Setting Up a Company: What Promoters Need to Know – Pre-Incorporation Contracts and Provisional Contracts Under Companies Act 2013

The formation of a company involves several steps, including the role of promoters, their legal position, and the concept of pre-incorporation contracts and provisional contracts. Let’s elaborate on these aspects with reference to the Companies Act of 2013 in India.

Promoters and Their Legal Position:

1. Definition (Section 2(69)): The Companies Act, 2013, defines a promoter as a person who has been named as such in the prospectus or is identified by the company in its annual return.
2. Role and Responsibilities: Promoters are individuals or entities who take the initiative to establish a company. They conceive the idea, arrange for the initial capital, and play a key role in the incorporation process.
3. Legal Position: Promoters act on behalf of the company before its incorporation. They owe a fiduciary duty to the company and its future shareholders. Their actions should be in the best interest of the company.
4. Liabilities and Accountability: Promoters can be held liable for any misrepresentation in the prospectus or any fraudulent activities. They are accountable for the pre-incorporation actions that may affect the company’s future.

Pre-Incorporation Contracts:

1. Definition (Section 19): A pre-incorporation contract is a contract entered into by a person on behalf of a company before its incorporation.
2. Ratification by the Company: Once the company is incorporated, it has the option to ratify or adopt the pre-incorporation contracts. If ratified, the company becomes bound by the terms of those contracts.
3. Promoter’s Personal Liability: Until ratification, the promoter remains personally liable for any obligations arising from the pre-incorporation contract.
4. Binding on the Company: Once ratified, the company is bound by the pre-incorporation contracts as if they were contracts entered into after incorporation.

Provisional Contracts:

1. Definition (Section 26): A provisional contract is a contract entered into by a company after its incorporation but before it obtains a certificate to commence business.
2. Commencement of Business (Section 11): A company cannot commence business unless it obtains a certificate to commence business. Provisional contracts are entered into during the period between incorporation and obtaining this certificate.
3. Effect on the Company: Provisional contracts are valid and enforceable, but the company is not bound until it obtains the certificate to commence business.
4. Liability of Directors: Directors may be held personally liable for any contract entered into before obtaining the certificate to commence business, unless the contract expressly provides that the company will not be bound until the certificate is obtained.

In summary, promoters play a crucial role in the formation of a company, and their legal position involves fiduciary duties to the future company and its shareholders. Pre-incorporation contracts are contracts entered into on behalf of a company before its incorporation, and provisional contracts are those entered into after incorporation but before obtaining the certificate to commence business. Understanding these concepts is essential for a comprehensive understanding of the company formation process under the Companies Act of 2013.