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A pre-incorporation contract is one which is entered into when the Company is in the process of being incorporated but is not yet completed

01 / 10 / 2021 Assignment

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1.      Explain rules governing pre-incorporation contracts

·         A pre-incorporation contract is one which is entered into when the Company is in the process of being incorporated but is not yet completed. Or a pre incorporation contract is one which is purportedly made by or on behalf of a corporation at a time when the corporation has not yet been incorporated.

·         Because the corporation named in the promoter`s contract has not been formed at the time the contract made, is not bound by the contract. However, adoption of the contract is anticipated by the parties to the contract. If the corporation adopts the contract, then it will assume those rights and liabilities set out in the contract.

·          The rule of privity of contract keeps away the company from pre-incorporation contract. But recent development in corporate law and contract law makes the company liable for pre-incorporation contract.

·         When the pre-incorporation contract is made, the corporation is not in existence and therefore cannot be a party to the contract. The promoter thus must be a party to the contract, and, under agency law principles, the promoter will be personally bound as an agent acting on behalf of a non-existent principal.

·         In order to get the benefits of a ‘corporate personality`, it is very necessary for ‘an association of persons` to become incorporated under the Companies Act, 1956. After the incorporation of association of persons the company comes in existence, and it can start its business operations as company only after that. The simple reason behind it is that before incorporation company do no has any legal existence before incorporation, and if the ‘association of persons` enters into an agreement in the name of company before incorporation; the agreement would be void ab initio.

·         The promoter is obligated to bring the company in the legal existence and to ensure its successful running, and in order to accomplish his obligation he may enter into some contract on behalf of prospective company. These types of contract are called ‘Pre-incorporation Contract`.



Pre-incorporation contracts   rules

·         The contract was in writing; when the company was registered at the Companies Registration Office.

  • The company`s memorandum of association stated that one of the objects of the company was to ratify the contract;
  • The pre-incorporation contract was lodged with the Registrar of Companies at the same time as the company`s memorandum of association and articles of association were lodged.

·         The only legal formalities for a valid pre-incorporation contract under the new Companies Act are thus that the contract must be in writing.

·         Must be entered into in the name of or on behalf of the company still to be formed













2.      Explain reasons why 3rd party dealing with a company may concern itself with doctrine itself with doctrine utra-vires.

·         Any action taken by a company beyond the powers conferred by its memorandum of Association is known as ultra vires transaction. Ultra vires in company law is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it.

·         The doctrine of ultra vires was, thus, developed as a matter of judicial control to protect the investors and creditors of the company. This doctrine prevents a company to spend the money of the investors for a purpose other than those stated in the objects clause of its memorandum. Thus, the investors and the company may be assured that their investment will not be used for the objects or activities which they did not have in contemplation at the time of investing their money in the company.

·         This doctrine protects the creditors of the company by ensuring them that the funds of the company to which they must look for payment are not dissipated in unauthorized activities. The wrongful application of the company’s assets may result in the insolvency of the company, a situation when the creditors of the company cannot be repaid. Besides the doctrine of ultra vires prevents directors from departing from the objects for which the company has been formed and, thus, puts a check over the activities of the directions. It enables the directors to know within what lines of business they are authorized to act.

3. Five circumstances under which a company may issue a bonus share.

Bonus Issues, also known as Scrip Issue or Capitalization Issue, are an issue of free additional shares to the existing shareholders of the company in direct proportion to their existing shareholding in the company.

 While Bonus Issues result in an increase of shares in circulation, existing shareholders continue to retain their proportionate ownership in the company.

In a Bonus Issue, the nominal value (where applicable), also known as face or par value of the company’s shares does not change.


Companies pursue Bonus Issue for the following reasons:

·         One of the major reasons why companies declare bonus issues is that a higher number of shares improves float and liquidity and thereby traded volumes of the stock.

·         A lower price also makes the stock seem more affordable to small retail investors, who might otherwise give it a miss at high price levels.

·         Another aspect of a bonus issue is that it reflects the confidence of the company in its ability to service a larger equity base. Thus, bonus issues are said to be a good signaling mechanism on the company’s capacity to deliver future benefits to shareholders in terms of increased dividend.

  • To offer existing shareholders part of their respective interests in the undistributed profits retained in the company in the form of shares instead of cash distribution so as to conserve cash for business operations or expansions
  • To promote more active trading of the company’s shares in the stock market through a reduction in the market price per share within a more reasonable range as a result of the enlarged share capital base so that they are within the reach of the retail investors at large who might otherwise give the stock a miss due to its initial high price levels
  • To serve as a strong indication to the stock market of the company’s financial strength through its continued ability to service its larger equity base and future growth prospects, thereby possibly enhancing the credit standing and hence borrowing capacity of the company.
  • Bonus Issue is a sign that the company is expanding equity but it is not a performance indicator. In the long run, Investors should look to the company’s fundamentals and growth prospects beyond Bonus Issue in making investment decisions.



International House, 12 Constance Street, London, United Kingdom,
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