary for a
contract, and the company before incorporation is a non-entity, the promoters cannot act as agents for the company,
which has yet to come into existence. As such, the company is not liable for the acts of the promoters done before its
incorporation.
When the company comes into existence, it is not bound by the pre-incorporation contracts even when it takes the
benefit of the work done on its behalf. However, specific performance of a contract between a third party and the
promoters may be successfully claimed by the third party against the company, when the company enters into
possession of the property on the faith of the promoters’ contract.
Similarly, the company, after incorporation, cannot enforce any contract made before its incorporation, which means
the company cannot sue the other party to the contract if the other party fails to carry out the contract.
Promoters remain personally liable on the contract.
A company also cannot ratify a contract entered into by the promoters on its behalf before its incorporation.Therefore,
it cannot by adoption or ratification obtain the benefit of the contract purporting to have been made on its behalf
before it came into exis-tence, as ratification by the company when formed is legally impossible.
The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to
contract at the time of the contract by the agent. Where a contract is made on behalf of principal known to both parties
to be non-existent, the contract is deemed to have been entered into personally by the actual maker, i.e. the agent. A
company may, if it desires, enter into a new contract, after its incorporation, with the other party which is known as
novation of promoter’s contracts; and if it makes a fresh contract in terms of the preliminary contract, the liability of the
promoters comes to an end and if it does not make a fresh contract within a limited,period of time, either of the parties
may rescind the contract.
The essential feature of novation is that the right under the original contract is relinquished and a new right referable to
a new contract is created. The substituted contract must, in order to effect a novation, be enforceable one.
The pre-incorporation agreements entered into by the promoters acting on behalf of the intended company with third
party cannot always be avoided for various reasons. These agreements affect the operations of the incorporated
company.
However, u/s 15 (h) and u/s 19 (e) of the Specific Relief Act of 1963, lies the solution to our problem. These
provisions, while deviating from the common law principles to some extent, make the pre-incorporation contracts

valid. U/s 15 (h), Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained
by--
 any party thereto;
 the representative in interest or the principal, of any party thereto
Conclusion
Pre-incorporation contracts, though at first, might appear to be with no legal status and value, but they are very much
important and legally valid as well as enforceable. Pre-incorporation contracts may be undertaken by the company after
its incorporation either by
 incorporating the contract in the terms of incorporation, or
 by entering into a fresh contract with the other party or with the promoters, or
 By accepting the benefits from the contract, either expressly or impliedly.
And hence, the pre-incorporation contract becomes legally enforceable against the company.
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