ARUN VERMA (C)

1. PROMOTERS AND
PREINCORPORATION CONTRACTS
Arun Verma
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(C) Arun Verma

2. 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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3. 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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4. 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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5. • 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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6. 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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7. 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.
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8. 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.

9. 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.
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10. 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.

11. • 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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12. (C) Arun Verma
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