NAME- RASHMI HEMANT ALVE

ROLL NO – 01

CLASS- SYLLB

SUBJECT- COMPANY LAW

TOPIC – A BRIEF STUDY ON PROMOTERS

AND PRE-INCOPORATION CONTRACTS AND
IT’S EFFECTS
ABSTRACT-
The research paper gives a brief explanation on the topic promoters and pre incorporation of contracts. The
role of promoters is important in the formation and establishment of company. Under the company law
promoters are the individual who undertake the task of incorporating a company. The research paper analysis
the liabilities, duties of the promoter. Furthermore, its analysis the pre incorporation of contract a significant
aspect of company formation which often leads to legal disputes.

Promoters initiates the process of incorporation of company by identifying a business opportunity, arranging
the capital and securing the necessary legal framework for company incorporation. The Company Act of
2013 define the promoter as a person who has control over the company affairs wither directly or indirectly
and who is involved in setting up a company. Section 2(69) of the company act 2013 gives the definition of
the phrase promoters. The promoters play various function in formation of company which include business
concept, gather funding, and handle all the legal steps to officially create the company. Promoters also find
key people to run the company and sometimes make contracts on the company's behalf before it’s fully
formed. One of the most legal liability of the promoter is pre incorporation contracts. These are the contracts
entered into by promoters on behalf of company before its legal incorporation. Pre incorporation of contracts
get validity from Specific Relief Act and Company Act.
This paper aims to critically analyses the legal framework governing the role of promoters under company
law, focusing on their fiduciary duties, disclosure obligations, and liability in pre-incorporation contracts.

KEY WORDS- Company Act 2013, Promoters, Section 2(69), Liabilities of promoters, Duties of
Promoters, Pre incorporation of contract, Specific Relief Act,

“A promoter is the one, who forms a company with a given object and sets it going by taking
the necessary steps. -Justice C.J. Cokburn
INTRODUCTION-
The term "promoter" holds a significant place in company law, particularly in the context of the
Companies Act, 2013. A promoter is an individual or entity that takes the initiative in the formation of a
company, playing a crucial role from the conceptualization of the business idea to the actual incorporation
of the company.

DEFINITION- Section 2(69) of Company Act 2013, “Promoter is a person whose name has been
mentioned in the prospectus of the company or is identified in the annual returns of the company, or any
person who has direct or indirect control over the affairs of the company, whether as a stakeholder or as a
director, or on whose direction the Board of Directors act.”
In simple terms, A promoter is someone who plays a key role in setting up a company. Their name is usually
mentioned in the company's prospectus or annual returns. A promoter can be anyone who has direct or
indirect control over how the company is run, either as a major stakeholder or a director. They may also be
someone whose guidance or instructions the Board of Directors follows when making decisions.

MAIN BODY-
FUNCTIONS OF PROMOTERS
1. A promoter’s primary function is to conceive the idea of forming a company. This involves
identifying a business opportunity or creating a new product or service.
2. The promoter checks if the business idea is practical, profitable, and worth pursuing .
3. The promoter organizes the necessary resources, such as capital, materials, and human resources, to
set the company in motion. This involves raising funds, securing facilities, and acquiring technology
or other essential inputs.
4. The promoter selects an appropriate name for the company and prepares key legal documents like
the Memorandum of Association (MoA) and Articles of Association (AoA), which outline the
company's objectives, structure, and internal regulations.
5. The promoter decides the location of the company’s registered office and nominates key officers,
such as the first directors, auditors, and bankers, to handle the initial management and financial
operations of the company.
6. The promoter drafts all documents required for the incorporation of the company, including consent
letters from the directors, statutory declarations, and other compliance certificates needed for
registration.

7. The promoter has to enter into a preliminary contract with the third parties on behalf of the company
to collect all the resources necessary to form a company. The promoter makes contracts for the
purchase of material, land, and machinery, and he also recruits staff for the initial functioning of the
company.
8. The promoter advertises the company and uses marketing strategies to create interest in the company
during the early stages.

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CHARACTERISTICS OF THE PROMOTERS-

Promoters play a crucial role in establishing a company, laying the groundwork for it to operate
independently. Even individuals who take on a less active role in this process can still be considered
promoters.

There are various characteristics of a promoter of a company. Some of them are as follows-

1. Conceptualizing the Company: The promoter is responsible for developing the initial idea and
outlining the future objectives of the company.

2. Conducting Research: They investigate the business's goals and potential prospects.

3. Group Collaboration: A promoter can be an individual or a collective of individuals working together

towards a specific aim.

4. Handling Documentation: The promoter manages the necessary paperwork and formalities for the
company's incorporation.

5. Responsibility: Promoters are accountable for significant aspects of the company's early operations.

CASE LAW

PROBIR KUMAR MISRA VERSUS RAMANI RAMASWAMI (2009)

The Madras High Court addressed whether promoters need to sign the Memorandum and Articles of
Association to be held liable for their actions prior to a company’s incorporation. The court ruled that it is
not necessary for promoters to be signatories to these documents or to be shareholders or directors of the
company.

Promoters are often referred to as the "midwives" of the business because they play a vital role in creating
the company. They are responsible for defining the company’s objectives, developing the initial plan,
organizing the registration process, and preparing important documents like the Memorandum and Articles
of Association.

Because of their significant involvement in the formation of the company, promoters can be held liable for
their actions, even if they haven’t signed the key documents or taken on formal roles. Their connection to
the incorporation process establishes their accountability.
DUTIES OF PROMOTERS

1. DUTY OF DISCLOSURE OF INTEREST –

A promoter is obligated to disclose all relevant facts to the company, including any profits made or personal
interests in transactions with the company. Section 26 of the Companies Act, 2013, requires that any profit
made by the promoter be disclosed in the prospectus of the company.

2. DUTY NOT TO MAKE SECRET PROFIT –

A promoter must not make any secret profits from the promotion of the company. If a promoter purchases
property or a business for themselves and then sells it to the company at a higher price, all such profits must
be accounted for and disclosed.

3. DUTY TO MAKE COMPENSATION –

Under Section 340, if during the winding up of the company it is found that the promoter has misused,
misapplied, or unlawfully retained the company's capital or property, the Tribunal may direct the promoter
to repay or restore the money or property to the company or contribute to the company’s assets by way of
compensation.

4. DUTY TO DISCLOSE ALL THE HIDDEN FACTS –

A promoter must disclose all relevant information in the Memorandum of Association (MOA) and Articles
of Association (AOA) of the company, ensuring full transparency.

RIGHTS OF PROMOTERS

1. RIGHT TO RECOVER GENUINE AND PRELIMINARY EXPENSES –

Promoters can request reimbursement for reasonable initial expenses like advertising, legal fees, and
surveys, but this is not a guaranteed right. The company’s board decides whether to approve these claims,
and promoters need to provide receipts.

2. RIGHT TO INDEMNITY-

If multiple promoters are involved, one promoter can sue the others to recover compensation or damages
they paid due to false statements in the prospectus or hidden profits. Promoters are jointly and individually
responsible for such issues

3. RIGHT TO REMMUNARATION-

Promoters don’t have an automatic right to payment for their work unless specified in a contract. The
company’s articles may allow directors to pay promoters, but this doesn’t create a binding right to sue for
payment. Often, promoters are also the directors, so they end up receiving compensation in practice.
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HYPOTHESIS

After passing of the Specific Relief Act, can promoters be held accountable for pre-incorporation contracts,
or can they find a way to escape that liability?

LIABILITES OF PROMOTERS

1. LIABILITES REGARDING IRREGURALITES IN PROSPECTUS-

Section 26 outlines what information must be included in a company's prospectus, which is a document
given to potential investors. It specifies the details that need to be shared, such as financial reports and
important facts about the company. If promoters fail to include the required information or provide false
information in the prospectus, they can be held responsible by shareholders.

2. CRIMMINAL LIABILITY AND CIVIL LIABILITY-

Section 34 outlines the criminal penalties for promoters if they draft a prospectus with false information. If
a prospectus contains misleading statements, promoters can face criminal charges, in addition to civil
penalties. However, promoters can defend themselves if they can prove that the false statement was not
significant or that they had reasonable grounds to believe it was true when the prospectus was issued.

Section 35 addresses civil liabilities for false statements in a prospectus. If someone buys shares or
debentures based on misleading information in the prospectus, they can hold the promoter responsible for
any losses they incur. This means promoters can be sued for damages caused by these false claims. Section
62 also outlines specific conditions under which promoters can escape liability. Overall, these rules protect
investors by giving them the right to seek compensation for misleading information in a prospectus.

3. PERSONAL LIABILITY-

Promoters can be personally held responsible for contracts made before a company is officially formed. They
must provide accurate information in the company's prospectus, and if they fail to do so, they can be held
liable. If someone invests in the company's securities based on false information in the prospectus and suffers
losses, they can sue the promoter for damages. In addition to civil liability, promoters may face criminal
charges if they knowingly include false statements to mislead investors. This can lead to serious penalties.
If there are allegations of fraud related to the company's formation or promotion, promoters can be subjected
to public examinations. The company itself can take action against promoters if they breach their duties,
misuse company property, or betray the trust placed in them. Essentially, promoters have a legal
responsibility to act honestly and protect the interests of the company and its investors.

4. LIABILITY FOR PRE-INCORPORATION OF CONTRACTS-

Pre-incorporation contracts are agreements made by promoters before a company is officially formed. In
such cases, the company is not liable for these contracts, and the promoters are personally responsible.
However, after the Specific Relief Act of 1963 was passed, there was a change. Sections 15(h) and 19(e) of
the Act allow promoters to transfer their rights and responsibilities to the company if the incorporation
terms permit it. This means that under certain conditions, the company can take on the obligations from
these pre-incorporation contracts once it is established.
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PRE-INCOPORATION OF CONTRACT

In India, when a company is formed and registered, it becomes a separate legal entity that can enter into
contracts and assume its own liabilities. Before the company is officially incorporated, its promoters can
make agreements on its behalf, known as pre-incorporation contracts. These contracts may involve acquiring
property or rights necessary for the company. Once the company is incorporated, it can adopt these pre-
incorporation contracts if they align with its objectives, making them valid and binding. It's important that
the company communicates its acceptance of these contracts to the other parties involved. The legal validity
of such contracts is supported by the Specific Relief Act and the Companies Act, 2013, ensuring that these
agreements are recognized even before the company officially exists.

Pre-incorporation contracts are agreements made by the promoters of a company before it is officially
registered. These promoters are individuals or firms responsible for getting the company started, including
attracting investors and handling the initial setup. Since the company doesn’t legally exist before
incorporation, these contracts can’t be executed in the company’s name at that time. Instead, the promoters
personally take on the responsibility for these contracts. Once the company is formed, it can choose to adopt
these contracts, making them valid and binding. Essentially, pre-incorporation contracts are essential for
getting a business up and running, but until the company is incorporated, the promoters bear the liability for
them.

ENFORCEBILITY OF PRE- INCOROPORATION OF CONTRACT-

Under the Indian Contract Act, 1872, pre-incorporation contracts are deemed invalid because a valid contract
requires two parties, and a company does not exist as a legal entity until it is incorporated. Therefore, there
is no entity to enter into a contract. Additionally, when individuals attempt to create agreements on behalf
of a company that has not yet been formed, they do so as agents. However, without a legally recognized
principal the company these individuals cannot effectively act as agents. According to Section 230 of the
Indian contract Act, an agent cannot bind a principal who is not present, which means that any agreement
made before the company's incorporation lacks legal standing. This combination of factors leads to the
conclusion that pre-incorporation contracts are unenforceable.

In India, the enforcement of pre-incorporation contracts is addressed by the Specific Relief Act, 1963.
Section 15(h) of this Act states that if promoters enter into a contract for the future company before it is
officially incorporated, the company is considered to have accepted the agreement. This implies that the
company will assume all liabilities associated with the contract, and the promoters must communicate this
acceptance to the other parties involved. Additionally, Section 19(e) provides further support for promoters
who have made agreements before incorporation. It states that if the terms of incorporation warrant the
contract, it will be deemed accepted by the company, and the acceptance must also be communicated to the
other parties. This section is designed to protect the interests of promoters who enter into contracts on behalf
of the future company, ensuring they are not left liable for obligations that the company will later assume.
In essence, these provisions establish a framework for recognizing and enforcing pre-incorporation contracts,
offering legal protection to both promoters and other parties involved.
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PROMOTERS LIABILTY DURING PRE- INCORPORATION OF CONTRACT

Promoters play a crucial role in the formation of a company by acting on its behalf, even before the company
officially exists. This situation raises unique challenges regarding the validity of contracts made during this
pre-incorporation phase. Since the company has not yet been registered, these contracts are typically not
binding on the company or third parties.

The Specific Relief Act, 1963, particularly Sections 15 and 19, addresses the enforceability of such pre-
incorporation contracts. According to Section 15(h), if promoters enter into contracts for the benefit of the
future company, these contracts can be enforced once the company is registered, provided that the company
accepts them explicitly and communicates this acceptance to the other party involved. Furthermore, Section
19(e) allows the other party to the contract to seek specific performance against the company once it has
ratified the contract. This means that for the company to benefit from these agreements, its members must
approve and ratify the contracts post-incorporation, along with proper communication of this acceptance.

CASE LAWS
1. WEAVER MILLS LTD VERSUS BALKIES AMMAL

FACTS-

The promoters of Weaver Mills LTD. agreed to purchase a property on behalf of the company before it was
officially incorporated. After the company was incorporated, the promoters began construction on the
property but did not transfer the title of the property to the company's name.

JUDGMENT –

The Madras High court held that, despite the lack of a formal title transfer, the company's claim to the
property could not be challenged. The court affirmed that the company had a valid title to the property,
emphasizing that pre-incorporation agreements could still hold legal weight once the company was
established. This ruling highlighted the enforceability of contracts made on behalf of a company before its
incorporation, allowing the company to maintain ownership rights over the property. Overall, the judgment
reinforced the significance of pre-incorporation contracts and the company's ability to assume rights and
obligations from such agreements.

2. LINDSAY INTERNATIONAL PVT LTD &ORS VERSUS LAXMI NIWAS MITTAL & ORS
(2017)

An agreement can indeed be oral, and such agreements are enforceable. Their existence can be demonstrated
through the behaviour and ongoing interactions between the parties involved.

In a legal context, it is the responsibility of the plaintiff to prove the agreement mentioned in their claims.
Mr. Chidambaram referenced Section 15(h) of the Specific Relief Act, 1963, which pertains to pre-
incorporation contracts. This section states that if promoters enter into contracts aimed at forming the
company and these contracts align with the company's objectives, the company can enforce them once it is
incorporated. The other party cannot object based on the principle of privity. Furthermore, if the company
ratifies the contract, it is bound by its terms.

Mr. Kapoor focused on the phrase “warranted by the terms of the incorporation” from Section 19 of the Act.
He argued that the defendant's ongoing support for the plaintiff, both before and after incorporation, along
with assurances that all supplies for the associated companies would be sourced exclusively through the
plaintiff, indicates a breach of agreement by the defendant.
Additionally, if there are concerns about whether the company’s transactions fall outside its intended purpose
(ultra vires), Section 19(e) can provide relief, asserting that the buying and selling activities were indeed
consistent with the company’s goals as defined at incorporation. Mr. Kapoor argued that the evidence clearly
shows these activities were justified under the company's incorporation terms.

CONCLUSION
Promoters play a vital role in the formation and establishment of a company, particularly concerning pre-
incorporation contracts. These contracts, which are entered into by promoters on behalf of the future
company, are crucial for setting up the foundational framework necessary for the company's operations. The
legal framework surrounding these agreements is primarily guided by the Specific Relief Act, 1963,
particularly Sections 15(h) and 19. These provisions recognize the validity of pre-incorporation contracts,
allowing the newly formed company to enforce agreements that align with its objectives, thereby overcoming
potential objections related to privity of contract. Promoters are often referred to as the “midwives” of the
business, as they undertake significant responsibilities such as defining the company's goals, arranging for
registration, and preparing essential documents. Their involvement is pivotal, even if they are not formally
signatories or shareholders once the company is established. Courts have affirmed that the obligations arising
from pre-incorporation contracts can bind the company post-incorporation, provided the contracts are ratified
and communicated appropriately. This legal recognition ensures that the company's rights are protected,
enabling it to operate effectively and pursue its business objectives without hindrance. However, it is crucial
for promoters to act diligently, as they can remain personally liable for any obligations incurred during this
period if the contracts are not properly ratified by the company after incorporation. Additionally, the
provisions of the Specific Relief Act provide safeguards for both the company and third parties involved in
these contracts, ensuring that the intentions of all parties are honoured. Ultimately, the interplay between the
actions of promoters and the legal recognition of pre-incorporation contracts establishes a robust framework
for facilitating business formation and ensuring that companies can quickly transition from formation to
operational status. This legal clarity not only protects the interests of the promoters and the company but
also fosters confidence among third parties engaging with newly formed entities, thereby promoting
economic growth and business development.

REFERENCE
https://blog.ipleaders.in/important-clauses-of-pre-incorporation-contracts/

https://lawbhoomi.com/pre-incorporation-contracts-and-its-enforceability-under-companies-act/

https://blog.ipleaders.in/position-promoter-india/#Weaver_Mills_v_Balkies_Ammal1969

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