The time between agreeing to form a corporation and the date of incorporation has a gap. This gap exists because the process of incorporation is meticulous. You have to draft the articles of incorporation and by-laws. This takes time to plan and do.
Sometimes, you will have to enter into a contract with a third person, even before the date of incorporation. These contracts may be with suppliers, the bank, or others you need help from. We call these contracts pre-incorporation contracts.
What is a pre-incorporation contract and how do they work? Learn more right here! We’ve simplified the facts to make it easier to understand.
Incorporation Issues: What is Pre-incorporation Contracts in Company Law
A pre-incorporation contract is a contract entered into by a company that is not yet incorporated. Promoters contract into a pre-incorporation contract on behalf of a pre-incorporated company.
What makes a pre-incorporation contract? To make a pre-incorporation contract, the following details must be included in the text.
- Name of Pre-incorporated Company
The agreement should state the company’s intended corporate name. Because the corporation has not formed yet, the promoters should make sure that the corporate name used herein will be the actual name of the corporation.
You could look up the registry of corporate names in the Securities and Exchange Board of India. You have to make sure that the name you will use in the contract has not been used or reserved by other companies.
- State of Incorporation
Name the State of incorporation of the company. The state of incorporation is usually the country where the company originates. This is important to know which State governs over the company and the pre-incorporated contract. Also include the principal address of the company, if this is already known.
- Authorized Number of Shares
The pre-incorporation contract should state the capital structure of the company. You should include the number of authorized shares to issue and the initial number of shares it will issue upon incorporation. The number shares to be initially issued need be equal to the authorized shares. This gives the company allowance to issue more shares if needed.
- Purpose of the Company
You should also indicate in the contract the purpose for which the company is formed. If the company’s purpose is already formulated, it’s better. Otherwise, you can write the business’s purpose more broadly.
Effects of Pre-Incorporation Contract
Because the contract took effect before incorporation, in reality, the corporation was not a party to the contract. This is an issue that holds the pre-incorporation contract on a thin line. Is the contract existing or not? The answer to this is: it could be.
The pre-incorporation contract is created with the intention that the corporation will declare itself bound to the contract upon its incorporation. If the corporation makes it known that he intends to be bound to the terms of the contract, then the contract persists.
It could be implied, where the directors of the corporation neither ratify nor reject the company’s involvement in the contract. In this case, the incorporated company assumes the terms of the contract by not denying that it is a party to the contract. Secondly, through express declaration saying that he accepts the terms of the contract. Lastly, it could be through the ratification of terms, and a new contract replaces the old one.
Liability of Promoters
The promoters contract a pre-incorporation contract as agents of a pre-incorporated company. However, no person can act as the company’s agent because there was no company at the time of the contract. Therefore, the promoters are the primary party to the contract, and thus are primarily liable. If the company did not incorporate or did not adopt the contract, the promoters will be liable for breach of contract.
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