Difference Between Pre Incorporation Contracts & Provisional Contracts: A company being an artificial person can contract only through its agents. A contract will be binding on a company only, if it is made on its behalf by any person acting under its authority, express or implied. The powers of the company are defined by its Memorandum of Association and any contract made beyond the limits laid down in the Memorandum of Association, will be ultra vires to the company and void even if all the shareholders assent to it.’
Contracts made before the incorporation of company is called pre-incorporation contracts. Contracts made after incorporation, but before the company becomes entitled to commence business are called provisional contracts. Provisional contracts are no more valid as provisions relating to commencement of business have been omitted by Companies (Amendment) Act, 2015. The contracts after the incorporation should be within the purview of Memorandum of Association.
Pre Incorporation Contracts
Preliminary contracts or Pre Incorporation Contracts are contracts purported to be made on behalf of a company before its incorporation. Before incorporation, a company is non-existent and has no capacity to contract. Consequently, nobody can contract as agent on its behalf because an act which cannot be done by the principal himself cannot be done by him through an agent. Hence, a contract by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time the contract was concluded the company was not in existence.
Difference Between Pre Incorporation Contracts & Provisional Contracts
| Pre-Incorporation Contracts | Provisional Contracts |
| A contract entered into by the promoters on behalf of a proposed company i.e. before incorporation of a company | Any contract made by a company before the date at which it is entitled to commence business |
| A Pre-Incorporation contract is governed by Specific Relief Act, 1963. | A Provisional Contract is governed by Companies Act, 2013. |
| The term Pre-Incorporation Contract is relevant for public as well as private company | The term Provisional Contract is not relevant for Private Company |
| Term Pre-Incorporation Contract is relevant for every company, even though it has no share capital | The term Provisional Contract is not relevant for a company not having share capital. |
| A Pre-Incorporation contract is not binding unless the company adopts the contract. | A provisional contract becomes binding on the company when it obtains the certificate of commencement. |
Contracts made after incorporation of business
A company can do all such acts, as by its Memorandum, it is expressly or impliedly authorised, to do. Any purported act, which is not so authorized, is ultra vires the company, and the company cannot enforce it, nor can the other party enforce it against the company. Such a contract cannot be ratified even if every member of the company assents to it, as it is void ab initio. This rule is commonly known as the Doctrine of Ultra Vires. ‘Ultra vires’ means “beyond the powers”. The powers of the company are derived from its Memorandum of Association and the statute constituting it. Consequently, only those contracts which are intra vires or within the powers of the company will be valid and binding.
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