PROMOTERS AND PRE-INCORPORATION OF CONTRACTS AND ITS EFFECT

Introduction

A promoter is someone who assumes first responsibility for establishing a business. The
Companies Act of 1994 does not provide a definition of a promoter. Legislators and judges
are hesitant to define the term "promoter" since, on occasion, the promoter might use the
business to defraud investors. Because of this, common law judges make the definition of
"promoter"1 open-ended enough to cover as many of these con artists as feasible. A wide
range of fiduciary obligations were developed by common law judges with the goal of
establishing high standards of behaviour for promoters. The Companies Act of 1994 does not
define the term "promoter," thus we must turn to legal principles for guidance.
the promoter is solely liable for the breach of contract. The reason behind is that the promoter
is the party who enters into the contract, and not the company.

In order to fulfil his role to establish the company's legal existence and assure its successful
operation, the promoter may enter into contracts on the company's behalf. Pre-incorporation
contracts are the name given to these contracts.

Pre-incorporation contracts differ slightly from regular contracts in nature. Such a contract is
bilateral in nature even though it has elements of a trilateral agreement. With this kind of
agreement, the promoter provides the contract to the interested party; their agreement is
bilateral. The surprising aspect of this contract, though, is that it benefits the prospective
company even though it is not a party to it.

PROMOTERS AND PRE-INCORPORATION CONTRACT

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 6.4.22 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, it says that
“promoter means a person who has
(a) been named as such in a prospectus
(b) control over the affairs of the company, directly or indirectly whether as a shareholder,
directors.

1. Company Act 1956, Avtar Singh ,

2. Majumdar, A.K., and G.K. Kapoor, 2009, Taxmann’s Company Law and Practice, Taxmann Pub Pvt Ltd, Fourteenth Edition
The "Promoter" is a term of commerce, not of law, according to Bowen J., who holds a key
position in the formation of a corporation. Whereas Cockburn CJ stated that a promoter is
"one who undertakes to incorporate a corporation with relation to a specific concept and to
set it starting and who takes the required steps to accomplish that objective" in Twycross v.
Grant. In conclusion, it can be said that a promoter is any person, syndicate, association,
partnership, or corporation that goes through all the necessary motions to found, shape, and
launch a company.
Contracts that are arranged by the promoters prior to the formation of the company are
referred to as pre-incorporation contracts. Pre-incorporation contracts are bilateral in nature.
The promoter enters into a bilateral contract with a party who is interested. These contracts
have elements of a tripartite contract, and one of its unique aspects is that they provide
assistance to potential or hypothetical enterprises that are not contract parties.

Only after receiving the certificate of incorporation, which is given by the Registrar of Joint
Stock Companies, does a business acquire legal status.A company cannot be made liable for
contracts entered into on its behalf before its incorporation due to the fact that it simply
does not exist at that time.

GENERAL PRINCIPLE ( CASE LAW)

In Kelner v. Baxter1 (1866), the promoter accepted Mr. Kelner's offer to sell wine on behalf
of an unformed company. When the corporation refused to pay Mr. Kelner, he filed a lawsuit
against the promoters. The principal-agent relationship cannot exist prior to incorporation,
and if the firm was not yet established, the principal of an agent could not also exist,
according to Erle CJ. He goes on to say that the business cannot assume the obligation of a
pre-incorporation contract by adoption or ratification since a stranger cannot do either, and
the company was a stranger at the time the contract was formed because it did not exist. it
was determined that promoters contracting on behalf of a putative company will be held
personally liable for pre-incorporation contracts because, at the time of the pre-incorporation
contract, the company does not exist, and the doctrine of privity will operate to prevent rights
and liabilities being imposed on the company upon its subsequent creation.

The Court of Appeal provided a different interpretation of the Kelner v. Baxter ruling and
expanded upon the premise in Newborne v. Sensolid2 (Great Britain) Ltd. In this instance, an
unformed business entered into a contract, and the other contracting party declined to fulfil
his obligations. According to Lord Goddard, a company cannot exist prior to incorporation,
and if it does not, then the contract that the unformed company signed will likewise not exist.
Because the promoter was not a party to the pre-incorporation contract, they cannot make a
claim for breach of contract on behalf of the firm.

1. Kelner v. Baxter (1866)

2. Newborne v. Sensolid ltd

This case raised some questions about whether the agent or promoter would be held
personally accountable if the contract was signed by them, and whether they would have the
power to sue or be sued. Yet, the contract would be void if it were signed by someone
pretending to be him and acting as the director of an unincorporated business. This distinction
was deemed unacceptable by Windeyer J in Black v. Smallwood, and Professor Treitel in the
Law of Contract also questioned it. Lord Denning later resolved the issue in Phonogram
Limited v. Lane, concluding that although a contract entered into by an unformed business
cannot bind the firm, the contract's legal effect is not wholly lost.

HOW CAN A PROMOTER SHIFT HIS LIABILITY AND RIGHTS TO COMPANY

Although the pre-incorporation contract makes the promoter personally accountable under
common law, there are specific circumstances in which the promoter may transfer his
obligation to the company. Under the Particular Relief Act of 1963, he can transfer his
liability to the firm, or he can seek novation under contract law.

Under Specific Relief Act

Sections 15(h) and 19(e) of the Particular Relief Act of 1963 are the two key provisions
concerning pre-incorporation contracts. Although it has several restrictions, Section 15 deals
with the right of a stranger to sue if he is entitled to a benefit or otherwise has an interest in
the contract. In accordance with Section 15(h), a firm that is unfamiliar with a pre-
incorporation contract may file a lawsuit against the other contracting party. The contract
must, however, be guaranteed by the provisions of its incorporation in order for it to be valid.
The common law doctrine that states the firm cannot ratify or adopt the pre-incorporation
contract is explicitly refuted by this clause. Promoter may assign the company his right to sue
under this clause. In Vali Pattabhirama Roa v Sri Ramanuja Ginning and Rice Factory Pvt.
Ltd1 this position was accepted.
On the other hand, section 19(e) states that the company can be sued by the other party of
pre-incorporation contract, if the terms of incorporation warrant and adopt the contract. This
provision reduces the promoter of liability of pre-incorporation contract.

1.Vali pattabhirama Rao v Sri Ramanuja Ginning And Rice Factory Pvt ltd.
CONCLUSION

This study concludes that the promoter is legally responsible for the pre-incorporation
contract because there was no principal-agent relationship or incorporation of the company at
the time the pre-incorporation contract was formed. When the pre-incorporation contract was
made, the company was not responsible for it. Nevertheless, according to Sections 15(h) and
19(e) of the Special Relief Act of 1963, the company is now allowed to assume the
promoter's rights and obligations. Additionally, it has been established under American,
English, and Indian law that the promoter is personally accountable for the pre-incorporation
contract. A promoter's relationship with a corporation is a fiduciary one by definition. A
promoter develops ideas and does all other essential actions to establish the company.
Promoter responsibility ends when the board of directors is established, and the
responsibilities and liabilities are transferred to the directors. As a result, promoters are
crucial in the development of a company.