CORPORATE LAW

PROJECT WORK

SUBMITTED TO: SUBMITTED BY:

Dr. Qazi Mohd Usman Chetan Singh

BALLB (H)

Rollno- 8
ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to
my teacher Dr. Qazi mohd Usman sir who gave me the
golden opportunity to do this wonderful project on the
topic “pre-incorporation contracts” which also help me in
doing a lot of research and I came to know about so many
new things and proper understanding of various concepts.

I am really thankful to him. Secondly, I would also like to

thank my parents and friends who helped a lot in
finalizing this project within the limited time frame.

PRE-INCORPORATION CONTRACTS
A pre-incorporation agreement is entered into by the corporate promoters, who form
the company by filing its Articles of Incorporation. Since the corporation has not been
formed yet, it cannot be a party to the agreement. And any breach of agreement will
make promoters personally liable, since the company has not been incorporated. A
company is a legal entity that is capable of entering into business, owning property, and
trading activities, and entering into contracts with parties and capable of being bought
and sold and inherited by successive owners. It is most favorable business structure
having many advantages such as limited liability, independent corporate existence, and
opportunity to raise funds, perpetual succession, and contractual powers. It is very
important that process of incorporation must be complete before the company come
into existence. The main feature of incorporation is that company attains its legal
features after incorporation and the company attains the contractual powers. It is
however necessary for members incorporating the company to enter into contracts on
behalf of yet to be formed company. Contracts such as contracts for purchase of
property or rights to be acquired, or for securing the services of manager, these kinds of
contracts are usually known as pre-incorporation contracts which are entered by these
members before the formation of company and act as an inducement to the public to
take shares. These contracts are to be entered before on behalf of company which is yet
to be come into existence. These are also called preliminary contracts, and preliminary
agreements
A pre-incorporation contract is an agreement entered into before the incorporation of a
company by a person who purports to act in the name of, or on behalf of, the company,
with the intention or understanding that the company will be incorporated and will
thereafter be bound by the agreement. The promoters stand in very fiduciary position.
In common law the company is not in existence therefore it has no legal capacity to
form contracts. The promoter cannot be said to be an agent because there is no body to
ratify as principle.
Under the strict principles of contract law, the promoter is solely liable for the breach of
contract. The reason behind is that the promoter is party who enters into the contract,
and not the company. The rule of privity of contract keeps away the company from pre-
incorporation contract. But recent development in corporate law and contract law
makes the company liable for pre-incorporation contract.
Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-
incorporation contract, was similar to the English Common Law. This was based on the
general rule of contract where two consenting parties are bound to contract and third
party is not connected with the enforcement and liability under the terms of contract.
And because company does not come in existence before its incorporation, so the
promoter signs contract on behalf of company with third party, and that is why the
promoter was solely liable for the pre-incorporation contract under the established
ruling of Kelner v Baxter.
The problem with the unincorporated companies is that it is not yet comes into
existence and it cannot be legally bound and cannot bind anyone. The
most clear solution for this is that the promoters’ and other agents have to
enter into contracts on behalf of company and bear rights and liabilities
for the company before the time of incorporation.
Going by the definition of the contract, there have to be at least two parties/persons
who enter into contract with each other. So, the general principle goes
that no contract is there if one of the parties to the contract is not in
existence at the time of entering into the contract. Hence, the company
can’t enter into a contract before it comes into existence, and it comes
into existence only after its registration.
1
In the absence of any contract to that effect, an agent cannot personally enforce
contracts entered into by him on behalf of his principal, nor is he personally bound by
them. 

Presumption of contract to contrary. Such a contract shall be presumed to exist in the

following cases:

Sub Section where the contract is made by an agent for the sale or purchase of goods
(1) for a merchant resident abroad;
Sub Section
where the agent does not disclose the name of his principal
(2)

Provided that where the learning , skill, solvency or any personal quality of such party is
a material ingredient in the contract, or where the contract provides that
his interest shall not be assigned, his representative in interest or his
principal shall not be entitled to specific performance his part of the
contract, or the performance thereof by his representative in interest, or
his principal, has been accepted by the other party; when the promoters
1
Section 230 of Indian Contract Act 18721
 of a company have, before its incorporation, entered into a contract for
the purposes of the company, and such contract is warranted by the terms
of the incorporation, the company. U/s 19 (e), Except as otherwise
provided by this Chapter, 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
Another obstacle that arises before the incorporation is that common law
prevents a person who acts an agent for the principal that does not yet
exists. The principle that flows is that unincorporated company is not yet
into existence and thus cannot perform the juristic acts. And another
consequence of this principle is that no person has the authority to act as
an agent for the non-existing principle. rules determine that a principal,
not yet in existence at the time of the transaction, is not competent to
ratify and hence there can be no representation of such a person. 2
 KELNER v BAXTER

In 1866, in case of kelner v baxter3 the comman law confirmed that contracts
professed and signed by an agent who acts on behalf of non-existent principal
would be totally inoperative unless they are binding upon the person who is
signing and he should be personalkly liable for any breach that may occur in
forseen future. The company does not in legal existence at time of pre-
incorporation contract. If someone is not in legal existence, then he cannot be a
party to contract, and ‘Privity to Contract’ doctrine excludes company from the
liability.

2
https://repository.up.ac.za/bitstream/handle/2263/25308/dissertation.pdf?sequence=1
3
1866 L.R. 2 C.P. 174
 In this case it was held that company cannot take liability of pre-incoproration
contarcts through ratification because company was stranger at the time of
contract.

 NEW BORNE v SENSOLID4

 A written contract purported to sell goods by a company described as Leopold

Newborne (London) Ltd. The document was subscribed by the name of the
company with Mr. Leopold Newborne’s signature under it. At that time it had not
been incorporated. Mr. Newborne attempted to enforce the contract as one to
which he was party. 
Held: This was inconsistent with the description of the party in the contract. Lord
Goddard CJ: ‘In my opinion, unfortunate though it may be, as the company was
not in existence when the contract was signed there never was a contract, and
Mr. Newborne cannot come forward and say: ‘Well, it was my contract.’ The fact
is, he made a contract for a company which did not exist.’ The contract purported
to be a contract with the company and it was not relevant that, as was the case,
it was a matter of indifference to the purchasers whether they contracted with
the company or with Mr. Newborne personally. This case created some amount
of confusion that, if the contract was sign by the agent or promoter, then he will
be liable personally and he has the right to sue or to be sued. But if a person
representing him as director of unformed company enters into the contact then
the contact would be unenforceable. This distinction was found objectionable by
the Windeyer J in Black v Smallwood and this was also criticized by Professor
Treitel in the Law of Contract. Later in Phonogram Limited v Lane, Lord Denning
settled the position, he found that if an unformed company enters into the
contact, then it cannot bind the company, but the legal effect of contract does
not entirely lack. And even in that situation the promoter or representor are
personally liable for the pre-incorporation contract.

 TOUCHE v METROPOLITAN RAILWAY WAREHOUSING CO.

There is a valuable exposition of the law by Lord Hatherley in the first of these
last two cases that is, Touche v. Metropolitan RailwayWarehousing Co. (1871) 6
Ch. A. 671 which was adopted by Lord Justice Cotton in the second. The Lord
Chancellor-said: "The case comes within the authority that, where, a sum is

4
1953 1 All E R 708
 payable by A B for the benefit of CD, CD can claim under the contract as if it had
been made with himself.

 Phonogram Limited v Lane,

A person was attempting to from a company which was going to run a pop artists
group and that person arranged financial assistance from a recording company.
But this company never came in existence, and the amount was due. The
recording company brought an action against the person who represented the
unformed company. Lord Denning analyzed Kelner v Baxter, Newborne v
Sensolid, Black v Smallwood and the section 9(2) of the European Communities
Act, 1972 , and found that the promoters are personally liable for the pre-
incorporation contract.These principles were found applicable in Indian case. In
Seth Sobhag Mal Lodha v Edward Mill Co. Ltd., the High Court of Rajsthan
followed the approach of Common Law regarding liability of pre-incorporation
contract. This case was criticised by A. Ramaiya in Guide to Companies Act (Sixth
Edition), he found that learned judges did not noticed the Specific Relief Act.
However, under 15(h) and 19(e) of the specific relief act 1963 deviates from the
common law and make these pre incorporated contracts valid.

WHO IS A PROMOTER?
“A promoter is the one, who undertakes to form a company with reference to a given
object and sets it going and takes the necessary steps to accomplish that purpose.” —
Justice C.J. Cokburn
“A promoter is the person conscious of the possibility of transforming an idea into a
business capable of yielding a profit; who brings together various persons concerned
and who finally, superintendents the various steps necessary to bring the new business
into existence.” —Arthur Dewing

The company law has not given any legal status to promoters. A promoter is neither an
agent nor a trustee of the company because it is a non entity before incorporation.
Some legal cases have tried to specify the status of a promoter. He stands in a fiduciary
position.
The promoter moulds and creates the company and under his supervision it comes into
existence. It is the duty of the promoter to get maximum benefits for the company. He
should not get secret profits from the company. If he sells his property to company,
then he should explain his interest in such property.

The promoter occupiesaweightyabode and has wide powers relating to the formation of
the company. It is however interesting to note that he (the promoter) is neither an
agent nor a trustee of the company that he proposes to establish. He is not an agent
because there is no company yet in existence and he is not a trustee because there is no
trust in existence. But that does not mean that promoter does not have any legal
relationship with the company. The exact way to describe the legal position of the
promoter is that he stands in a fiduciary relationship with the company. Lord Cairns in
Erlanger vs. New Sombrero Phosphate has said that “the promoters of a company stand
undoubted in a fiduciary position. They have in their hands the creation and molding of
the company. They have the power of defining how and when and in what shape and
under whose supervision it shall come into existence and begins to act as trading
corporation.
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.

Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of

such contract is bilateral, be it has the features of tripartite contract. In this type of
contract, the promoter furnishes the contract with interested person and it would be
bilateral contract between them. But the remarkable part of this contract is that, this
contract helps the perspective company, who is not a party to the contract.

One might question that ‘why is company not liable, even if it a beneficiary to contact'
or one might also question that ‘doesn't promoter work under Principal-Agent
relationship. Answer to these entire questions would be simple. The company does not
in legal existence at time of pre-incorporation contract. If someone is not in legal
existence then he cannot be a party to contract.

Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-
incorporation contract, was similar to the English Common Law. This was based on the
general rule of contract where two consenting parties are bound to contract and third
party is not connected with the enforcement and liability under the terms of contract.
And because company does not come in existence before its incorporation, so the
promoter signs contract on behalf of company with third party, and that is why the
promoter was solely liable for the pre-incorporation contract.

However, the provisions of the specific relief Act, 1963 makes the pre-incorporation
contracts valid. Section 15(h) and Section 19 (e) of the Specific Relief Act of 1963, deviat
from the common law principles to some extent,

Provided that where the learning , skill, solvency or any personal quality of such party is
a material ingredient in the contract, or where the contract provides that his interest
shall not be assigned, his representative in interest or his principal shall not be entitled
to specific performance his part of the contract, or the performance thereof by his
representative in interest, or his principal, has been accepted by the other party; when
the promoters of a company have, before its incorporation, entered into a contract for
the purposes of the company, and such contract is warranted by the terms of the
incorporation, the company. Under Section 19 (e) of the Specific Relief Act, 1963. Except
as otherwise provided by this Chapter, 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 favor of the company after its incorporation,
the company’s title over the property could not be set aside. 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.
In Kelner v Baxter, where the promoter in behalf of unformed company accepted an
offer of Mr. Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and
he brought the action against promoters. Erle CJ found that the principal-agent
relationship cannot be in existence before incorporation, and if the company was not in
existence, the principal of an agent cannot be in existence. He further explain that the
company cannot take the liability of pre-incorporation contract through adoption or
ratification; because a stranger cannot ratify or adopt the contract and company was a
stranger because it was not in existence at the time of formation of contract. So he held
that the promoters are personally liable for the pre-incorporation contract because they
are the consenting party to the contract. In Newborne v Sensolid (Great Britain) Ltd,
Court of Appeal interpreted the finding of Kelner v Baxter in a different way and
developed the principle further. In this case an unformed company entered into a
contract, the other contracting party refused to perform his duty. Lord Goddard
observed that before the incorporation the company cannot be in existence, and if it is
not in existence, then the contract which the unformed company signed would also be
not in existence. So company cannot bring an action for pre-incorporation contract, and
also the promoter cannot bring the suit because they were not the party to contract.
In Seth Sobhag Mal Lodha v Edward Mill Co. Ltd., the High Court of Rajasthan followed
the approach of Common Law regarding liability of pre-incorporation contract. This case
was criticized by A. Ramaiya in Guide to Companies Act (Sixth Edition), he found that
learned judges did not noticed the Specific Relief Act.
Many contracts are concluded not by the principal parties themselves, but through their
representatives or agents.16 The term ‘agency’ enjoys a variety of meanings and
frequently overlaps with the concept of representation.For the purpose of this study it is
necessary to clarify the primary difference between the two terms. In the event of
agency, a principal authorises another person (the agent), to represent him or her in
negotiating a contract with a third person. The agent then, acting on behalf of the
principal, enters into negotiations with the third party. If a successful contract is
concluded as a result of the negotiations, that contract comes into being between the
principal and the third party. The agent will not be a party to the contract, but will be
bound to a separate contract with the principal governing his or her appointment as the
principal’s agent. The term ‘agency’ in this instance signifies the contractual relationship
between the agent and principal, or the agent’s representation of his principal, or both.
Thus, it would seem that there can only be ‘agency’ where a person is contractually
authorised by a principal to perform a juristic act and not where authority is derived
from another source.5

VALDITY OF PRE-INCORPORATION CONTRACTS

Whilst it is a generally accepted principle that a company does not exist as a legal entity
until such time that it has been incorporated, for all intents and purposes however, prior
to incorporation someone will be required to act on behalf of the company.

5
https://repository.up.ac.za/bitstream/handle/2263/25308/dissertation.pdf?sequence=1
In order for the process of incorporation to be completed various formalities of
incorporation need to be attended to, and in getting through such rigours of
incorporation various contracts must be entered into with third parties. Given the fact
that prior to completion of the incorporation process a company does not yet exist in
the eyes of the law, the conundrum of assumption of liability, and of enforcing
contracts, either by the company when formed or by the individual who entered into
these contracts on its behalf arises.

In order to address such issues the Companies Act 71 of 2008 (“Companies Act”) makes
provision for the regulation of pre-incorporation contracts. Section 1 of the Companies
Act defines a pre-incorporation contract as a written agreement entered into before the
incorporation of a company by a person who purports to act in the name of, or on
behalf of, the purposed company with the intention or understanding that the purposed
company will be incorporated, and will thereafter be bound by the agreement.

Section 21 of the Companies Act sets out various provisions relating to pre-
incorporation contracts. Section 21(1) of the Companies Act states that a person may
enter into a written agreement in the name of, or purport to act in the name of, or on
behalf of, an entity that is contemplated to be incorporated in terms of the Companies
Act, but does not yet exist at the time.

Section 21(2) of the Companies Act provides that, an individual who does anything
contemplated in subsection (1) is jointly and severally liable with any other such person
for liabilities created as provided for in the pre-incorporation contract while so acting, if
the contemplated entity is not subsequently incorporated, or after being incorporated,
the company rejects any part of such an agreement or action.

Section 21(4) of the Companies Act stipulates that within 3 months after the date on
which a company was incorporated the board of that company may completely,
partially or conditionally ratify or reject any pre-incorporation contract or other action
purported to have been made or done in its name or on its behalf.

CONCLUSION
A preincorporation contract though appears to be with no legal status and value but
they are very much important and are legally valid and enforceable. Pre-incorporation
contracts may be undertaken by the company after it is incorporated either by-
(a) Incorporating the contracts in terms of incorporation
(b) Or by entering into agreements with third parties or with the promoters.
(c) By accepting the benefits from the contracts, expressly or impliedly.

And hence a pre-incorporation contract becomes legal and enforceable. Companies law
does not provide about promoters contracts. The company is an artificial person and is
capable of entering contracts in its own legal capacity. The separate legal entity feature
is awarded to most of the business structures in India, under the Companies Act 2013.
As per the Act, the company under its legal entity capacity, can employ people, can
purchase and sell goods and services, can own property, can enter into contracts with
third parties. The existence of the company is completely on registration of the
company with the Registrar of Companies. If the company is not registered, then the
advantages of limited liability, perpetual succession, contractual powers etc do not
come into being.

It is the duty of the promoter to bring the company in the legal existence and thereby
ensuring its successful running.

BIBLIOGRAPHY
Books referred

 Avtar singh, company law, eastern book publication,

lucknow
 J.p Sharma, corporate laws, ane books pvt. Ltd
 Munish Bhandari: Professional Approach to Corporate
Laws and Practice, Bharat Law House, Jaipur.