Pre- incorporation contracts can be undertaken by the company after its incorporation either by:
- entering into a newborn contract with the other party or with the promoters
- Incorporating the contracts with the terms of incorporation
- By accepting the benefits of the contract, either expressly or impliedly.
Full Answer
What are pre incorporation activities?
What are pre incorporation activities? Pre-Incorporation Agreements (or Pre-Incorporation Contracts) establish the operations, management, and define who will have control prior to the initial corporate meeting.
What do you mean by pre incorporation?
Definition of preincorporation : existing or occurring before the formation of a corporation the preincorporation period/process preincorporation expenses a preincorporation contract.
What is pre incorporation and provisional contracts?
Contracts made before the incorporation of company is called pre-incorporation contracts. Contracts made after incorporation, but before the company becomes entitled to commence business are called provisional contracts.
Who are promoters and what is pre incorporation contracts?
The term is one broadly used to describe the person who brings the corporation into existence. It is a business term, not particularly a legal term. Pre-incorporation contracts are contracts entered into by a company promoter on behalf of the company being promoted prior to the incorporation of the proposed company.
What are the 3 types of incorporation?
The three main types of business incorporations are:C Corporation. C Corporation is the most common form of incorporation among businesses and contains almost all of the attributes of a corporation. ... S Corporation. ... Non-Profit Corporation.
Who forms the pre-incorporation contracts?
At common law such contracts were held to be void, as the Company is not yet in existence." The person who enters into a pre-incorporation agreement is usually called the Promoter. The Indian Companies Act 2013 defines the Promoter under Section 2(69).
What is pre-incorporation contract and give an example?
An example of a pre-incorporation contract is a co-founder contract. The person signing the Agreement on behalf of the Company intends to bind the Company to the Agreement in the future when the Company is finally formed.
What are pre-incorporation contracts and why are they necessary?
Section 1 of the Act defines a PIC 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 proposed company, with the intention or understanding that the proposed company will be incorporated, and will thereafter be bound by the ...
What is pre-incorporation contract otherwise known as?
Contracts which are entered into by promoters with parties to acquire some property or right for and on behalf of a company yet to be formed are called as 'pre-incorporation contracts' or 'preliminary contracts'.
What is 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. To answer this several underlying legal issues must be looked at from two different angles, one being the general law and the other statutory laws.
When does a company become bound by a pre-registration contract?
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. Also s 131 (1) still applies to when the proposed company name is unavailable as long as the new company is reasonably identifiable with ...
What happens if a company makes ratification by an adoption of contract?
Furthermore if the company make ratification by an adoption of contract then the company is bound by the contract as an adoption of contract shows the company’s intention to be bound (Bolton Partners v Lambert) [ xiii] like s131 (1).
Can a non-incorporated company ratify a contract?
[ ii] Kelner v Baxter [ iii] case confirms that a corporation cannot ratify a contract that an agent purported to enter into on behalf of the corporation as the corporation did not exist at the time of the formation of a contract. However if there is a clear intended contract, only way in which there could be a valid contract was if the person who represented the company was the other contracting party. Hence person who entered contract was liable in the case. [ iv] However further interpretations were made after Kelner’s case and that is promoter is only liable if it can be said that it was intended in the circumstances that the promoter be a party to the contract (Newborne v Sensolid). [ v] In Black v Smallwood & Cooper it has been held that if a pre-incorporated contract objectively has an intention to bind the company only then the promoter does not necessarily takes the liability especially if the promoter had not known the fact that the company had not been incorporated. In this case it was held that the company did not exist hence it was a promise with a non-existent party and therefore no contract at all (Black v Smallwood & Cooper). [ vi]
Can a corporation have an employment contract before incorporation?
At the common law, it has been said that there could not be an employment contract before the incorporation (Wickberg v Shatsky). [ xvi] As stated in (a) the common law states that no ratification can be given by a corporation that did not exist at the time of forming a contract [ xvii] and only a promoter may be liable if the clear intention exists from the promoter at the time of formation of the contract [ xviii] .
Is a pre incorporation contract bound by S131?
As explained in (b) if ratification is shown then a pre-incorporation contract is bound (s131 (1)). s181 (3) also states that company is still liable if an employee acts fraudulently. Applying all principles and authorities mentioned previously along with s181 (3) the legal issue can be looked from the statutory law.
What is Pre-incorporation Contracts in Company Law and How Does It Work
The time between agreeing to form a corporation and the date of incorporation has a gap. This gap exists because the process of incorporation is meticulous. You have to draft the articles of incorporation and by-laws. This takes time to plan and do.
Incorporation Issues: What is Pre-incorporation Contracts in Company Law
A pre-incorporation contract is a contract entered into by a company that is not yet incorporated. Promoters contract into a pre-incorporation contract on behalf of a pre-incorporated company.
Effects of Pre-Incorporation Contract
Because the contract took effect before incorporation, in reality, the corporation was not a party to the contract. This is an issue that holds the pre-incorporation contract on a thin line. Is the contract existing or not? The answer to this is: it could be.
Liability of Promoters
The promoters contract a pre-incorporation contract as agents of a pre-incorporated company. However, no person can act as the company’s agent because there was no company at the time of the contract. Therefore, the promoters are the primary party to the contract, and thus are primarily liable.
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What is pre-incorporation contract?
Promoters are the person obliged to promote a company to operational level ensuring it running successfully. Therefore, the promoters enter into various contracts necessary to promote company. These contracts also include those executed with the professionals for company registration or those imperative to float company.
How to accept a contract?
Accept the contracts through passing a resolution for acceptance of contracts and actions by the promoters for the incorporation of the company and related matters.
What happens if a company does not accept a contract?
In case, the said contract is not accepted by the company in its meeting, such contract is binding to the promoters and the both, promoters and other party may demand specific performance against each other.
What is the prime characteristic of a company structure?
The prime characteristic of the company structure is separate legal identity, which allows it to enter into contract with parties and own assets in its own name. A company obtains the legal identity after its incorporation and registration in India.
Do pre incorporation contracts bind the company?
Although, the promoters act as agent of the company to represent its interest, while registration, the principal is not in the existence. Therefore, the contracts entered by the promoters do not bind the company or the third party. The validity and enforceability of the pre-incorporation contracts is always in question. However, the fix lies in Section 15 and 19 of the Specific Relief Act, 1963.
Is a promoter's contract inevitable?
Promoter’s contracts or pre-incorporation contracts are inevitable in most cases. Process like private limited company registration in india would always be allied with such contracts whether in form of contract with professional or property owners or otherwise that would affect the company operations in one or the other way. Hence, while such execution these prospects must be known by the promoters. Also, it would be advisable to ask the professionals while executing such contract that which aspects must be kept in mind.
What is a 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 a novation of contract?
Novation of contract is defined in Scarf v Jardine [ 14] as, ‘being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or different parties, the consideration mutually being the discharge of the old contract’ [ 15] .
How is novation different from ratification?
Novation is different from the Ratification [ 16] ; because in Novation, a new contract is made on the same terms but this time between the company and the third party [ 17] , whereas in Ratification, dates back to the time of the act ratified, so that if the company ratifying, who is not in existence, cannot itself have then performed the act in question its subsequent ratification of it is ineffective [ 18] .
What is a promoter in the company act?
Resent Company Bill does have the definition of Promoter in the definition clause under section 2 (zzq), it says that “promoter means a person who has (a) been named as such in a prospectus; or (b) control over the affairs of the company, directly or indirectly whether as a shareholder, director”. But this Bill is not in force till now, so the old Act of 1956 would be applicable in present day, which does not has the common definition clause of promoter. Even the English law does not provide the definition [ 6] . Joseph H. Gross in his celebrated article ‘Who is a Company Promoter?’ found that it was rather intentional to not providing definition in English Legislation, because if legislation try to define it then someone might escape from the liability who enjoy the place of promoter but not come under the definition of promoter [ 7] . In this situation, where the legislature if silent about the definition, it is necessary to see the judicial interpretation.
What does "promoter" mean?
In conclusion, one can say that promoter connote any individual, syndicate, association, partnership or a company, which takes all the necessary steps to create company and mould a company and set it going [ 9] .
When do companies become corporate?
In order to get the benefits of a ‘ corporate personality’ [ 1] , it is very necessary for ‘an association of persons’ to become incorporated under the Companies Act, 1956. After the incorporation of association of persons the company comes in existence, and it can start its business operations as company only after that [ 2] . The simple reason behind it is that before incorporation company do no has any legal existence before incorporation [ 3] , and if the ‘association of persons’ enters into an agreement in the name of company before incorporation; the agreement would be void ab initio [ 4].
Can an association of persons do business before incorporation?
It would be a matter of inconvenience that ‘an association of persons’ cannot perform any official business operation in the name of company before its incorporation or the issue of certificate of commencement of business; they may have to make arrangement for office, place of work, worker, etc. In order to do away with these inconveniences, the promoter [ 5] can enter into the agreements in the benefit of ‘association of persons’ or prospective company; these agreements are known as pre-incorporation contract.
Which article of the pre-incorporation agreement stipulated that disputes of the company should be submitted to arbitration?
In SocieteGeneraleFavouriser Development Du Commerce Et De L’Industrie En France V Societe Generale Bank (Nigeria), the court held that Article 11 of the pre-incorporation agreement (which stipulated that disputes of the company should be submitted to arbitration) should be obeyed by the company.
Why are incorporation contracts not binding?
This is because before incorporation, the company is regarded as being inexistent, thereby lacked contractual capacity.
How to do service of process on a company?
On Service of Process on Companies: It can be done by delivering it to the company’s registered office or head office or giving it to a principal officer [12] of the company- Buhari V Haddy Smart Nig Ltd. For foreign companies, Order 7 rule 10 HCLL adds that it can be given to an agent of the foreign company who is within jurisdiction.
What is a certificate of incorporation?
The certificate of incorporation is rebuttable proof that the company is duly registered. A person who asserts that the company was not incorporated should prove his assertion- Abakaliki LGC V Abakaliki Rice Mills Owners Enterprises. Section 634 EA. Consequently, those who assert that a co has been incorporated should prove same by producing the certificate of incorporation- Registered Trustees of Pentecostal Assemblies of the World Inc V Registered Trustees of African Apostolic Christ Church.
What is the meaning of "no contract" in Garba v Sheba?
In Garba V Sheba, the court held that since a co cannot contract before its formation, a promise by the company (before its incorporation) to pay the promoter cannot be enforced. Similar position was maintained in Re National Motor Mail Co, Clinton’s Co. In practice, the promoters would usually be the directors and would find a way around. For example, they usually buy the property and resell to the company at a reasonable profit (this was okayed by the court in Re Ambrose Lake Tin and Copper Mining Co ). Same done in Re Cape Brenton where the purchase was E5,000 and the promoters sold it for E42,000 to the company. They got away due to lapse of time. Also in Omnium Electric Palaces V Baines, the court noted that since the promoter is neither a trustee nor agent of the company, he is not bound to disclose profit. However, since Section 62 puts the promoters in a fiduciary position, sales to the company at a profit should be disclosed… sub 4 removes the time limitation for suing a promoter.
How many members are required to be registered as a company?
On the Registration/Incorporation Process: Any association or group carrying on business for the purpose of making profit with more than 20 members must be registered as a company [5] – Section 19.
What is a private company?
Private Companies: is a company declared to be private by its memorandum- Section 22 (1) The total members must not exceed fifty (50 [3] )- Section 22 (3). The Articles of a private co should restrict [4] transfer of its shares- Section 22 (2).
When was section 14 of the Corporations Act amended?
This changed when in 1976 , when The Corporations Act (Manitoba) (the "MCA") was amended to include what is now section 14. This contemplates and provides for the validation of pre-incorporation contracts. In essence, section 14 provides that:
Can a corporation be a party to an agreement?
In the past, it was legally impossible for a corporation to be a party to an agreement where the agreement was entered into on behalf of the corporation prior to the incorporation of the corporation. So if "A", being a developer and promoter of an anticipated business venture, entered into a contract with "B" in connection with that business venture, and "A" did so on behalf of - and in anticipation of "A"'s incorporation of - his corporation, notwithstanding the subsequent incorporation, it could not be bound by - or obtain the benefits of - the contract*.
Incorporation Issues: What Is Pre-Incorporation Contracts in Company Law
- From the perspective of the statutory law – is Lead Balloon or Jeremy liable by a pre-incorporati…
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. Also s 131(1) still applies to when the prop…
Effects of Pre-Incorporation Contract
Liability of Promoters
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