Pre-Incorporation Contract
A Pre-Incorporation Contract is entered into when the company is in the process of being incorporated but is not yet completed. In legality, such contracts are held to be void since the company is not yet in existence.
A corporation represents a distinct legal entity, distinct from an individual, recognized by the law. It operates as an entity that can possess assets, enter into contractual agreements, and conduct business activities. This legal concept is acknowledged in both English and Indian law. Promoters are the individuals or groups responsible for the behind-the-scenes work required to establish a company. They serve as the architects and builders of the corporate structure, playing a pivotal role in ensuring the legal formation and successful operation of the company.
Before a company initiates its operations, it is necessary to establish various contractual agreements and incur initial expenses. These agreements, created by promoters on behalf of a company that is yet to be formally established, are commonly referred to as Pre-incorporation Contracts or Preliminary Contracts.
Table of Content
- Pre-incorporation Agreements: Role of the Specific Relief Act, 1963 in India
- Legality of Pre-incorporation Contracts: An Examination
- Legal Ramifications of Pre-Incorporation Contracts
- Conclusion
- Frequently Asked Questions (FAQs)
The process of incorporating a company offers several advantages within a corporate structure, including safeguarding individual owners or shareholders from financial liabilities. Once incorporated, the company assumes the burden of debt. Consequently, before incorporating a company, pre-incorporation contracts can be used to determine the roles, functions, and liabilities of the company.
Following are the two situations in which individuals may prefer to draft pre-incorporation contracts.
- Internal Arrangements: A pre-incorporation agreement allows the incorporators to clearly define the roles, functions, and liabilities of each individual involved in the company’s formation. This includes determining who will serve as directors, financial head, legal head, and other key positions, along with their respective responsibilities and potential liabilities. Additionally, the agreement can be used to draft rules and regulations that will govern the company’s operations once it is incorporated.
- Business Agreements: As a company interacts with other firms and entities, a pre-incorporation agreement safeguards its interests. This agreement can specify whether the company operates with limited liability, ensuring that the personal assets of the incorporators are protected from potential liabilities incurred by the company. It also outlines the transfer of ownership from promoters to the company after incorporation, ensuring a clear transfer of authority and responsibility.
Promoters:
According to the Company’s Act, 2013, a Promoter is defined as:
1. A person who has been named as such in a prospectus or is identified by the company in the annual return in Section 92; or
2. A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.