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Promoter
Introduction
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.
It would be a matter of inconvenience that ‘an association of persons' cannot perform any
official business operation in the name of company before its incorporation or the issue of
certificate of commencement of business; they may have to make arrangement for office,
place of work, worker, etc. In order to do away with these inconveniences, the promoter
can enter into the agreements in the benefit of ‘association of persons' or prospective
company; these agreements are known as pre-incorporation contract.
Research Question
Whether the promoter is liable for pre-incorporation contract or not? If he is liable, under
what circumstances he can be held liable?
Whether there is any difference among Indian Law, American Law and English Law
concerning the liability of promoter in relation to pre-incorporation contract?
Meaning Of Promoter And Nature Of Pre-Incorporation
Contract
Promoter
The Company Act, 1956, does not provide a common definition of Promoter. Although
few section like 62, 69, 76, 478, 519 of Company Act and SEBI Guidelines 2000 Chapter
VI Explanation I to III to clause 6.4.2(k) does discuss about promoter, but definition
provided under those section would be restricted to the area of those section. Resent
Company Bill does have the definition of Promoter in the definition clause under section
2(zzq), it says that “promoter means a person who has (a) been named as such in a
prospectus; or (b) control over the affairs of the company, directly or indirectly whether
as a shareholder, director”. But this Bill is not in force till now, so the old Act of 1956
would be applicable in present day, which does not has the common definition clause of
promoter. Even the English law does not provide the definition. Joseph H. Gross in his
celebrated article ‘Who is a Company Promoter?' found that it was rather intentional to
not providing definition in English Legislation, because if legislation try to define it then
someone might escape from the liability who enjoy the place of promoter but not come
under the definition of promoter. In this situation, where the legislature if silent about the
definition, it is necessary to see the judicial interpretation.
According to Bowen J., the ‘Promoter' is not the term of law but it is a term of business,
who play main role in the setup of a company. Whereas Cockburn CJ in Twycross v Grant
observed that a 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'.
In conclusion, one can say that promoter connote any individual, syndicate, association,
partnership or a company, which takes all the necessary steps to create company and
mould a company and set it going.
Pre-Incorporation Contract
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'.
Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of
such contract is bilateral, be it has the features of tripartite contract. In this type of
contract, the promoter furnishes the contract with interested person; and it would be
bilateral contract between them. But the remarkable part of this contract is that, this
contract helps the perspective company, who is not a party to the contract.
One might question that ‘why is company not liable, even if it a beneficiary to contact' or
one might also question that ‘doesn't promoter work under Principal-Agent relationship'.
Answer to all those question would be simple. The company does not in legal existence at
time of pre-incorporation contract. If someone is not in legal existence, then he cannot be
a party to contract, and ‘Privity to Contract' doctrine excludes company from the liability.
In Kelner v Baxter, Phonogram Limited v Lane this position was confirmed.
In pure common law sense, Pre-incorporation contract does not bind the company. But
there are certain exceptions to this contract, and these exceptions were developed in USA,
India and later in England.
Liability Of 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.
Doctrine Of Equity
In India under the doctrine of equity the company can be held liable. Weavers Mills Ltd
V. Balkies Ammal, company was held liable because it get the benefit of pre-
incorporation contract. But the position in English Common Law is deferent. According
to Chitty on Contract, even in equity the company cannot be held liable for pre-
incorporation contract.
Brief Comparison Between Indian And Other Countries Law
Regarding Promoter's Liability For Prep-Incorporation
Contract
Although under the English Common Law, the American law and the Indian Law
recognize the rule that promoter is personally liable for pre-incorporation contract,
American Laws and Indian laws are much more innovative and effective to solve the
problem of Pre-incorporation Contract. Whereas the English Courts still follow the
principle of Kelner v. Baxter. Although in UK, Contracts (Rights of Third Parties) Act
1999 brought some relief, but it is not as broad as the American and Indian Laws are.
Under English Common Law, the ratification or adoption, after the incorporation, did not
release the promoter from liability of pre-incorporation contract. Whereas in American
Court recognize that if the after the incorporation company can ratify or adopt the
contract, and this would bound the company and not the promoter. 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 applicable in above three
counties, the reason behind is that, the novation replace the old contract with the new
contract, so there is not problem of non-existence of company.
Now after the Contracts (Rights of Third Parties) Act 1999, English laws may also allow
company to become the part of pre-incorporation contract, when it acquire its legal
existence.
Conclusion
This research paper finds that, promoter is personally liable for the pre-incorporation
contract, because at the time of formation of pre-incorporation contract, the company
does not come in existence, so neither the principle agent relationship exist not the
company become the party. 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. It is also found
that promoter is personally liable for the pre-incorporation contract in American Law,
English Law and Indian Law.