ENFORCEABILITY OF PRE-INCORPORATION CONTRACTS IN INDIA

Companies cannot be allowed to escape the liabilities conferred on them by their conceivers. According to the common law, the pre incorporation contracts are the contracts that were entered by promoters on behalf of the company with other parties before incorporation of the company. These contracts are not enforceable against the company nor could the company enforce them against the other party, as the company was not party to it. Presently According to Sections 51(h) and 19(e) of Specific Relief Act,1963 pre incorporation contracts can be enforced against the companies if they are essential as per the terms of incorporation and if they are accepted and the same is communicated by the company. These contracts can also be accepted by novation, by the company. Promoters are personally liable if company doesn't take up the responsibility. Incorporation brings a company into existence and the contracts made for the sake of companies prior to their incorporation by their promoters are very beneficial for the company but lack formal legal enforceability. Though certain provisions have been incorporated through various statutes for enforceability of pre incorporation contracts on company but yet courts have at different times given different interpretation in this regard. This creates problems in defining the limits enforceability of these contracts. The laws in relation to the pre-incorporation contracts are not definitive in India. Pre incorporation contracts should be made enforceable against the companies and the companies should be able to enforce them against the other party in the contract without requirement novation of that contract.