Pre-incorporation Agreements: Role of the Specific Relief Act, 1963 in India
In India, Section 19(e) of the Specific Relief Act of 1963, signifies a significant departure from common law principles. It allows for the enforcement of specific performance against a company under specific conditions. When promoters, before the company’s formal incorporation, enter into a contract on the company’s behalf, and if these contract terms are included in the company’s Articles of Association, it becomes legally possible. Additionally, the company must accept the contract after its incorporation and communicate this acceptance to the other party involved.
Section 15(h) of the same act outlines a similar process for a company to seek specific performance. These provisions have prompted a re-evaluation of previous English court rulings, which regarded pre-incorporation contracts made by promoters on behalf of the company as null and unenforceable by or against the company. After the enactment of the Specific Relief Act, there have been instances where promoters have been held personally responsible.
Before the Specific Relief Act of 1963, in India, promoters encountered significant challenges during the incorporation process. Contracts entered into, before a company’s formal incorporation were void and unratifiable, causing uncertainty around pre-incorporation agreements. The Act marked a pivotal moment in Indian company law, offering a legal mechanism for the validation and enforcement of pre-incorporation contracts, thereby providing a secure and reliable avenue for promoters to engage in necessary transactions with confidence.
Incorporation refers to the formal process of establishing and registering a company as a legal entity, complete with its own distinct rights and responsibilities.
Sections 15(h) and 19(e) of the Specific Relief Act, 1963, outline specific conditions for the enforcement of pre-incorporation contracts. Firstly, the contract must serve the company’s interests, with terms aligned with the company’s expected incorporation and future goals. Upon formal incorporation, the company’s explicit acceptance of the pre-incorporation contract is a vital condition, requiring effective communication to validate the agreement.
Section 15(h) allows the company to seek specific performance from a third party if these conditions are met, with a similar provision under Section 19(e) for the other party. To effectively enforce the contract, the company must ensure its members ratify the contract, followed by acceptance communication. Failure to do so would result in personal liability for the promoters, highlighting the importance of compliance with the specified conditions for the protection and interests of all parties involved.