Page 54 - DCOM106_COMPANY_LAW

Unit 4: Formation of Company

A pre-incorporation contract never binds a company since a person cannot contract before his Notes
(or its) existence and a company before incorporation has no legal existence. However, S.15(h)
and 19 (e) of the Specific Relief Act, 1963 has provided some relief in this regard. It provides that
when promoters of a company have, before its incorporation entered into a contract for the
purpose of the company and such a contract is warranted by the terms of its incorporation, the
contract may be specifically enforced by or against the company. It is, however, necessary that
the company in such a case must have accepted the contract after its incorporation and
communicated such acceptance to the other party to the contract. Contracts like preparation and
printing of the Memorandum, Articles, etc., renting premises, hiring secretarial staff are envisaged
under the Act.
Liability of promoters vis-à-vis pre-incorporation contracts. An important question that needs
to be tackled is what is the position of a promoter vis-à-vis preliminary contracts? If the company
does not execute a fresh contract after incorporation and the contract is not one warranted for the
purpose of incorporation of the company, what will be the legal position of the promoter who
brings about such a contract?

In Phonogram Ltd. v. Lane (1982) Q.B. 938, it was observed that although a contract made before
a company’s incorporation cannot bind the company, it is not wholly devoid of legal effect, even
if all the persons who negotiated the contract are aware that the company has not yet been
incorporated.
The contract takes effect as a personal contract with the persons who purport to contract on the
company’s behalf [Kelner v. Baxter (1866) LR 2 CP 174]. Promoters shall be liable to pay damages
for failure to perform the promises made in the company’s name. This shall be so even where
the contract expressly provides that only the company’s paid up capital shall be answerable for
performance [Scot v. Lord Ebury (1867) LR 2 CP 255].

Task The registrar of companies issued a certificate of incorporation on 8 January, 2006.
However, by mistake, the certificate was dated 5 January, 2006. An allotment of shares had
been made on 7 January, 2006. Can the allotment be declared void on the ground that it
was made before the company was incorporated?

4.5 Provisional Contracts

Those contracts which are entered into by a public company after obtaining the certificate of
incorporation but before getting the certificate to commence business are known as provisional
contracts [s.149(4)]. Such contracts are not binding on the company until the company is entitled
to commence business and on that date they shall become binding, without any need for
ratification.
If the company is unable to obtain the certificate to commence business, the provisional contracts
will never become binding on it, and no one can sue in respect of them.
As it shall be explained later, a company can do only such acts as by its memorandum it is
expressly or impliedly authorised to do. Any transaction which is not so authorised is ultra vires
(beyond the powers) and is null and void ab initio. Neither the company, nor the other party to
the contract can enforce it.

LOVELY PROFESSIONAL UNIVERSITY 49