The company is an artificial person and is capable of entering contracts in its own legal capacity. The separate legal entity feature is awarded to most of the business structures in India, under the Companies Act 2013. As per the Act, the company under its legal entity capacity, can employ people, can purchase and sell goods and services, can own property, can enter into contracts with third parties. The existence of the company is completely on registration of the company with the Registrar of Companies. If the company is not registered, then the advantages of limited liability, perpetual succession, contractual powers etc do not come into being.
- It is the duty of the promoter to bring the company in the legal existence and thereby ensuring its successful running.
- Accordingly, to accomplish the obligation of creating the separate legal status for the company, the promoter may enter into some contract on behalf of prospective company.
- The company or its promoters may have to enter into contracts before and after its formation, or even during the time of its formation.
- The contractual features of the company can be exercised only after obtaining it legal1 features by incorporation. However, the company is required to enter into various contracts prior to its incorporation also.
Nature of contract is discussed in two heads, the Preliminary Contracts or Pre-Incorporation Contracts and the Provisional Contracts.
Pre Incorporation Contract-
A contract entered into by the promoters on behalf of a proposed company i.e. before incorporation of a company. A Pre-Incorporation contract is governed by Specific Relief Act, 1963. The term Pre-Incorporation Contract is relevant for public as well as private company. The term Pre-Incorporation Contract is relevant for every company, even though it has no share capital. A Pre-Incorporation contract is not binding unless the company adopts the contract.
- Company cannot be sued on pre-incorporation contract. -Sometimes contracts are made on behalf of a company even before it is duly incorporated. But no contract can bind a company before it becomes capable of contracting by incorporation. “Two consenting parties are necessary to a contract, whereas the company, before incorporation, is a non-entity”. A company has no status prior to incorporation. It can have no income before incorporation for tax purposes. 14 Shares cannot be acquired in the name of a company before its incorporation. A transfer form is liable to be rejected where the name of a proposed company is entered in the column of transferee.
In the case of AP Tourism Development Corporation vs Pampa Hotels Ltd 2010 , It was held that an arbitration agreement was held to be non-existent when the company with which it was made was incorporated subsequent to it.
- Company cannot sue on pre-incorporation contract – Secondly, the company is also not entitled to sue on a pre-incorporation contract. “A company cannot by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence.
This was held in Natal Land & Colonisation Co v Pauline Colliery Syndicate 1904 ,
N Co entered into an agreement with one C, who acted on behalf of a proposed syndicate. Under the agreement N Co was to give the syndicate a lease of coal mining rights. The syndicate was then registered and struck a seam of coal and claimed a lease which N Co refused. An action by the syndicate for specific performance of the agreement or in the alternative for damages was held not maintainable as the syndicate was not in existence when the contract was signed.
- Ratification of pre-incorporation contract -Thus, so far as the company is concerned, it is neither bound by, nor can have the benefit of, a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963. Section 15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. “Warranted by the terms of incorporation” means within the scope of the company’s objects as stated in the memorandum.
- Personal right and liability of contracting agent -Now, in reference to contracts which do not fall within the purview of the above provisions, the question arises whether they can be enforced by or against the agent who acted on behalf of the projected corporation? The answer will depend upon the construction of the contract. If the contract is made on behalf of a company not yet in existence, the agent might incur personal liability. For, where a contract is made on behalf of a principal known to both the parties to be non-existent the contract is deemed to have been entered into personally by the actual maker. Similarly, “where a person purports to contract as agent he may nevertheless disclose himself as being in truth a principal, and bring an action in his own name”
Thus, the agents were held personally liable in Kelner v Baxter 1866.
The facts were that the plaintiff intended to sell wine to a company which was to be formed, but under the contract he agreed to sell to the proposed directors of the company. The proposed directors intended to buy the wine on behalf of the company, but, as it was not in existence when the contract was made, they personally took delivery. It was held that as they had contracted on behalf of a principal who did not exist, they having received the wine, must pay for it.
As per the Act, the contracts made after incorporation of the company but before it is entitled to commence business are termed as Provisional Contracts. A Provisional Contract is governed by Companies Act, 2013. The term Provisional Contract is not relevant for Private Company. The term Provisional Contract is not relevant for a company not having share capital. A provisional contract becomes binding on the company when it obtains the certificate of commencement. The private companies can commence its business immediately after the incorporation of the company, however, for a public limited company, the commencement of business occurs only after obtaining certificate of commencement of business. The term Provisional Contract applies only to the companies with share capital.
Major differences between Pre-incorporation and provisional contract
- Preliminary contracts are those contracts made before the formation of the company, whereas the contract entered by a company after incorporation but before it is entitled to commence business is termed as provisional contracts.
- As per the provisions of the act, neither the company can sue nor can it be sued to enforce the preliminary contracts, whereas the provisional contracts can be enforced only on receiving a certificate of Commencement of Business.
- Preliminary contracts are the liabilities of promoters, his liability ceases only after adoption of such contract by the company after incorporation. However, provisional contracts are the responsibilities of the company. Preliminary contracts may relate to property which the promoters desire to purchase for the company or they may be made with the persons whose know-how is vital to the success of the company.
- As per the Act, both private and public company have the right to undertake these contracts, whereas only public limited companies can undertake provisional contracts.
- As the provisional contracts are being entered in a period after incorporation and before obtaining business commencement certificate, it can be applied only to public limited companies. However, no such case arises in private limited companies as private limited company obtain legal feature immediately on receipt of incorporation certificate.