# Pre-Incorporation (Preliminary) Contracts

## Concept

A pre-incorporation contract is one that a promoter enters into on behalf of a company before the company is incorporated.

The legal difficulty: before incorporation, the company is non-existent and has no capacity to contract. So strictly, the company is not a party to the agreement.

## Legal Consequences

1. Company is NOT bound: The company cannot be sued nor can it sue on a pre-incorporation contract because it had no legal existence when the contract was made.

2. Promoter is PERSONALLY liable: The promoter who signed remains personally liable on the contract.

3. Ratification is NOT possible under common law (because there was no principal in existence at the time).

4. Adoption / Novation: After incorporation, the company may, by a fresh contract (novation), adopt the obligations — effectively a new contract is created among the company, promoter and the third party. Specific Relief Act, 1963 (Sec 15 & 19) also allows enforcement where the company has 'accepted' the contract and communicated this to the other party, provided the contract was warranted by the terms of incorporation.

## Diagram — The Three Parties

```

Promoter ——— Contract ——— Third Party (e.g., Vendor)

| ^

| (after incorporation) |

v |

Company ——— New / Adopted contract ———

```

Worked example

### Example 1

Example: Mr. P, promoter of a proposed company 'NewCo Ltd', signs a contract on 1 January with a vendor for office furniture worth ₹5 lakh. NewCo Ltd is incorporated on 1 March. The vendor demands payment from NewCo Ltd. Is NewCo Ltd liable?

Answer: No — because NewCo Ltd did not exist on 1 January, it cannot be bound. The promoter, Mr. P, remains personally liable. NewCo Ltd may, however, enter into a fresh contract (novation) after incorporation, in which case the new contract binds NewCo Ltd and the vendor.

⚠️ Common exam mistakes

Saying that the company can ratify a pre-incorporation contract — it cannot; only novation/adoption is possible.
Holding the company primarily liable instead of the promoter.
Confusing pre-incorporation contracts (before COI) with provisional contracts (post-incorporation but pre-Certificate of Commencement of Business under the old regime).

Bare-Act text Sections 15 & 19, Specific Relief Act, 1963 · Specific Relief Act, 1963 (read with Companies Act, 2013) · click to expand

Section 15, Specific Relief Act, 1963 — Who may obtain specific performance — ... (h) when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract. Section 19(e) makes such contracts enforceable against the company on the same conditions.

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Pre-Incorporation / Preliminary / Promoters' Contracts

Worked example

⚠️ Common exam mistakes