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PROMOTERS AND
PREINCORPORATION CONTRACTS
Arun Verma (C) Arun Verma
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(C) Arun Verma
PROMOTERS
Under Section(Section 2(69) Companies Act 2013
• “Promoters” is not a term of art, nor a term of
law, but a term of Business.
• Promoter is a person who brings about the
incorporation and organisation 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.
• Whether a person is a promoter or not is a
question of fact in each case.
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Test to Determine – Who is Promoter
• One who works from the very beginning
• One who formed scheme to build a company
• One who provisionally formed company
• One who prepare Prospectus
• One who is being paid for printing and advertising and other
incidental to formation of a company i.e. Attorney's fee
• One who is discharged from his liabilities as soon as governing
body, like board of directors starts functioning
[Twycross v Grant (1877) 2CPD 469 CA]
In USA, the Securities Exchange Commission Rule 405(a)
defines promoter as a person who, acting alone or in
conjunction with other persons directly or indirectly takes the
initiative in founding or organizing the business enterprise.
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PROMOTERS UNDER SECTION 2 (69)
COMPANIES ACT, 2013
“promoter” means a person—
(a) 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
(b) who has control over the affairs of the company, directly
or indirectly whether as a shareholder, director or
otherwise; or
(c) 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
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• In Lagunas Nitrate Co. v. Lagunas Syndicate [1889] 2
Ch. 392 (p. 428, C.A.), 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.
Duties of Promoter
• The promoters occupy an important position and have wide
powers relating to the formation of a company. It is, however,
interesting to note that so far as the legal position is
concerned, he is neither an agent nor a trustee of the
proposed company. But it does not mean that the
promoter does not have any legal relationship with the
proposed company. The promoters stand in a fiduciary
relation to the company they promote and to those
persons, whom they induce to become shareholders
in it.
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DUTIES OF PROMOTERS
• Duty to disclose secret profits
• Duty of disclosure of interest
• Promoter’s duties under the Indian Contract Act
• Termination of Promoter’s Duties
• Remedies available to the company against the
promoter for breach of his duties
• Rescission of contract
• To recover secret profit
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LIABILITIES ON PROMOTERS
• A promoter is subjected to liabilities under the various provisions of the Companies Act.
· 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 company.
• 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 [2010] 104 SCL
174, 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.
Pre incorporation contracts
• These are contracts which the promoters of the company make before the
company is incorporated, on the assumption the company will assume
responsibility for the contract
“A contract that purports to be made by or on behalf of a
company at a time when the company has not been formed has
effect, subject to any agreement to the contrary, as one made
with the person purporting to act for the company or as agent
for it, and he is personally liable on the contract accordingly”
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
these entire questions 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.
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Under Section 19 (e) of the Specific Relief Act, 1963,
• Except as otherwise provided by this Chapter, specific performance of a
contract may be enforced against the company, when the promoters of a
company have, before its incorporation, entered into a contract for the
purpose of the company and such contract is warranted by the terms of the
incorporation.
• In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the
Madras High Court extended the scope of this principle through its decision.
In this case, promoters had agreed to purchase some properties for and on
behalf of the company to be promoted. On incorporation, the company
assumed possession and constructed structures upon it. It was held that
even in absence of conveyance of property by the promoter in favor of the
company after its incorporation, the company’s title over the property could
not be set aside.
• 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.
PRE- INCORPORATION CONTRACTS
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.
Newborne v Sensolid [1954]
IN the case of Kelner x Baxter [1866] certain individuals were
purportedly acting on behalf of the Gravesend Royal Alexandra
Hotel Co. Ltd which was in the process of being formed. The
individuals entered into a contract for the purchase of wine from K.
The wine was delivered to the Company after its formation but
before K was paid the Company went into liquidation.
The Court held that the Company was not liable but the individuals
were personally liable as they had entered into contracts before the
Company came into existence.
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• Braymist v Wise Finance Co Ltd [2002]
Promoter personally liable for pre-incorporation contracts
and Promoter can personally enforce a pre-incorporation
contract.
In conclusion we can say that, a 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..
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THANK YOU
