PROMOTERS ,

PRE INCORPORATION
CONTRACTS
&
COMPANY CONTRACTS
LEGAL STUDIES UNIT
USJP
INTENDED LEARNING
OUTCOMES OF THE LESSON
• On successful completion of this chapter, undergraduates
will be able to:
1.Identify who is a promoter
2.Discuss legal implications of promoters in a company
3.Identify pre-incorporation contracts
4.Discuss legal implications of pre-incorporation contracts
OUTLINE
PROMOTERS
 WHO IS A PROMOTER

•Promoter ‘a person who takes the

necessary steps to form a company’

•Promoter – not defined

in the Companies Act
Twycross v. Grant (1877)

“A promoter is one who undertakes to form a co. with reference

to a given project, and to set it going, and who takes the
necessary steps to accomplish that purpose….
and so long as the work of formation continues, those who carry
on that work must, …. Retain the character of promoters”

Wide definition

• Promoters = parents of a co.

• Twycross v. Grant (1877)
• Action by the plaintiff to recover the amount paid
by him on certain shares taken by him in the L.
Company. Claimed that the defendants
(promoters) were committing fraud and omitted 2
contracts being entered into prospectus. The fraud
was the they have induced the plaintiff to buy
shares which was proved worthless.

• Held: the Promoters liable and that the contracts

should have been entered into the prospectus.
SEC.41(6)
• 41(6)(a) “promoter” : means a promoter who was a party to the
preparation of the prospectus or of the portion thereof containing the
untrue statement, but does not include any person by reason of his acting
in a professional capacity for persons engaged in procuring the formation
of the company ;

• Civil liability for untrue in prospectus.

• 41(1) where a prospectus invites persons to subscribe for shares in or
debentures of a company, the following persons shall be liable to pay
compensation to all persons who subscribe for any shares or debentures
on the faith of the prospectus, for the loss or damage they may have
sustained by reason of any untrue statement included in such prospectus,
that is to say:—
– (a), (b),
(c ) every person being a promoter of the company
Who can be a Promoter
• Promoter could be an individual or another corporation.
• There could be more than one promoter

However,
Mere servant or agent of a promoter is NOT a promoter
o Eg: An attorney who does the legal work necessary for
formation of a co. is not a promoter
: Accountant
DUTIES OF A PROMOTER

1. The Promoter has fiduciary duties towards the company

Erlanger v. New Sombrero Phosphate Co.(1878)
“ They (promoters) stand, undoubtedly in a fiduciary position. They have in
their hands the creation and moulding of the co.”
The court held that the contract should be void because the prospectus that
offered the company’s shares to the public did not disclose the promoter’s
profit.
Rationale– It is unjust for promoters to use their effective control over a
corporation to exploit that corporation for their own private gain.

fiduciary duties……
• Should not make secret profit.
• Must make Full disclosure of any profits the Promoter makes
FUNCTIONS OF A PROMOTER
• Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

• Frederic Emile Erglanger was a Parisian banker. He bought the lease of

the Anguilla island of Sombrero for phosphate mining for £55,000.
He then set up the New Sombrero Phosphate Co. Eight days after
incorporation, he sold the island to the company for £110,000 through
a nominee. One of the directors was the Lord Mayor of London, who
himself was independent of the syndicate that formed the company. Two
other directors were abroad, and the others were mere puppet directors of
Erlanger. The board, which was effectively Erlanger, ratified the sale of
the lease. Erlanger, through promotion and advertising, got many
members of the public to invest in the company.
• After eight months, the public investors found out the fact that Erlanger
(and his syndicate) had bought the island at half the price the company
(now with their money) had paid for it. The New Sombrero Phosphate
Co sued for rescission based on non-disclosure, if they gave back the
mine and an account of profits, or for the difference.
• Gluckstein v Barnes(1900)
• A syndicate had purchased the exhibition hall, Olympia. The
syndicate disclosed the profit that it was making in re-selling the
hall to the company but failed to disclose a profit that it was
making in relation to certain mortgages over the hall which it
had purchased at a discount. This meant that, when the
syndicate purchased the hall, there was a further reduction of
£20,000 since the price of the purchase also included an amount
to be set off against debts which were now owed to the
syndicate..

The Court held that there were in breach of their duties as

promoters and the Company was entitled to recover the profit
from them.
The Company can recover the secret profit even though they chose
not to rescind the contract. The liability of the promoters is "joint or
several". A Promoter who is found liable may recover contributions
from the other promoters
• Where the BOD is not independent……

• Salomon v. Salomon & co. Ltd.

• Gluckstein v. Barnes
Held that: promoter of the company were under a duty to make explicit
declarations of the profit they make from resale of the property.
THE REMEDIES AVAILABLE TO THE CO. AGAINST
THE PROMOTER
Where the promoter fails full disclosure co. can
obtain the following remedies:

1.Rescission (cancel)

2.Recovery of secret profits

3. Damages for breach of fiduciary duty

PAYMENT FOR SERVICE OF A PROMOTER?
• No Right for remuneration or compensation
(promoters = parents)

• This applies even if the company has received

the benefit of work done. ( Re English and
Colonial Produce Co Ltd (1906))

• However, generally the Articles of Association

confer discretionary power upon directors to pay
preliminary expenses out of company funds
Questions

1. Who is a promoter?
2. What are the duties of a Promoter? Explain with reference to case
law.
3. What are the remedies available to the company if the promoters
breach their duties?
PRE-INCORPORATION
CONTRACTS
 1. PRE- INCORPORATION
CONTRACTS

• Common Law – Case law

• Companies Act No.07 of 2007

Section 23 - Section 25
 2. PRE-INCORPORATION CONTRACTS UNDER THE
COMMON LAW
• Kelner v. Baxter
A pre-incorporation contract binds the
promoter not the co.

• Re English Colonial Produce Co. Ltd

The mere fact that a benefit was taken does not change this position.

• Turnvelly
Co. Ltd
Sugar Refining Co. Ltd. V. Mirlees Watson & Yarington

Correspondingly, a Co. cannot, even after its incorporation enforce a

contract made name prior to the incorporation.
• Kelner v. Baxter [1866] L.R.2 CP 174

• The promoters of a hotel company entered into a contract on its behalf for
the purchase of wine. When the company formally came into existence it
ratified the contract. The wine was consumed but before payment was made
the company went into liquidation. The promoters, as agents, were sued on
the contract. They argued that liability under the contract had passed, by
ratification, to the company. It was held, however, that as the company did
not exist at the time of the agreement it would be wholly inoperative unless
it was binding on the promoters personally and a stranger cannot by
subsequent ratification relieve them from that responsibility.
 CASE LAW

• A co. becomes a legal person only after it is incorporated

• Therefore, before the incorporation, a co. cannot make a
contract either personally or through an agent (as there
cannot be an agent to a non-existing principal)

• A pre-incorporation contract does not bind the company

• Therefore, the person who entered in to the contract is

bound by it unless the co. ratifies it afterwards
3. WHAT IS A PRE-INCORPORATION
CONTRACT?
• What is a pre-incorporation contract?
A contract entered in to before the incorporation
of a corporation

• Sec 23 –
• "pre-incorporation contract" means –
• (a) a contract purported to have been entered
into by a company before its incorporation; or
• (b) a contract entered into by a person on behalf
of a company before and in contemplation of its
incorporation.
4. WARRANTIES IMPLIED IN PRE-INCORPORATION
CONTRACTS
• This was introduced to Sri Lanka for the first time by the Companies Act,
2007

• Sec 24(1)-
Notwithstanding anything to the contrary in any law
In a pre-incorporation contract,
(unless a contrary intention is expressed in the contract)
there shall be an implied warranty
by the person who enters into the contract in the name of or on
behalf of the company-

(a) that the company will be incorporated within such period as specified
in the contract OR
if no period is specified, within a reasonable time after the making of the
contract.
AND
(b) that the company will ratify the contract within such period as
specified in the contract OR if no period is specified, within a reasonable
time after the incorporation of such company.
5. BREACH OF IMPLIED WARRANTIES

• Sec 24(2) –
The amount of damages recoverable in an action for breach of an
implied warranty

the amount of damages that is recoverable in an action against the

company for an unperformed obligations under the contract by
the company if the contract had been ratified by the company.

Sec 24(3)- Discharge of this liability

6. METHODS AVAILABLE FOR THE PROMOTER TO
AVOID PERSONAL LIABILITY FOR PRE-
INCORPORATION CONTRACTS UNDER THE
COMPANIES ACT OF 2007
• According to the Companies Act of 2007
A promoter’s liability can be avoided in 2
methods:

1.Ratification – Sec 23(2)

2.The co. makes a fresh agreement with the
third person – Sec 24(3)
6.1. Ratification of Pre-incorporation Contracts

• Sec 23(2) –
Notwithstanding anything to the contrary in any law,
a pre-incorporation contract may be ratified
within such period as may be specified in the contract
OR
if no such period is specified, within a reasonable time
after the incorporation of the company

in the name of which or on behalf of which it has been

entered into.
• Sec 23(4) –
A pre-incorporation contract can be ratified by a
company in the same manner as a contract may be
entered into on behalf of a company under section
19 (methods a company can make contracts)

Sec 23(3) –
A ratified pre-incorporation contract should be as
valid and enforceable as if the company had been
a party to the contract at the time it was entered
into.
6.1 Fresh Agreement

• Sec 24(3)-

After the incorporation of a company,

when the company enters into a contract
in the same terms as or in substitution for a pre-
incorporation contract (not being a contract ratified by the company
under section 23)
the liability
of a person who purported to enter in to a contract in the
name of the co. or on behalf of the co.
should be discharged
 7. FAILURE TO RATIFY
 Sec 25-
Where a company has acquired property pursuant to a pre-incorporation
contract
that has not been ratified by the company after its incorporation,
on an application made in that behalf by the party from whom the
property was acquired,
the court can make an order –
(a) directing the company to return property acquired under the
pre-incorporation contract, to that party;
(b) validating the contract in whole or in part; or
(c) granting any other relief in favour of that party relating to
that property acquired.
Questions

1. How has the Common Law position regarding pre-incorporation

contracts changed by the Companies Act 2007? Explain with
reference to case law and provisions of the Companies Act.

2. What are the avenues available for the Promoters to avoid personal
liability for pre-incorporation contacts under the Companies Act?

3. What are the implied warranties in the Companies Act regarding

pre-incorporation contracts? What are the remedies available under
the Act for the breach of those warranties?
COMPANY CONTRACTS
• Sec 19-
• Co can enter into contracts according to the law in the
following manner :
a) If the contract/ obligation is such that if it was entered into by
a natural person, they would have to under the law make it in
writing, sign and notarially execute - when a company enters
into a such a contract it has be signed under the co name by
• Two directors
• If only one director, that director
• If articles state so, any person or class of persons
• One or more attorneys appointed by the co
+
Notarially execute
b) If it is an obligation that a natural person can enter into by writing
and signed, according to the law, then the co can enter into that type
of contract by a person acting under the co’ express or implied
authority

c)If it is an obligation that a natural person does not have to make in

writing then the co can enter into such contracts in writing or orally,
by a person acting under the Co’s express or implied authority.

s. 19(2) the above provisions apply

- whether or not that contract is entered into in Sri Lanka
- whether or not the law governing the contract or obligation is
the law of Sri Lanka