Pre-Incorporation Contracts and Its Enforceability under Companies Act
Pre-Incorporation Contracts and Their Enforceability under Companies Act, 2013
What are Pre-Incorporation Contracts?
Pre-incorporation contracts are agreements entered into on behalf of a company that is yet to be formed (not yet incorporated).
These contracts are typically made by promoters or persons acting on behalf of the future company to secure assets, services, or business deals before the company legally exists.
Legal Position in India
1. Company Act, 2013 - No Direct Provision for Pre-Incorporation Contracts
The Companies Act, 2013 does not explicitly provide provisions regulating pre-incorporation contracts.
It neither validates nor expressly invalidates such contracts.
The Act focuses more on post-incorporation contracts and company operations.
2. Promoters’ Role and Liability
Promoters, who enter into contracts on behalf of the company before incorporation, are personally liable on such contracts unless otherwise agreed.
Since the company does not exist legally at that time, it cannot be a party to the contract.
The promoter acts as a principal (liable party) and not an agent for the company at this stage.
3. Company’s Liability After Incorporation
Once the company is incorporated, it can adopt or ratify pre-incorporation contracts through a resolution of the Board of Directors.
After adoption, the company becomes liable under those contracts.
However, the original contract remains between the promoter and the third party until adoption.
4. Enforceability Issues
Since the company is not in existence at the time of contract formation, third parties can only sue the promoter personally.
If the company is never formed, the promoter remains solely responsible.
Adoption by the company post-incorporation is necessary for transferring liability to the company.
Relevant Legal Principles & Case Law
Courts generally hold promoters personally liable unless the contract explicitly limits such liability.
The principle of “no company before incorporation” means the company cannot be bound by pre-incorporation contracts unless adoption happens.
Example Case: Kelner v Baxter (English law but often referred to in India) — promoter personally liable on pre-incorporation contracts.
Practical Recommendations
Promoters should clearly state in the contract that they are entering on behalf of a company to be incorporated.
Include clauses for post-incorporation adoption/ratification.
Avoid promoters’ personal exposure by getting indemnity agreements or other protections.
Companies should adopt or ratify such contracts soon after incorporation to clarify liability.
Summary Table
| Aspect | Position under Companies Act & Law |
|---|---|
| Contract with unborn company | Not binding on company (no legal existence) |
| Promoter liability | Personally liable until company adopts contract |
| Company liability | After adoption/ratification by company post-incorporation |
| Enforcement | Third party can sue promoter until adoption |
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