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Unit 8: Formation of Company

When the company has complied with these conditions, the Registrar will issue a certifi cate to Notes
commence business.
Penalty: If any public company having share capital commences business or exercises borrowing

power without obtaining the certificate to commence business, then every person at fault is liable
to a fi ne upto `5000 for every day of default.
The certificate to commence business entitles the company to commence business given in the

main objects clause of the memorandum. No business given in the ‘other objects’ clause can be
commenced without obtaining prior approval of the shareholder by special resolution. However,
the Central Government may, on an application made by the Board of Directors allow a company
to commence business in the ‘other objects’ clause, even if only ordinary resolution is passed by
the company in general meeting.

Pre-incorporation and Provisional Contracts

We have mentioned earlier that a company is an artificial person and is capable of entering into
contracts. The promoters may enter into contracts with third parties on behalf of the proposed

company before obtaining the certificate of incorporation or after obtaining the certifi cate of

incorporation but before obtaining the certificate to commence business. Thus, in the case of a
public company following are the three situations when contracts may be entered into:
(i) contracts before incorporation,

(ii) contracts after incorporation but before obtaining the certificate to commence business
and

(iii) contracts after obtaining the certificate to commence business.
However, in the case of a private company, as it is not required to obtain the certifi cate to
commence business, there are only two situations, i.e., (i) contracts before incorporation; and (ii)
contracts after incorporation.

Those contracts which are entered into by promoters for the intended company before registration
of the company are known as pre-incorporation or preliminary contracts. Very often a company is
formed to purchase an existing business or other property. In such circumstances, the promoters
enter into contracts with the owners of the business or property to be acquired by the proposed
company.

A pre-incorporation contract never binds a company since a person cannot contract before his (or
its) existence and a company before incorporation has no legal existence. However, Ss.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 a 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,

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