What Is The Status Of Pre-Incorporation Contracts In India With Respect To Validity And Enforceability? How Does It Compare With The English Law Position?
Abhijit Debnath, O.P. Jindal Global University
ABSTRACT
The paper examines the validity and enforceability of pre-incorporation contracts in India. The paper begins by discussing the concept of pre- incorporation contracts and how they differ from ordinary contracts. It highlights the absence of a clear definition of a promoter in various statutes and laws.
The paper then explores the position of English law regarding pre- incorporation contracts, emphasizing that a newly incorporated company cannot assume liability for such contracts. It discusses relevant case laws, including Kelner vs. Baxter, Phonogram vs. Lane, and Newborne vs. Sensolid, which establish that promoters are personally liable for breaches of pre-incorporation contracts in England.
Next, it delves into the stance of Indian law on pre-incorporation contracts. It examines cases like Seth Sobhag Mal Lodha v. Edward Mills Co. Ltd and CIT v. City Mills Distributors (P) Ltd, which initially held that pre- incorporation contracts were not enforceable unless the company was registered. However, subsequent cases considered the provisions of the Specific Relief Act, 1963, which allow for specific performance and relief against parties involved in pre-incorporation contracts.
The paper highlights the different ways in which Indian law recognizes the assumption of liability by a newly incorporated company, including novation of contract, express ratification, and acceptance of benefits. It also discusses the broadening scope of novation based on principles of equity, as seen in Weavers Mills Ltd. v. Balkies Ammal.
Furthermore, the Indian position is compared with English law, emphasizing that Indian law provides more avenues for a company to assume liability for pre-incorporation contracts. It mentions the role of the Specific Relief Act and unilateral ratification in Indian law, contrasting them with the English system's reliance on innovation.
In my opinion, Indian law is more advanced in dealing with pre- incorporation contracts compared to English law. However, the paper acknowledges the need for a specific statutory provision to clarify the legal framework further.
In conclusion, pre-incorporation contracts are valid and enforceable in India. I suggest that the Indian legislature should introduce a statutory provision in the Companies Act to alleviate the burden on the courts and provide a more comprehensive legal framework for pre-incorporation contracts.
