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What Are The Provisional Contracts? Is It Binding? : Explained

Meaning of Provisional Contracts

All those contracts/agreements, which are entered into by a Company (mainly Public Company) after its incorporation but before the Certificate of Commencement(COC) of Business is issued to the Company, is called as "Provisional Contracts".

After Incorporation → Contracts entered into (Provisional Contracts) ← Before Issue of Certificate of Commencement

Binding Nature of Provisional Contracts

(1) In case Certificate of Commencement is issued:-
According to the sub-section 4 of the section 149 of the Companies Act, 1956, all such provisional contracts shall be binding from the date on which the company was entitled to commence business and shall not be binding on the company until that date.

(2) In case Certificate of Commencement is not issued:-
As the section 149(4) makes it very clear that only after issue of the COC of business the provisional contracts would be binding on the company, and therefore in case the company is not issued the COC, the provisional contracts would lapse and would not be binding.

Ratification of the Provisional Contracts

It is nowhere mentioned that such contracts would require the ratification by the shareholders in the general meeting, and it can be interpreted that there is no need of the ratification of provisional contracts.

Whether the provisional contracts are ratified or not, it would be binding on the company by virtue of the provisions of section 149(4) as mentioned above.

Provisions in the Companies Act 2013

It seems there is no such provision for provisional contracts under the new companies act.

Section 11 of Cos' Act 2013 contains similar provisions as it was in Section 149 of Cos' Act 1956. But sec 11 doesn't have any provisions for provisional contracts. Section 11 was made effective w.e.f. 1st April 2014 by MCA notification dated 26th March 2014 and was later omitted by the Companies (Amendment) Act, 2015. (see here)

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