As the saying goes, prevention is better than cure. Since the risk lies with the person who signed the contract, it is extremely important that this person carry out the appropriate checks before entering into a contract to confirm that the business in question has been properly established and continues to exist. If you have already signed a pre-incorporation agreement on behalf of a company and cannot prove an « agreement to the contrary », you may still be able to avoid the personal liability described below. This means that any person who signs a contract on behalf of a company before the creation of that company is liable as if he were the contracting party. Section 51 also has a dual effect, as confirmed in Braymist Ltd v. Wise Finance. In addition to personal liability, the person signing on behalf of a company can personally perform the pre-incorporation contract. Ratification is a process by which a party can give retroactive authority to someone who has entered into an agreement on their behalf. Although some commentators suggest that ratification might be useful in these circumstances, we do not believe that ratification is possible in the case of treaties before they are established. A number of conditions must be met for a measure to be ratified. One of these conditions is that the customer (in this case the company) must exist at the time of conclusion of the contract.
Since a company does not legally exist before its creation, these conditions are not met. Therefore, the application of pre-incorporation contracts in India derives from the Specific Relief Act 1963. Section 15 (h) of the Specific Reorganization Act 1963 provides that if the promoters of a company enter into a contract for the purposes of the company prior to its establishment, it is stated that the company has accepted and justified the agreement and has also communicated it to other parties. This section means that if the Company`s promoters are on its behalf, it is said that the Company has accepted the Agreement and will assume all responsibilities under the Agreement, and it has also been assumed that the Promoters have communicated this to other parties. Therefore, this article essentially reflects the concept of a pre-incorporation contract. Article 19(e) of this Law stipulates that in order to facilitate the Promoters of the Company who have entered into a contract justified by the period of incorporation preceding its incorporation, it is stated that the Company has accepted this contract and has also communicated it to the other parties. This article relieves the burden on the promoters of the company who have concluded a contract before incorporation. In India, after the establishment and registration of a company, it becomes a separate legal entity. After that, the company is able to enter into contracts on its behalf and bear all the liabilities of a company.
After starting a business, she goes through various contracts and agreements on a daily basis. But the « promoters » of the company are able to conclude contracts even before the creation of the company. These contracts are valid on behalf of the promoters and are called pre-incorporation contracts. Pre-incorporation contracts or preliminary contracts are entered into by the Company`s project promoters on behalf of the Company prior to their incorporation in order to acquire ownership or rights of the Company. The contract before incorporation binds a company or a sponsor after incorporation if it corresponds to the purpose of the company and is accepted after incorporation. After the acceptance of the pre-incorporation contracts by the company, this should also be communicated to the parties. Pre-incorporation contracts are confirmed by the Specific Relief Measures Act and the Companies Act 2013. A pre-incorporation contract that is too specific in terms of the type of work and company in which the company will engage could affect the founders` ability to expand into new areas of activity. The best way to achieve this – if the other party agrees, of course – is to include in the pre-incorporation contract a provision that the other party exclusively reviews the company`s performance and that the founders are relieved of any subsequent liability. Founders of a company can sign contracts for that company before completing the incorporation process. In such a situation, the following principles apply.
(This discussion is about California law, although the laws of other states should be similar.) Under the Indian Contracts Act, 1872, pre-incorporation contracts are invalid because there should be two parties to entering into a contract and, in the case of a pre-incorporation contract, the corporation is not registered at the time of the agreement. Therefore, there is no legal entity in the contract on whose behalf the contract is concluded. The second reason is that in pre-incorporation contracts, the parties form the agreement as representatives of the company, but without the presence of the customer himself, how could the parties appoint themselves as representatives? Under section 230 of the Indian Contract Act 1872, an agent may not assert or personally bind the principal on his behalf, in which case the company that is the principal is not legally present because this agreement is entered into before the establishment of the company. In this case, the defendant law firm signed the contract « for and on behalf of the buyer ». The contract was for the sale and purchase of a property in London and included a clause stating that the benefit of the contract was personal to the buyer. Since both parties were not aware that the company in question was indeed not registered, Mr Klein concluded that the contract had not been drawn up taking into account Article 36C(1). The conditions in question were clearly intended for another purpose, namely to prevent or restrict a third party from becoming a buyer through an assignment of the sub-sale. This agreement establishes the basic structure and function of a company: what will be the name of the company, its purpose, its vision, who will be the directors, what will be the roles, what should be the capital investment of the promoters, etc. Contracts entered into on behalf of the Company by project proponents prior to the formation of the Company to obtain certain rights and property rights are referred to as pre-incorporation agreements. A business promoter is a business or person who does the preparatory work related to starting a business, including its promotion, creation and IPO, and who asks individuals to invest money in the company when it is created. Therefore, they are required to promote their business at the operational level or to ensure that their business is functioning properly. To this end, they conclude various contracts.
Pre-incorporation contracts are contracts necessary for the management of a business or incorporation.