The corporation will not be liable for any contracts entered into by the promoter on its behalf prior to incorporation
unless it adopts the contract
, either by direct action of the board of directors, or through implied action, by accepting the benefit of the contract.
Can a company enforce a contract entered by a promoter on its behalf prior to its incorporation?
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.
Can a promoter ratify the contracts of promoters who acted on behalf of the company before its incorporation?
Such contracts are called the contracts formed before the
incorporation
stage or the Promoter’s Contract. Such contracts cannot be ignored before the incorporation of the company and are inevitable for the registration and are therefore recognized under The Companies Act, 2013 and The Specific Relief Act, 1963.
Can a promoter lawfully contracts with a company he has formed?
The promoters
enter into preliminary contracts
, generally as agents or trustees of the company. Such contracts are not legally binding on the company because two consenting parties are necessary to a contract whereas the company is nonentity before incorporation.
What are the consequences of contracts entered into by the promoter before registration of the company?
Promoter’s Liability
Although, the promoters act as company’s agent to represent their interest, the principal is not in existence while registration. The contracts entered into by the promoters are
therefore not binding on the company or third parties
.
What is the legal position of contract made before incorporation?
Legal status of Pre-incorporation contract
Hence, the company can’t enter into a contract before it comes into existence, and it comes into existence only after its registration. It may be argued that, the pre-incorporation contract is
entered into by the promoters on behalf of the company
. But here also, is a tangle.
What is the legal status of a contract made by a company before its incorporation?
Legal status of pre-incorporation contracts under English Common Law is
invalid or illegal
. It is not enforceable by law. The reason is because there is no company in existence before its incorporation.
Who is liable for pre-incorporation contract?
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.
What happens if promoter makes any secret profit during pre-incorporation stage?
A promoter is not forbidden to make profit but to make secret profits.
He may make a profit out of promotion with the consent of the company
, in the same way as an agent may retain a profit obtained through his agency with his principle’s consent.
What is the legal position of a promoter of a company?
The legal position of promoters is that
he is neither agent nor employee of the company but he stands in fiduciary capacity
. Fiduciary capacity brings two duties of promoters i.e. duty not to make secret profit and duty to disclose to company.
What are the rights of a promoter?
The promoters are
entitled to receive all the expenses incurred for in setting up and registering the company, from Board of Directors
. The articles will have provision for payment of preliminary expenses to the promoters.
Who are called promoters of a company?
A promoter is
the one who decides an idea for setting up a particular business at a given place
and carries out a range of formalities required for the setting up of a business. A promoter may perhaps be an individual, a firm, and an association of persons or a company.
What are the three types of promoters?
- Professional Promoters: These are the persons who specialise in promotion of companies. …
- Occasional Promoters: These promoters take interest in floating some companies. …
- Financial Promoters: Some financial institutions of financiers may take up the promotion of a company. …
- Managing Agents as Promoters:
Can contracts before incorporation be enforced against the company?
Therefore, the contracts entered by the promoters do not bind the company or the third party. The validity and enforceability of the pre-incorporation contracts
is always in question
. However, the fix lies in Section 15 and 19 of the Specific Relief Act, 1963.
Who Cannot become a member of a company?
4/72 dated 09.03. 1972,
a firm not being
a person cannot be registered as a member of the Company. Such firm can be a member of section 8 company. In the case of partners, a firm as such cannot be registered as a member, but the partners in their individual names may be registered as joint holders of the shares.
Can a company enter into a contract before incorporation?
Before a company is incorporated,
it cannot enter into commercial contracts
. … A contract entered into by a party on behalf of a company, where that company has not yet been formed, is called a pre-incorporation contract.
