Contracts made before the incorporation of company is called pre-incorporation contracts. Contracts made after incorporation, but before the company becomes entitled to commence business are called provisional contracts. Provisional contracts are no more valid as provisions relating to commencement of business have been omitted by Companies (Amendment) Act, 2015. The contracts after the incorporation should be within the purview of Memorandum of Association.
Pre Incorporation Contracts
Preliminary contracts or Pre Incorporation Contracts are contracts purported to be made on behalf of a company before its incorporation. Before incorporation, a company is non-existent and has no capacity to contract. Consequently, nobody can contract as agent on its behalf because an act which cannot be done by the principal himself cannot be done by him through an agent. Hence, a contract by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time the contract was concluded the company was not in existence.
Difference Between Pre Incorporation Contracts & Provisional Contracts
Contracts made after incorporation of business
A company can do all such acts, as by its Memorandum, it is expressly or impliedly authorised, to do. Any purported act, which is not so authorized, is ultra vires the company, and the company cannot enforce it, nor can the other party enforce it against the company. Such a contract cannot be ratified even if every member of the company assents to it, as it is void ab initio. This rule is commonly known as the Doctrine of Ultra Vires. ‘Ultra vires’ means “beyond the powers”. The powers of the company are derived from its Memorandum of Association and the statute constituting it. Consequently, only those contracts which are intra vires or within the powers of the company will be valid and binding. Other Relevant Articles
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