A corporation, though regarded as an independent person in the eyes of law,
never materializes by itself. Behind every company there are persons or
association of persons who strive to actualize the being of a company. These
persons are most times referred to as promoters.
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
These are contracts which the promoters of the company make before the company
is incorporated, on the assumption the company will assume responsibility for
"A pre-corporation contract is one which is entered into when the Company is in
the process of being incorporated but is not yet completed it. At common law
such contracts were held to be void, as the Company is not yet in existence."
The person who enters into a pre-incorporation agreement is usually called the
Promoter. The Indian Companies Act 2013 defines the Promoter under Section
2(69). The Job of promoter is not only limited towards, performing certain
duties, but surely it extends toward the incorporation of a company. It depends
on the nature of the company which is to be established, to arrange their
Pre-incorporation contracts perform a valuable function. By permitting valid and
binding legal commitments with third parties, nascent companies are able to
secure significant and sometimes essential services necessary to become a fully
capitalized and stable corporation.
Cockburn C.J., described a promoter as:
"one who undertakes to form a company with reference to a given project and to
set it going and who takes the necessary steps to accomplish that purpose"
In Lagunas Nitrate Co. v. Lagunas Syndicate
, it was stated that:
"To be a promoter one need not necessarily be associated with the initial
formation of the company; one who subsequently helps to arrange floating of its
capital will equally be regarded as a promoter."
"There are, however, significant problems that plague pre-incorporation
contracts, such as the spectre of fraud by entrepreneurs and promoters, as well
as the possibility of pre-incorporation commitments being disregarded or voided
after the fact.
These problems give rise to certain legal issues and questions which include,
could the company ratify or adopt a pre-incorporation contract so as to become
liable upon it?; if the company cannot, were those who acted for the company
before its incorporation personally liable on the contracts made by them? In
these situations, parties look to legal statutes and case laws to determine the
enforceability of such pre-incorporation contract, liability of parties if any,
remedy available for parties to the contracts, and finally the issue of who
bears the risk of loss." The project discusses all these questions in detail.
Legal Status Of Pre-Incorporation Contracts
"The legal status of a pre-incorporation contract is not easy to assess. Going
by the definition of the contract, there have to be at least two parties/persons
who enter into contract with each other. "So, the general principle is that if
one of the parties to the contract is not in existence at the time of entering
into the contract then no contract will there.
Hence, the company can't enter
into a contract before it comes into existence, and it comes into existence only
after its registration. Thus it is said that the pre-incorporation contract is
entered into by the promoters on behalf of the company.
The promoters, while
entering into the contract, act as agents of the company. However when the
principal, that is the company is itself not in existence, how can it appoint an
agent to act for it." So, the promoters, themselves" and not the company, become
personally liable for all contracts entered into by them even though they claim
to be acting for the prospective company.
But under section 230 of the Indian Contract Act , "an agent cannot personally
enforce contracts entered into by him on behalf of his principal, nor is he
personally bound by them if he specifies clearly, at the time of making the
contract, that he is only acting as an agent and he is not personally liable
under the contract. So if this principle is applied, the contract becomes in
fructuous as neither of the parties is liable under the contract."
Before Specific Relief Act, 1963
"A pre-incorporation contract never binds a company since a person (legal or
juristic) cannot contract before his or its existence and a company before
incorporation has no legal existence. Another reason is that promoters are
proverbially profuse in their promises and if the corporation were to be bound
by them, it would be subject to many unknown, unjust and heavy obligations."
"Even where there is a request purported to enforce such a contract, the company
cannot be found because ratification is not possible as the ostensible principal
did not exist at the time the contract was made. In re English and colonial
Produce Company case , a solicitor was engaged to prepare the necessary
documents and obtain the registration of a company. He paid the registration fee
and incurred the certain expenses incidental to registration. It was held in
this case that the company was not liable or bound to pay for his services and
"The company is also not entitled to sue on a pre-incorporation contract. As it
was held in the case of Natal land and Colonisation Company v. Pauline Colliery
that the syndicate was not entitled to its claim as it was not in
existence when the contract was made and a company cannot obtain the benefit of
a pre-incorporation contract in the suit of specific performance.
So, fact of
this case was that the a 'N' company contracted with 'A', the nominee of the
syndicate company which was not even incorporated, to grant a lease of certain
coal mining rights for three years. After the syndicate was registered, it
claimed the contracted lease which the company 'N' refused."
After Specific Relief Act, 1963
"Until the passing of the Specific Relief Act, 1963, in India the promoters
found it very difficult to carry out the work of incorporation. Since contracts
prior to incorporation were void and also could not be ratified, people
hesitated to either supply any goods or services for the cause of incorporation.
However, the Specific Relief Act, 1963 came as a relief to the promoters.
Section 15(h) and 19(e) of the Specific Relief Act provides as" follows:
- The contract should have been entered into by the promoter for the
purpose of the company.
- The terms of incorporation should warrant should warrant such contract.
- The company should accept the contract after incorporation.
- Such acceptance should be communicated to the other party to the
"Section 15(h) of the Specific Relief Act, 1963, the definition, it expressly
states that the contracts incorporated before the incorporation stage are
"entered into by the promoters of the for the very purpose and utility of the
company and subject to terms of incorporation of the company, the company may
ask for specific performance from the third party.
However, this condition can
only be applied if, after the registration/incorporation, the company has
expressly demonstrated acceptance of those contracts, and communicated such
contracts to the third party concerned." Under identical circumstances the other
party to the contract under Section 19(e) of The Specific Relief Act, 1963 may
enforce specific performance against the company.
Accordingly, in order for the
company to enforce the contract against the other party to contract, the members
must ratify the contract followed by a communication of acceptance. The company
may not receive any benefit from such a contract unless the contract is accepted
by the company and the promoters would be personally liable for the contracts."
Role Of The Promoter
The Common Law propounds that "the term promoter is a short and convenient way
of designating those who set in motion the machinery by which the Act enables
them to create an incorporated company" and therefore promoter is one who
"undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose."
plays a very important role in a company. Formation of a company starts with the
promotion of a company. Usually the idea of the company will be of the
promoters, they have the idea of the business and its feasibility.
"Promoter is a person who brings about the incorporation and organization of a
corporation. He brings together the persons who become interested in the
enterprise, aids in procuring subscriptions, and in motion the machinery which
leads to the formation itself."
Under Section 2 (69) Companies Act, 2013 "promoter" means a person:
- Who has been named as such in a prospectus or is identified by the company
in the annual return referred to in section 92; or
- Who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or
- In accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act: provided that nothing in
sub-clause (c) shall apply to a person who is acting merely in a
professional capacity; i.e. CA, Attorney
"The eminence of a promoter is generally terminated when the Board of Directors
has been formed and they start governing the company. Technically, the first
persons who control the company's affairs are its promoters. They carry out the
necessary investigation to find out whether the formation of a company is
possible and profitable. Thereafter, they organize the resources to convert the
idea into a reality by forming a company. In this sense, the promoters are the
originators of the plan for the formation of a company.
They are the ones who It to arrange or find ones who can arrange the share and
loan capital and other financial resources, Promoters are the one who arrange
for the company to acquire the business which the company is to conduct or the
property or assets from which it is to derive its profits or income, when these
things have been done, the promoter hand over the control of the company to its
director, who are themselves under a different name."
Functions Of A Promoter
- The formation of idea and forming the company and explore the
- To conduct the negotiation for the purchase of business.
- To collect the number for signing of the MOA and the AOA.
- To decide the name of the company, location of the registered office,
amount and form of share capital.
- To get the MOA and the AOA drafted and printed.
- To arrange for the minimum subscription.
- To arrange for the registration of company and certificate of
Liability Of The Promoter
"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 common Law in this context gave prime importance to the intention of the
parties in adjudicating the contract. If the promoter purported to act for the
corporation, then he was held personally liable for the contract. However, if
the contract is entered in name of the proposed company and the promoter merely
authenticated the signature, the promoter was absolved from all liability." The
justification for the same was based on the intention of the parties i.e. who
they look to when contracting."
A promoter is subjected to liabilities under the various provisions of the
- Section 26 of the Companies Act, 2013 lay down matters to be stated in a
prospectus. A promoter may be held liable for non-compliance of the
provisions of the section
- Under section 34 and 35, Companies Act, 2013 a promoter may be held
liable for any untrue statement in the prospectus to a person who subscribes
for shares or debentures in the faith of such prospectus. However, the
liability of the promoter in such a case shall be limited to the original
allottee of shares and would not extend to the subsequent allotters.
- According to section 300, a promoter may be liable to examination like
any other director or officer of the company if the court so directs on a
liquidator‟s report alleging fraud in the promotion or formation of the
- A company may proceed against a promoter on action for deceit or breach
of duty under section 340, where the promoter has misapplied or retained any
property of the company or is guilty of misfeasance or breach of trust in
relation to the company.
- The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy,
has held that to fix liability on a promoter, it is not necessary that he
should be either a signatory to the Memorandum/Articles of Association or a
shareholder or a director of the company. Promoter's civil liability to the
company and also to third parties remain in respect of his conduct and
contract entered into by him during pre-incorporation stage as agent or
trustee of the company."
Novation Of Contract
Novation of contract is defined in Scarf v Jardine
as, 'being a contract in
existence, some new contract is substituted for it either between the same
parties (for that might be) or different parties, the consideration mutually
being the discharge of the old contract'.
"Novation is different from the Ratification; because in Novation, a new
contract is made on the same terms but this time between the company and the
third party, whereas in Ratification, dates back to the time of the act
ratified, so that if the company ratifying, who is not in existence, cannot
itself have then performed the act in question its subsequent ratification of it
In the situation of Novation of Contract, the Company can replace the promoter
from the pre-incorporation contract. But one might say that such contract would
not be called pre-incorporation contract, but it should be called
post-incorporation contract; because novation of contract result into a new
contract." In Howard v Patent Ivory Manufacturing , the English Court accepted
the novation of contract. It was observed by the court that even though the
promoter is personally liable for the pre-incorporation contract, he can shift
his liability to the company. This novation of contract principle was later
incorporated into the Specific Relief Act, 1963."
Under Specific Relief Act
Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two
important sections for pre-incorporation contract. (As explained under second
Relationship Between The Promoter And The Company
Though the case laws and the academic discourse on this issue has been
multifaceted and inconclusive but the Indian Supreme Court has affirmed that the
relation between the two as that of a fiduciary relation. "It rejected the
position of the promoter with respect to that of the unincorporated company as
that of agency or trustees." In the case of Weavers Mills v. Balkis Ammal , it
was held that even without express conveyance of property by the promoter to the
unincorporated company, since the promoter stands in fiduciary duty to the
company, all the benefits of the pre-incorporation contract would pass on to the
"Position of the promoter is fiduciary concerning the company which the promoter
promotes his position is quasi legal. A promoter is neither a trustee nor an
agent of the company which he promotes because there is no trust or principal in
existence at the time of his efforts. But certain fiduciary duties, like an
agent, have been imposed on him under the Companies Act. As such he is said to
be in a fiduciary position (a position full of trust and confidence) towards the
company and the original allottee of shares." Consequently, a promoter must make
full disclosure of the relevant facts, including any profit made.
"One position can be that if the company accepts the benefits of the contract,
then it must accept the burden too and hence must compensate the promoter for
all his expenses under the said contract. However, if the company doesn't ratify
the contract, then the promoter can't claim for reimbursement."
"As he has a fiduciary relationship with the company so generally there is no
issue with regard to his remuneration. The Chancery Court in the Re English &
Colonial Produce Co. case held that a promoter is not entitled" to claim
expenses in his duty unless there is an express provision to do so but he is
entitled to a reasonable remuneration as stated in the Article of Association.
In Touche v Metropolitan Rly Warehousing Co. Lord Hatherly
the importance of remuneration saying that "the help of the promoter is unique
which requires great efficiency, power and which is employed in developing a
business plan and making it so to the best benefit and thus should be given his
Kelner V. Baxter
In this case, "on behalf of unformed company i.e. before the incorporation of
the company, the promoter accepted an offer of Mr. Kelner to sell wine,
subsequently the company failed to pay Mr. Kelner, and he brought the against
the promoter with whom he entered a contract. The court found that the
principal-agent relationship cannot be in existence in the pre-incorporation
contract that means before incorporation of a company and if the company is
unformed, the principal of an agent cannot be in existence.
He further explains that the company cannot take the liability of
pre-incorporation contract through adoption or ratification of the contract and
the company was stranger at the time they enter a contract." So, he held that
promoters are personally liable for the pre-incorporation contract because they
act on behalf of the unformed company as they are the consenting party to the
Newborne V. Sensolid (Great Britain) Ltd
This case explain the facts of in a different way and developed the principal
further. "If the company entered a contract before incorporation, the other
contracting party can have refused to perform his duty to that contract." The
court observed that before incorporation the company cannot come into existence
and if it is not in existence then the contract which the unformed company
signed would not be in existence. So, company cannot bring an action for
pre-incorporation contract, and the promoter cannot bring the suit because they
were not the party to contract.
Goodman V. Darden
In the instant case both the parties were aware of the fact, that the
corporation is non-existent at the time of making the contract and further that,
the corporation accepted the contract and the promoter who is acting on behalf
of the corporation directed all the payments received under the contract by the
corporation itself. "Still the court went ahead to hold that the intention of
the third party was never to release promoter form their personal liability for
entering the contract on behalf of the corporation having an intent that
corporation has not yet formed.
The knowledge of it being a pre-incorporation contract would indicate that to
reduce the uncertainty, the third party was never had an intent to release the
promoter from their liability too which didn't end of corporation adopting the
contract. This is going to ask for warranty that the corporation would perform
its obligations, which is comparable to the South African statutory law.
Thus, what the court examines is this the third parties as to limit the
liability of the promoter on the corporation adopting the contract the third
party intended to do it." This case clarified that just because the co rporation
adopted the contract, that doesn't mean the promoter would be dissolved from all
his personal liability.
Weavers Mills V. Balkis Ammal & Ors.
In this case:
"The promoters have agreed to purchase some property for and on
behalf of the company. On incorporation, the company assumed possession and
constructed structures upon it. The Madras High Court held that without
disclosure of all the facts and the materials related to the contract the
promoter has entered, since the promoter stands in fiduciary duty to the
company, all the benefits of pre-incorporation contract would pass on the
The company's title of the property would not be set aside.
Conclusion And Suggestions
"The promoter is obligated to bring the company into 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 the prospective company. These types of
contract are called 'Pre-incorporation Contract'. Therefore, Pre-incorporation
contracts, though at first stage may appear to be with no legal status but they
are very much legally acceptable and enforceable in the tribunal and courts.
There is no legal position of a promoter as he only has a fiduciary relationship
with the company as he is neither an agent nor a director or an employee. He
cannot make secret profits or else he will be held accountable. Therefore there
are many liabilities on him as he does the duties of the drafting of the
prospectus, entering into pre-incorporation agreements etc.
In Indian Law the rule of Kelner v. Baxter is applicable but under the Specific
Relief Act 1963, section 15(h) and 19(e) promoter can shift his right and
responsibility to the company, if it is warranted by the terms of incorporation.
The principle of novation of pre-incorporation contract is also applicable, the
reason behind is that, the novation replace the old contract with the new
contract, so there is no problem of non-existence of company."
Books And Articles
- Pre-incorporation contracts by Suryabhan Singh
- K.S. Anantharaman, 'Lectures on Company Law & Competition Act (including
Secretarial Practice)', Tenth ed., Nagpur, LexisNexis Butterworths Wadhwa;
- William J.R and, High Pressure Sales Tactics and Dead Trees: What to do
with Promoters' Pre-Incorporation contracts, Rutgder's business law journal
- Arden & Prentice ed., buckley on companies act (17 ed., lexisnexis,
- Andrew Ggriffiths, contracting with companies (hart publishing, 2005).
- Harry g. Henn & John R. Alexander, law of corporations (3 ed., west
publishing co. 2007)
- Newborne v. Sensolid, (1953) 1 All ER 708
- Twycross v. Grant, 1872 2 C.P.D. 469
- Lagunas Nitrate Co. v. Lagunas Syndicate  2 Ch. 392
- Parker v. Modern Woodman 181 All. 214, 234
- Kelner v. Baxter  15 LT 213
- Natal land and Colonisation Company v. Pauline Colliery Syndicate 
- Erlanger v New Sombrero Phosphate Co, (1878) 3 App Cas 1218
- Prabir Kumar Misra v. Ramani Ramaswamy  104 SCL 174
- Scarf v Jardine 1882 7 APP CAS 345
- Howard v Patent Ivory Manufacturing  38 Ch. D 156
- Weavers Mills v. Balkis Ammal, (1969) AIR Mad 462
- Touche v Metropolitan Rly Warehousing Co. (1871) LR 6, Ch App 671
- Goodman v. Darden (Wash. 1983) 670 P.2d 648
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