Validity of pre-incorporation contracts clarified

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An unborn company cannot sign an arbitration agreement. Ruling in Andhra Pradesh Tourism Development Corporation v Pampa Hotels Ltd the Supreme Court recently held that a company cannot enter into an arbitration agreement before it is formally registered under the Companies Act.

Pampa Hotels, a company that was created by its promoter to implement a specific hotel project, was attempting to settle its disputes with the Andhra Pradesh Tourism Development Corporation (APTDC) through arbitration. This was being resisted by the APTDC. The Supreme Court, describing Pampa as a “non-existent company claiming to be an existing company” as it was incorporated one year after it signed agreements with APTDC, said there was no contract between it and the APTDC, much less an arbitration agreement.

This judgment has implications for companies that enter into pre-incorporation contracts – in particular those that contain an arbitration clause. In order for a pre-incorporation contract to be valid, it must be entered into by the promoters of the company, in their capacity as promoters of the company that they intend to create. In addition, in order to avoid any ambiguity and legal scrutiny in the future, after the company is created it must ratify any pre-incorporation contracts that have been entered into.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.