'No Contract can bind a company before it becomes capable of entering into a contract by incorporation.' Discuss and explain the exceptions to this rule.
Find the question and answer of Company Law only on Legal Bites.
Question: 'No Contract can bind a company before it becomes capable of entering into a contract by incorporation.' Discuss and explain the exceptions to this rule.Find the question and answer of Company Law only on Legal Bites. ['No Contract can bind a company before it becomes capable of entering into a contract by incorporation.' Discuss and explain the exceptions to this rule.]AnswerThe legal principle of "no contract can bind a company before it becomes capable of entering into a...
Question: 'No Contract can bind a company before it becomes capable of entering into a contract by incorporation.' Discuss and explain the exceptions to this rule.
Find the question and answer of Company Law only on Legal Bites. ['No Contract can bind a company before it becomes capable of entering into a contract by incorporation.' Discuss and explain the exceptions to this rule.]
Answer
The legal principle of "no contract can bind a company before it becomes capable of entering into a contract by incorporation" means that a company is not legally bound by any contracts or agreements made before it is incorporated and becomes a legal entity. In other words, a company cannot be held liable for any contractual obligations made before its formation.
This rule is based on the fact that until a company is incorporated, it does not have a legal existence, and therefore, it cannot enter into any legal obligations. However, there are some exceptions to this rule, which are discussed below:
Adoption of Pre-Incorporation Contracts: A company may adopt a pre-incorporation contract by either express or implied agreement, after its incorporation. The company must enter into a new contract, confirming its agreement to be bound by the original contract. This adoption of the pre-incorporation contract must take place within a reasonable time after the company's incorporation.
Ratification of Pre-Incorporation Contracts: A company can also ratify a pre-incorporation contract after its incorporation. Ratification is a process by which the company confirms the validity of the pre-incorporation contract, and it must be done by the company's board of directors. However, the company must have the capacity to enter into the contract at the time of ratification.
Promoter Liability: Promoters of a company are personally liable for any pre-incorporation contracts they make on behalf of the company. This means that if a company is unable to adopt or ratify a pre-incorporation contract, the promoter who made the contract may be held liable for any contractual obligations.
The general rule is that no contract can bind a company before it becomes capable of entering into a contract by incorporation. However, there are exceptions to this rule, such as adoption, ratification, and promoter liability, which allow a company to be bound by pre-incorporation contracts in certain circumstances.
Mayank Shekhar
Mayank is an alumnus of the prestigious Faculty of Law, Delhi University. Under his leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.
