Promoters of a company to be formed enter into certain contracts for purchase of land, building and machinery. On incorporation of the company, promoters want the company to undertake the liability towards the payments t

During the pendency of the incorporation of the company or while taking procedural steps for the incorporation of the company which may take time, promoters may enter into contracts on behalf of the proposed company, like purchase of land, ordering machinery, employing key personnel, investment tie up etc. and also incur expenses relating to incorporation of the company. The same must be ratified on the incorporation of the company since these are the pre-incorporation agreements and contacts. The Articles of the company must authorize the directors to pay the expenses relating to registration of the company. However, pre-incorporation contracts are not binding upon the company, if the same are not adopted or accepted by the company after its incorporation. In accordance with the provisions of the Specific Relief Act, 1963, as contained under section 15 of the said Act, if promoters have made a contract before incorporation of a company for the purpose of the proposed company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce the contract. The term 'warranted by terms of incorporation' means 'within the scope of the company's objects as stated in the memorandum of the company'. Thus, the contract should be for the purposes of the company. As per section 19 of the Specific Relief Act, 1963, if the pre-incorporation contract is adopted or accepted by the company after its incorporation and if it is within the terms of incorporation, the other party can also enforce the contract, if such acceptance (adoption) was communicated to other party to the contract. Hence, if the provisions are therein the object clause of the Memorandum Of Association of the company empowering for the same and the Articles of Association of the company empowers to the directors to adopt such pre-incorporation contracts in the board meeting then on passing of the board resolution to that effect in the first board meeting after the incorporation of the company based on the statement containing the details of pre-incorporation contracts prepared for the approval of the board meeting, then the said resolution will bind the company. If the above procedure has been followed by the promoters of the company then the company will be held liable for the payments for the contracts entered into by the promoters before incorporation of the company otherwise not.