Pre-Incorporation Contracts — Company Law Notes

Pre-Incorporation Contracts

A promoter often signs contracts — for premises, for equipment — before the company exists, so it can hit the ground running. But there is a paradox: you cannot make a contract with someone who has not been born. So who is bound by these deals struck in the company’s name before it existed?

The problem and the rule

A pre-incorporation contract is a contract entered into by a promoter on behalf of a company that is not yet incorporated. At common law it raised two hard truths:

The company was not a legal person when the contract was made, so it was not a party and is not bound — and it cannot ratify the contract after incorporation (ratification needs a principal in existence at the time of the act). Hence “a company cannot be sued on a pre-incorporation contract.”
The promoter who signed is personally liable on it (Kelner v Baxter) — he made the promise, and someone must be bound.

Contrast Newborne v Sensolid (1954) — if the promoter signed merely as the company’s agent and the company did not exist, the contract may be a nullity, so the exact wording of the signature matters.

The Indian statutory relief

Indian law softens the common-law rigidity through the Specific Relief Act 1963:

Section 15(h) — the company may enforce a pre-incorporation contract if the contract was for the purposes of the company and the company accepts/adopts it after incorporation and communicates that acceptance.
Section 19(e) — the other party may likewise enforce it against the company where the company has adopted it.

So, after incorporation, if the company adopts the contract (for its purposes), it becomes enforceable by and against the company — and the promoter is then relieved.

Reimbursement of the promoter. A promoter has no automatic right to recover pre-incorporation expenses; the company was not bound to him. He is reimbursed only if the company, after incorporation, agrees (expressly, or by adopting the contract/expenses).

Section 15(h), Specific Relief Act 1963: specific performance may be obtained by “the promoters of a company [where] the contract has been entered into… before its incorporation, if the contract is warranted by the terms of its incorporation and the company has accepted the contract and communicated such acceptance to the other party.”

In Simple Terms: Because the company did not yet exist, it is not bound by contracts made before its birth and cannot simply ratify them — the promoter is personally on the hook. But under the Specific Relief Act, once the company is formed it can adopt a contract made for its purposes, and then it becomes enforceable by and against the company.

flowchart TD
    ROOT["Pre-incorporation contract"]:::root
    ROOT --> A["Company not yet a person -> not bound"]:::mid
    ROOT --> B["Cannot be ratified (no principal then)"]:::mid
    ROOT --> C["Promoter liable (Kelner v Baxter 1866)"]:::leaf
    ROOT --> D["Relief: SRA s.15(h)/s.19(e) - company adopts -> enforceable"]:::mid2
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    classDef mid fill:#FDE2E2,stroke:#991B1B,color:#000;
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🧩 WORKED EXAMPLE — promoter claims his registration expenses

Facts. A, on instructions, prepares documents and gets a company incorporated, paying the registration fee and incidental expenses. The company later refuses to reimburse him.

Rule. Pre-incorporation expenses do not automatically bind the company; there is no automatic right to reimbursement. The company is liable only if it adopts the contract/expenses after incorporation (SRA s.15(h)/s.19(e)).

Apply. If the company has not adopted or agreed to pay, A cannot compel reimbursement; his contract was, at common law, his own.

Conclusion. Advise A that he can recover only if the company ratifies/adopts the expenses (e.g. by a Board resolution); otherwise the claim fails. He should have secured the company’s post-incorporation adoption.

Case Laws

[C-9] Kelner v Baxter (1866) — promoter personally liable on a pre-incorporation contract.
Newborne v Sensolid (GB) Ltd. (1954) — where the promoter signs as agent for a non-existent company, the contract may be a nullity.
Weavers Mills v Balkis Ammal (1969) — Indian; company may enforce a pre-incorporation contract adopted for its purposes.

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