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Role Of A Promoter When It Comes To Pre-Incorporation Contracts

  • What is the role of a Promoter when it comes to pre-incorporation contracts?
  • What are pre-incorporation contracts?
A pre-incorporation contract refers to a contract where one party of the contract is a company that is yet to be incorporated or
we can say that a pre-incorporation contract is a contract, made between persons other than the subject incorporated company, in connection with the company , before incorporation.

Simply put, a pre-incorporation contract arises where a promoter deals with a third party on behalf of the unformed company.

An example of a pre-incorporation contract is a co-founders' agreement. The person who is signing the agreement on behalf of the company intends to bind the company to the agreement in future when the company is finally incorporated.

The pre-incorporation agreement outlines who will own what and how profits will be split for all parties involved. It also ensures that each party understands their role in the company, their rights and responsibilities as well as any compensation or benefits they are to receive during their time with the company.

Before a company is incorporated, it has no legal existence. Accordingly, it has no capacity to enter into a contract. The company cannot sue or be sued on a pre-incorporation contract. However, persons who conclude contracts for the unborn company can be held personally liable on such contracts.

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.

Who is a Promoter?

According to section 2(69) of the Companies Act, 2013 the term 'Promoter' can be defined as the following:
  1. A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or
  2. A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  3. A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Role of a Promoter

Promoters are usually the first persons who envision the idea of business. They perform the compulsory investigation to find out whether the formation of a company is probable and profitable.

Afterward they systematize the resources to convert the idea into a reality by founding a company; or in other words we can declare that it is the promoter:

  • who settles the name of the company thus determine the name, will be acceptable by the registered official of the office.
  • who decides the content or details as to the Articles of the companies. (here, articles refers to Articles of association & Memorandum of association)
  • who proposes the directors, bankers, auditors and etc.
  • who decides the place where registered office or head office has to be situated.
  • who prepares the Memorandum of Association, Prospectus and other essential documents and file them for the reason of incorporation.
  • In conducting the necessary transactions to the formation of a corporation, a promoter who may not be an incorporator, frequently enters into pre-incorporation agreements, including agreements with third parties, formal agreements and resolutions to incorporate, and stock subscription agreements.
The promoters occupy a significant position and have wide range of powers related to the formation of a company. It is, nevertheless, interesting to note that so far as the legal position is referred, he is neither an agent nor a trustee of the proposed company. However it does not signify that the promoter does not have any legal relationship with the proposed company. The promoters stand in a fiduciary relation to the company they support and to those persons, whom they persuade to become shareholders in it.

The legal position of promoters is that he is neither agent nor employee of the company but he stands in fiduciary capacity. Fiduciary capacity brings two duties of promoters i.e. duty not to make secret profit and duty to disclose to company.

Promoters are generally held personally liable for pre-incorporation contract. If a company does not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the common law principle would be applicable and the promoter will be liable for breach of contract.

The Company may replace the promoter from the pre-incorporation contract in the situation of Novation of Contract. Though it could be said that such a contract would not be called a pre-incorporated contract, but it should be called a post-incorporation contract; as novation of contract results in a new contract.

Company is not liable for the pre-incorporation contract when it come in existence, but under the arrangement of section 15(h) and 19(e) of the Specific Relief Act 1963, company can take the rights and liability of promoter.

Now we can say a promoter is someone, who is connected with the business from the start. He can also be referred to as the starter of a business or the founder. He is responsible for raising capital from various sources and entering into the first agreements for the start of a business and pre-incorporation of a company.

The status of the promoter is generally terminated when the Board of Directors has been formed and they start governing the company.

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