TOPIC PreIncorporation Contracts PRESENT BY PRAJWAL DHYANI q
TOPIC: - Pre-Incorporation Contracts PRESENT BY: PRAJWAL DHYANI
q TABLE OF CONTENTS �Introduction �Legality of the Pre- Incorporation contracts in India �Promoter’s liability during Incorporation �Responsibilities �Liabilities Under Companies Act � Types and Importance of Pre-Incorporation Contracts � Conclusion
ü Introduction � The company is successfully brought into existence and is running smoothly and fulfilling its obligations, the promoter has to enter into some contracts on behalf of the company. Such contracts are called the contracts formed before the incorporation stage or the Promoter’s Contract. � Such contracts cannot be ignored before the incorporation of the company and are inevitable for the registration and are therefore recognized under The Companies Act, 2013 and The Specific Relief Act, 1963.
ü Legality of the Pre-Incorporation contract in India � Section 15 (h) and Section 19 (e) of the Specific Relief Act, 1963 makes the pre-incorporation contracts valid. In the case of Weavers Mills Ltd. v. Balkies Ammal AIR 1969 Mad 462 – the promoters entered into the contract on behalf of the company and purchased some properties. The company after incorporation assumed possession of the properties and constructed structures on it. The court delivered the judgement that the company’s right and title over the property cannot be set aside.
ü Promoter’s Liability During Incorporation � The Promoters of the Company act as the agent of the company to represent their interest but the unique thing is that the Principal is not in existence while registration. � Therefore, it is more important for the promoter to act diligently because due to non-existence of the principal the contracts are not binding on the company or third parties. � Therefore, the validity and enforceability of pre- incorporation contracts lie in Section 15 and Section 19 of the Specific Relief Act, 1963.
ü Responsibilities Ø Responsibilities are mentioned below: � Revoke the contract and can recover the price of the contract. � Recover the profit even though rescission is not claimed or not possible. � In case there is any breach of the fiduciary duty which the promoter was obliged, the company can claim damages.
ü Liabilities Under Companies Act �Section 56 - Promoters liable in case of non- compliance �Section 62(1)(C)- Liability for false statements �Section 63 – Punishment for deceiving public �Section 478 – Liability for fraud during incorporation or promotion of company �Section 542 – Restraint imposed on guilty Promoters �∙ Section 543 – Consequences in case of breach of duty
ü Types and Importance of Pre. Incorporation Contracts �There are two key situations where such a contract may be desirable: 1) Internal Agreements 2) Business Agreements
q 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 (a) incorporating the contract in the terms of incorporation, or (b) by entering into a fresh contract with the other party or with the promoters, or (c) 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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