SALE WAS MADE INFAVOUR OF UNINCORPORATED COMPANY

[srinivasa reddy]

Respected Sir,

Sale deed was made on 10-4-2016 infavour of unincorporated Pvt Ltd Company, thereafter it was incorporated on 16-04-2016 as Pvt Ltd company, price consideration was paid by promoters of the company through their savings bank account to the vendor…

Is it legally enforceable document ?

Is it valid document? Or
void document? Or
voidable document?
plz clarify…

REGARDS
KS REDDY

[Dr. Ashok Dhamija]

Legal status of “pre-incorporation contracts” is slightly complicated. It is true that the promotors of the company may have to enter into certain contracts with third parties before the company is actually incorporated. However, a contract requires two existing parties who enter into an agreement. If the company (on whose behalf the contract is being entered into, before its incorporation) is non-existing, and is yet to be incorporated, then a contract on its behalf would mean that there are not two competent / existing parties to the contract and the contract may be invalid. There does not appear to be any provisions in the Companies Act for validating such pre-incorporation contracts. However, there are provisions in the Specific Relief Act, 1963, under which such pre-incorporation contracts on behalf of a non-existing company may be valid and may be enforced in favour of or against the company, if the conditions mentioned those provisions are satisfied.

Section 15(h) of the Specific Relief Act provides as under:

“15. Who may obtain specific performance.—Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by—

*** *** ***

(h) when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company:

Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract.”

Therefore, a company may obtain specific performance of a pre-incorporation contract if the following conditions are satisfied:

• the promoters of the company have, before its incorporation, entered into a contract for the purposes of the company;
• such contract is warranted by the terms of the incorporation; and,
• the company has accepted the contract and has communicated such acceptance to the other party to the contract.

Likewise, Section 19(e) of the Specific Relief Act provides as under:

“19. Relief against parties and persons claiming under them by subsequent title.—Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against—

*** *** ***

(e) when the promoters of a company have, before its incorporation entered into a contract for the purpose of the company and such contract is warranted by the terms of the incorporation, the company:

Provided that the company has accepted the contract and communicated such acceptance to the other party to the contract.”

Therefore, specific performance of a pre-incorporation contract may be obtained against a company if the following conditions are satisfied:

• the promoters of the company have, before its incorporation, entered into a contract for the purposes of the company;
• such contract is warranted by the terms of the incorporation; and,
• the company has accepted the contract and has communicated such acceptance to the other party to the contract.

Therefore, in the situations mentioned above, a pre-incorporation contract be enforced by or against the company if the above conditions are satisfied. Otherwise, generally speaking, a pre-incorporation contract may not bind the company and the promotors themselves may be liable for the consequences.

      

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Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles. List of his Quora Answers. List of his YouTube Videos.

[srinivasa reddy]

complete sale transaction was made not agreement of sale prior to incorporation of the company

[Author]

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