Question

Effects of pre incorporation
contracts
o If adopted by the company after
incorporation, the company is
liable
O The shareholders are personally
liable
O If not adopted by the company
afet incorporation, still the
company is liable
o The directors are personally
liable​

Answer 1

Author Name: suryabhansingh

It deals with the legal status of pre-incorporation contracts....

Before a company commences business, it has to enter into several contracts and incur several initial expenses. 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’.

1. Legal status of Pre-incorporation contract

The legal status of a pre-incorporation contract is not easy to define. 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. It may be argued that, the pre-incorporation contract is entered into by the promoters on behalf of the company. But here also, is a tangle. The promoters, while entering into the contract, act as agents of the company. But when the principal, i.e. the company is itself not in existence, how can it appoint an agent to act for it? So, the promoters, themselves and not the company, become personally liable for all contracts entered into by them even though they claim to be acting for the prospective company.