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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

A group of promoters has obtained the certificate of incorporation for Sahyadri Insurance Advisory Ltd, a company limited by shares. Before incorporation the promoters signed a lease for office space in the company's name. After incorporation, the company's board wants to know the legal position on that lease. Which statement reflects the general legal principle?

A company is not automatically bound by a contract made on its behalf before incorporation, because it did not exist then and cannot ratify it. The promoters ordinarily stay personally liable. Incorporation alone, a resolution or the Registrar's involvement does not make the company bound.

  1. AThe company is not automatically bound by a pre-incorporation contract, since it did not exist when the contract was made, and it cannot ratify itCorrect
  2. BThe company is automatically bound once its certificate of incorporation is issued
  3. CThe company becomes bound only if its shareholders pass a special resolution
  4. DThe promoters are released from all liability because the company is later formed
  5. The lessor can sue only the Registrar of Companies

Explanation

At common law a company cannot be a party to, or ratify, a contract made before it existed, so it is not bound automatically. The promoters typically remain personally liable. The Specific Relief Act allows the company to adopt such a contract only in limited circumstances, and that is not an automatic outcome of incorporation.

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