Pre incorporation contracts, though at first, might appear to be with no legal status and value, but they are very much important and legally valid as well as enforceable. Pdf relevance and enforceability of preincorporation. Pre incorporation contract law and legal definition. Topic 3 promoters and pre incorporation contracts studocu. In january of 2002 the court of appeal for ontario dealt with the law of preincorporation contracts under the business corporations act, r. Under section 51 of the companies act 2006, subject to any agreement to the contrary, the person purporting to act for the company, or as an agent of the company, is personally liable on the contract phonogram ltd v lane 1982 qb 939. Preincorporation contracts uk high court sets high standard for agent to exclude liability under a preincorporation contract section 45 of the companies act 2014 deals with pre incorporation contracts, i. Pre incorporation contracts promoters perform indispensable capacities to draw out a corporate individual the company into reality and are at risk to the company and in addition the outsiders in regard of their lead and contracts entered amid the pre joining stage. Liability of promoters during preincorporation contracts. Preincorporation contracts and the liability of the promoters. However, the legislature has foreseen that it may be necessary from a business perspective for a person to conclude a contract for a company that is not in existence yet and has therefore included section 21 into the companies act 71 of 2008 which is the enabling provision for the conclusion of preincorporation contracts. Nov, 2016 pre incorporation contracts a pre corporation contract is one which is entered into when the company is in the process of being incorporated but is not yet completed it. Pre incorporation contracts allow company promoters andor agents to enter into contracts where time does not permit the formation of a company beforehand.
A preincorporation agreement is entered into by the corporate promoters, who form the company by filing its articles of incorporation. Promoters are generally held personally liable for pre incorporation contract. If a company does not ratify or adopt a pre incorporation contract under the specific relief act, then the common law principle would be applicable and the promoter will be liable for breach of contract. Contractual law is governed by the indian contract act, 1872 along with. Promoters and preincorporation contracts slideshare. Some confusion stilt exists with accountants as to the correct accounting treatment for pre incorporation contracts. When the preincorporation contract is made, the corporation is not in existence and therefore cannot be a party to the contract. Preincorporation contracts and the promoter law teacher. Article 7 addresses preincorporation contracts specifically and arguably anticipates some reform of the problem of nonratifiability as well as the hazard posed to third party contractors, but the preambles refer to the wider problem of apparently valid contracts proving. Section 35 of the south african companies act of 1973 is laudable to the extent that it overcomes the commonlaw hurdle that a company cannot ratify a pre incorporation contract purportedly made by an agent on behalf of the company prior to the formation of the company. The person entering into the agreement has the intention that once the company comes into existence the company is to be bound by the provisions of the pre incorporation contract. The court held a preincorporation contract shall exist when the individual who actually acted as a promoter or agent on behalf. Sample format of preincorporation agreement enterslice. Pre incorporation contracts a precorporation contract is one which is entered into when the company is in the process of being incorporated but is not yet completed it.
Contracts entered into by an agent under these circumstances are considered invalid right from the outset. Feb 10, 2017 major differences between pre incorporation and provisional contract. Pdf section 35 of the south african companies act of 1973 is laudable to the extent that it overcomes the commonlaw hurdle that a company. Apr 11, 2016 section 45 of the companies act 2014 replaces, with very similar wording, section 37 of the companies act 1963. The promoter thus must be a party to the contract, and, under agency law principles, the promoter will be personally bound as an agent acting on behalf of a nonexistent principal. The effect of preincorporation contracts in german and english company law. Baxter 1 expressed more than one hundred years ago, still governs english law. 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. Article 7 addresses pre incorporation contracts specifically and arguably anticipates some reform of the problem of nonratifiability as well as the hazard posed to third party contractors, but the preambles refer to the wider problem of apparently valid contracts proving to be nullities due to the technicalities of company law. To overcome the difficulty presented by this common law rule, section 21 of the companies act, no. Preliminary or preincorporation contracts preincorporation contracts are those contracts, which are entered into, by agents or trustees on behalf of a prospective company before it has come into existence, e. The reform of section 35 of the companies act maleka femida cassim lecturer in law, university of the witwatersrand, johannesburg the conundrum of the preincorporation contract has taxed some of the.
Baxter 1866 2lr 2cp 174 1 was one of the first case to consider pre incorporation contracts. Pre incorporation contracts and promoters theoretical and. The common law view of preregistration contracts was that the company did not exist for legal purposes until it had been formally incorporated registered. Most common law countries follow this rule to the effect that no pre incorporation contract is binding upon a company, nor can the company adopt. Act since the act is similar to legislation in force federally and in various other provinces, this. Preincorporation contracts allow company promoters andor agents to enter into contracts where time does not permit the formation of. A promoters contract is when a promoter becomes a part of a contract as a representative of a corporation to be formed. Under common law position, the company cannot gain contractual rights or incurs liabilities from a pre incorporation contract. A pre incorporation contract refers to a contract where one party of the contract is a company that is yet to be incorporated. Preincorporation contract is an agreement which is entered into, usually by a promoter on behalf of a company at a time when the companys formation has not been completed by its registration. The key issue in this case is whether either lead balloon or jeremy will be bound by the pre incorporation contract. Secondly this study attempts to determine whether the old and the current legislation regulating preincorporation contracts have been effective, and if so, to what extent. The act furthermore introduces an extensive and renewed approach to the regulation of pre incorporation contracts in an attempt to address the shortcomings of.
Pre incorporation agreements pre incorporation agreements provide a means to specify the terms of the agreement between the persons forming a corporation before you incorporate to make everything clear. Substantive material from the internet has also been referred to. Baxter 1866 2lr 2cp 174 1 was one of the first case to consider preincorporation contracts. Default liability of promoters for preincorporation dealing s. The effect of pre incorporation contracts in german and english company law. Sample format of pre incorporation agreement the proposed entity or the promoters of the proposed entity ensures that everyone involved in establishing or developing the business has a clear understanding of the plans, strategy thereby minimizing the chance for future disputes and litigation. Preincorporation agreements blc attorneys port elizabeth. Indian contract act, 1872 alongside the specific relief act, 1963. But, although the south african legal principles relating to pre incorporation contracts were historically progressive, since south africa was one of the first jurisdictions to provide a. Since the act is similar to legislation in force federally and in. Preincorporation contracts are contracts entered into by a company promoter on behalf of the. To establish this, the statutory arrangements that currently regulate pre incorporation contracts require a grounded, solid and formulated basis, which is determined by an evaluation of the history of the different statutory sections on pre incorporation contracts in these enactments. If any party hereto is a partnership, corporation andor trust, such party represents that this agreement, the transaction contemplated herein, and the execution and delivery hereof, have been. Justice borins of the ontario court ofappeal recently.
A contract purportedly entered into by a person on behalf of a company at a time when the company has not been formed. Preincorporation contracts and the companies act 71 of 2008 the companies act 71 of 2008, defines a preincorporation contract as being one that is entered into before the incorporation of the company by a person who purports to act in the name of or on behalf of the company with the intention that the company will be incorporated and. Preincorporation agreement shareholder agreements us. However given the delays which can be encountered in the registration process.
The law on preincorporation contracts has been needlessly complex and unsuccessfully applied. Download samples of professional document drafts in word. In english common law, the legal status of preincorporation contracts is invalid and cannot be ratified and adopt the benefits of the contract which has been. Secondly this study attempts to determine whether the old and the current legislation regulating pre incorporation contracts have been effective, and if so, to what extent. In terms of this section, a person may enter into a written agreement in the name of, or purport to act in the name of, or on behalf of an entity which. Section 45 of the companies act 2014 replaces, with very similar wording, section 37 of the companies act 1963. The promoter is considered to be liable to fulfil the obligations of the corporation. Whether promoter is personally liable for pre incorporation.
If this is the first time you use this feature, you will be asked to authorise cambridge core to connect with your account. Preincorporation agreements preincorporation agreements provide a means to specify the terms of the agreement between the persons forming a corporation before you incorporate to make everything clear. This common law view resulted in companys being unable to enter a binding contract until they had been registered. Firstly, it is necessary to define the pre incorporation contracts. Some confusion stilt exists with accountants as to the correct accounting treatment for preincorporation contracts. An attempt is made in this article to present a framework of the legal positions and accounting treatments of all practical situations encountered with pre incorporation contracts. To establish this, the statutory arrangements that currently regulate pre. They are the contacts which the promoter wants to enter the contract before a company is incorporated. Preincorporation contracts there are times when business opportunities cannot wait. Pdf on mar 20, 2016, jacqueline obule and others published pre incorporation contracts. Under common law position, the company cannot gain contractual rights or incurs liabilities from a preincorporation contract. Legal effect on pre incorporation contract free essays. Firstly, it is necessary to define the preincorporation contracts. Scope and limitation even though the concept of the liability of the promoters for preincorporation contracts is a very vast concept which requires a theoretical line of thinking to understand it but it is not practically possible to deal with all the subtopics in great depth as a part of this paper.
Preincorporation contracts are contracts purported to be made usually by promoters on behalf of a company before it is incorporated sparka electrics nig. How to create a preincorporation agreement, contracts. Default liability of promoters for pre incorporation dealing s. Most common law countries follow this rule to the effect that no preincorporation contract is binding upon a company, nor can the company adopt. Company formation, preincorporation contracts, characteristics of a company, lifting the veil of incorporation sections 10 to 16, 20 to 25, 182 to 185, 301.
Name of the proposed entity that is the name and style which will be registered with the appropriate authority and with which it will carry on the business. The court held a pre incorporation contract shall exist when the individual who actually acted as a promoter or agent on behalf of the nonexisting entity would be legally liable. Pre incorporation contracts may be undertaken by the company after its incorporation either by a incorporating the contract in the terms of incorporation, or. At common law such contracts were held to be void, as the company is not yet in existence. Such contracts may relate to property which the promoters wish to purchase for the company or they may be made with persons whose knowhow is vital to. Liability on preincorporation contracts mcgill law journal. Pdf preincorporation contract company law mastura hashim. Pre incorporation contracts there are times when business opportunities cannot wait. Preincorporation contracts and promoters theoretical and. Preincorporation contracts allow company promoters andor agents to enter into contracts where time does not permit the formation of a company beforehand. Section 71 of the south african companies act,5 gives a company the power to ratify preliminary contracts made by the promoter. Scope and limitation even though the concept of the liability of the promoters for pre incorporation contracts is a very vast concept which requires a theoretical line of thinking to understand it but it is not practically possible to deal with all the subtopics in great depth as a part of this paper.
The problem arises because at the time of contracting, the company is non existent and hence the contract. A pre incorporation contract is a contract that is entered into by a person who is acting on behalf of a company that does not exist. This research paper finds that, promoter is personally liable for the pre incorporation contract, because at the time of formation of pre incorporation contract, the company does not come in existence, so neither the principle agent relationship exist not the company become the party. This paper seeks to explore the relevance and enforceability of preincorporation contracts of a company under indian law. To establish this, the statutory arrangements that currently regulate preincorporation contracts require a grounded, solid and formulated basis, which is determined by an evaluation of the history of the different statutory sections on preincorporation contracts in these enactments.