3. promotion and formation of - · pdf filekrishan commerce classes 3.5 best coaching...

KRISHAN COMMERCE CLASSES 3.1 Best Coaching available for CS & CA (Inter & Final Law Subjects)

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Promotion:

The term Promotion includes all those steps which are required to bring the company

into existence.

Following steps are taken in the process of Promotion:

Conceiving an Idea

Taking necessary steps for the incorporation of a company

Floatation i.e. raising of capital or arranging the financial resources so as to

carry on its business operations

Obtaining certificate of Incorporation from ROC

Note: Now companies are not required to get certificate of commencement of business.

Promoter:

As defined by 2(69) “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;

CONTROL – 2(27)

"Control" shall include the right to appoint majority of the directors or to control the

management or policy decisions exercisable by a person or persons acting individually

or in concert, directly or indirectly, including by virtue of their shareholding or

management rights or shareholders agreements or voting agreements or in any other

manner;

3. Promotion and Formation of

Company


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Position of Promoters:

Promoters are neither the Trustee nor Agent of a Co., because the Principal has not

come into existence and trust has also not yet constituted.

The Promoters stands in a fiduciary (trustworthy) relationship with the co.

The Fiduciary relationship requires full disclosure of the relevant facts, including

any profits made.

Q. A promoter is neither an agent nor a trustee of the company, but he occupies a

fiduciary position in relation to the company. Discuss. (June, 14 – 4 marks)

Q. Whether Holding company is considered as promoter?

Hint: By virtue of its shareholding, Holding company shall be considered to be a

promoter.

Q. Explain the provisions to determine in what circumstances an Individual will be

considered as a promoter of the Company, if Kundan has been identified as a promoter

in the recent annual return of the Company, please comment whether Kundan will be

considered as a promoter of that Company? In the event of a mis-statement in the

prospectus of the company, what will be civil liability of Kundan? (June, 17(F) – 4

marks)

Ans.

Q. A,B,C and D developed a business plan. To implement the plan, it was decided that A

and B will incorporate a company and C, a Chartered Accountant, will provide them his

professional services for the same. It was also decided that D will provide loan to

company the loan to be provided by D was essential to start the business of the

company. Advise, out of C and D, who shall be regarded as a promoter of the company.

(Dec, 14 – 4 marks)

Hint: C not to be considered promoter, but D to be if he enjoys control over the

affairs of the company.

Right to receive Preliminary Expenses

A promoter has no legal right to claim promotional expenses for his services unless

there is a valid contract. Without such a contract he is not even entitled to recover his

preliminary expenses. [Re. English & Colonial Produce Company (1906) 2 Ch. 435 CA].


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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. The company may pay the expenses

to the promoters even after its formation, but such payments should not be Ultra Vires

the articles of the company. The Articles may have provision regarding payment of

fixed sum to the promoters.

In India, promoters are eligible to claim such preliminary expenses, if company adopts

such contracts after incorporation.

Q. Promoter’s rights to receive preliminary expenses should have been enshrined in the

articles of association. (Dec, 13 – 4 marks)

Duties of the Promoter:

(a) BENEFIT ACCRUES ON THE BASIS OF NON DISCLOSURE OR INSUFFICIENT

DISCLOSURE:-

As per section 102 relating to explanatory statement, where any promoter,

director, manager(if any), or any other managerial personnel doesn’t disclose or

discloses insufficient information and as a result of it, he or his relatives directly

or indirectly get any benefit then without prejudice to any other action being taken

against him under this Act or under any other law for the time being in force, be

liable to compensate the company to the extent of the benefit received by him.

In case of non compliance of above provision, the person in default shall be

punishable with fine which may extend to Rs. 50000 or 5 times of benefit derived,

whichever is more

(b) DISCLOSURE OF INTEREST:- A promoter is not allowed to derive a profit from the sale of his own property to the

company unless all material facts are disclosed. If a promoter contracts to sell his own

property to the company without making a full disclosure, the company may either

repudiate the sale or

affirm the contract and recover the profit made out of it by the promoter.

A promoter is not prohibited to make profit but he is prohibited to make secret profit.

(c) EXIT OPPORTUNITY BY PROMOTERS

As per section 13(8), a company, which has raised money from public through

prospectus and still has any unutilised amount out of the money so raised, shall not

change its objects for which it raised the money through prospectus unless a special

resolution is passed by the company and the dissenting shareholders shall be given an


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opportunity to exit by the promoters and shareholders having control in accordance

with regulations to be specified by the Securities and Exchange Board.

(d) EXIT OPPORTUNITY IN CASE OF CHANGE IN PROSPECTUS

As per section 27(2), the dissenting shareholders being those shareholders who have

not agreed to the proposal to vary the terms of contracts or objects referred to in the

prospectus, shall be given an exit offer by promoters or controlling shareholders at

such exit price, and in such manner and conditions as may be specified by the

Securities and Exchange Board by making regulations in this behalf.

(e) PROMOTER AS A DIRECTOR U/S 167

As per section 167(3), where all the directors of a company vacate their offices under

any of the disqualifications specified in sub-section (1), the promoter or, in his absence,

the Central Government shall appoint the required number of directors who shall hold

office till the directors are appointed by the company in the general meeting.

(f) PROMOTER AS A DIRECTOR U/S 168

As per section 168(3), where all the directors of a company resign from their offices,

or vacate their offices under section 167, the promoter or, in his absence, the Central

Government shall appoint the required number of directors who shall hold office till the

directors are appointed by the company in general meeting.

(g) CO-OPERATION TO COMPANY LIQUIDATOR

As per section 284(1), the promoters, directors, officers and employees, who are or

have been in employment of the company or acting or associated with the company shall

extend full cooperation to the Company Liquidator in discharge of his functions and

duties during winding up by the Tribunal.

LAIBILITY OF PROMOTER UNDER COMPANIES ACT, 2013

1) Incorporation of company by furnishing false information:- As per section 7(6),

where, at any time after the incorporation of a company, it is proved that the company

has been got incorporated by furnishing any false or incorrect information or

representation or by suppressing any material fact or information in any of the

documents or declaration filed or made for incorporating such company, or by any

fraudulent action, the promoters, the persons named as the first directors of the

company and the persons making declaration shall be liable for fraud under section

447.

2) Contents of Prospectus - Section 26 of the Act lays down matters to be stated and

reports to be set out in the prospectus. The promoter(s) may be held liable for the

non-compliance of the provisions of this Section. Further, as per section 26(1)(a)(xiv)

prescribed disclosures about sources of promoter’s contribution has to be made in

prospectus.


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3) Civil Liability for misstatements in prospectus u/s 35 :- A promoter is liable for

any misleading statement in the prospectus to a person who has subscribed for any

securities of the company on the faith of the prospectus. By virtue of section 35(1),

where a person has subscribed for securities of a company acting on any statement

included, or the inclusion or omission of any matter, in the prospectus which is

misleading and has sustained any loss or damage as a consequence thereof, the company

and certain persons as mentioned in the said section, including a promoter of the

company shall, without prejudice to any punishment to which any person may be liable

under section 36, be liable to pay compensation to every person who has sustained such

loss or damage.

No promoter shall be liable under this section, if he proves that the prospectus was

issued without his knowledge or consent, and that on becoming aware of its issue, he

forthwith gave a reasonable public notice that it was issued without his knowledge or

consent.

4) Punishment for fraudulently inducing persons to invest money u/s 36:- As per

section 36, any person who, either knowingly or recklessly makes any statement,

promise or forecast which is false, deceptive or misleading, or deliberately conceals any

material facts, to induce another person to enter into, or to offer to enter into,

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or

underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit

to any of the parties from the yield of securities or by reference to fluctuations in the

value of securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or

financial institution, shall be liable for punishment for fraud under section 447.

5) Contravention of provisions relating to private placement: If a company makes an

offer or accepts monies in contravention of the provisions of private placement as

stated in section 42, the company, its promoters and directors shall be liable for a

penalty which may extend to the amount involved in the offer or invitation or Rs. 2

crores , whichever is higher, and the company shall also refund all monies to

subscribers within a period of 30 days of the order imposing the penalty. [Section

42(10)]

6) Failure to cooperate with Company Liquidator during winding up: As per section

284 (2), where any promoter, without reasonable cause, fails to cooperate with the

Company Liquidator during winding up, he shall be punishable with imprisonment which

may extend to 6 months or with fine which may extend to Rs. 50,000 , or with both.

7) Public examination - A promoter may be liable to public examination like any other

director or officer of the company if the Tribunal so directs on a Company Liquidator's


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report alleging fraud in the promotion or formation business or conduct of affairs of

the company since its formation [Section 300(1)].

8) Misapplication of company’s money/property - 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 money or property of the company or is guilty

of misfeasance or breach of trust in relation to the company.

9) Criminal Liability for misstatement in prospectus: Besides civil liability, the

promoters are criminally liable under Section 34 for the issue of prospectus containing

untrue or misleading statements in form or context in which it is included or where any

inclusion or omission of any matter is likely to mislead.

Section 447 imposes severe punishment for fraud on promoters who make untrue or

misleading statements in prospectus with a view to obtaining capital. that the

statement or omission was immaterial; or

(i) that he had reasonable grounds to believe, and did, up to the time of the issue of

prospectus, believe that statement was true or the inclusion or omission was

necessary.

Remedies available to subscribers deceived by misstatement in the

prospectus - The following are some of the remedies available to the subscriber who is

deceived by any misleading statement or the inclusion or omission of any matter in the

prospectus:—

(a) As per section 37, a suit may be filed or any other action may be taken under

section 34 or section 35 or section 36 by any person, group of persons or any

association of persons affected by any misleading statement or the inclusion or

omission of any matter in the prospectus.

(b) He may take proceedings to repudiate the contract and require repayment of his

money with interest.

(c) He may, in respect of any misleading statement or the inclusion or omission of any

matter in the prospectus, bring an action against the directors and promoters for

the recovery of compensation.

(d) He may, bring an action for damages against the directors and other persons

responsible for failure to disclose matters in a prospectus.

(e) He may, in respect of any misleading statement or the inclusion or omission of any

matter in the prospectus, bring an action against directors or those who are

responsible for the prospectus.

In addition to directors and promoters the liability under the section also attaches to

person who have authorised the issue of the prospectus. However, the words cannot

reasonably be held to apply to such persons as bankers, brokers, accountants, solicitors

and engineers who merely consent to their names appearing as such in the prospectus.


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10) Liability during Revival and Rehabilitation: The liability of promoters is now dealt

under Insolvency and Bankruptcy Code, 2016.


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RIGHT TO RECOVER PROPORTIONATE AMOUNT FROM THE CO-PROMOTERS

The promoters are held jointly and severally liable for the secret profits made by them

in the formation of a company. Therefore if the entire amount of secret profits is paid

to the company by a single promoter, he is entitled to recover the proportionate

amount from co-promoters. Likewise, if the entire liability arising out of mis-statement

in the prospectus is borne by one of the promoters; he is entitled to recover

proportionately from the co-promoters.

Remuneration to Promoters:

Right of the Promoter to Receive the

Remuneration: The Promoters shall have the right to

receive the remuneration only if

company after incorporation contracts

for the remuneration.

If Company does not contract for the

remuneration, later on provision

contained in the AOA can not the bind

the company.

Modes of Payment of Remuneration: Issue of shares at discount

Right to subscribe the shares of the

company at a fixed price in future.

Purchase of the Property of the

Promoter at a higher Price

Paying lump sum remuneration

Commission on any Property purchased

by the company.

Commission on the shares sold by them

Requirements of Section 3:

1. Association of Persons: Company is an association of Persons who are desirous to form a

corporate firm.

Min. Statutory

Limit of Members

(Sec. 3)

Private Company 2

Public Company 7

One Person

company (OPC)

1

2. Common & Lawful Object: The persons so associated shall have a common and lawful object

which the co. is going to pursue after incorporation.

3. Subscription: The MOA and AOA must be subscribed by at least

7 Persons In case of Public Company

2 Persons In case of Private Company

1 person In case of OPC

INCORPORATION OF A COMPANY


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Subscribers to memorandum = Member u/s 2(55)

4. Compliance of Formalities:The requirements of the Company Law must be complied in

respect of registration.

Availability of Name: (Reservation of Name)

As per Rule 9 of the Companies (Incorporation) Rules, 2014, an application in form no.

INC 1 made with the fees prescribed for the reserving the name for the proposed

company or for company who wants to change its name.

Name

should not be too identical or resemble with the name of the already existing

company or should not be such that the use of its name will constitute an

offence of any law for the time being in force.

should not be undesirable in the opinion of CG

should not give any impression that company has any patronage from Govt.

should not be of those words or expressions prohibited by CG, unless approval of

CG has been obtained.

The ROC shall reserve the name for the 60 days of making application on the basis

of information provided.

Q. The promoters of a new company have decided to start their company with the name ‘i2

Technologies Ltd.’ However, the jurisdictional Registrar of Companies (ROC) has declined to

allow the name starting with small alphabets. Is the ROC’s contention valid under company law as

prevalent in India? (June, 11 – 4 marks)

Hint: ROC contention not valid.

Documents to be filed with ROC:

Compulsory Documents:

1. MOA & AOA - Preparation of Memorandum and Articles and the MOA & AOA of

the company shall be signed by each subscriber to the memorandum, who shall add

his name, address, description and occupation, if any, in the presence of at least one

witness who shall attest the signature and shall likewise sign and add his name,

address, description and occupation, if any.

2. Statutory Declaration - Statutory declaration in the prescribed form by an

advocate, a chartered accountant, cost accountant or company secretary in practice

and by a person named in the articles as a director, manager or secretary of the

company, who is engaged in the formation of the company, stating that all

requirements of Companies Act have been complied with. (Form No. INC 8)

3. Affidavit - The affidavit shall be submitted by each of the subscribers to the

memorandum and each of the first directors named in the articles in Form No. INC.


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9 that he is not convicted of any offence in connection with the promotion,

formation or management of any company, or that he has not been found guilty of

any fraud or misfeasance or of any breach of duty to any company under this Act or

any previous company law during the preceding 5 years and that all the documents

filed with the Registrar for registration of the company contain information that is

correct and complete and true to the best of his knowledge and belief;

4. Particulars of subscribers: At the time of incorporation some particulars of

subscribers shall be filed with ROC such as

If subscriber is a non corporate identity: Name (including surname), father’ or

mother’s name, nationality, date & place of birth, PAN number, email id, phone

no., fax no. address proof, present & permanent address(including office

address) etc.

If subscriber is a body corporate: Name, CIN no. , FCRN no. , office address, in

case of company Board resolution specifying inter alia the authorization to

subscribe to the memorandum of association of the proposed company and to

make investment in the proposed company, the number of shares proposed to be

subscribed by the body corporate, and the name, address and designation of the

person authorized to subscribe to the Memorandum.

Partners’ resolution in case of LLP including the same information.

If subscriber is a foreign body corporate: copy of certificate of incorporation

along with office address.

5. Particulars of first directors: The particulars of each person mentioned in the

articles as first director of the company and his interest in other firms or bodies

corporate along with his consent to act as director of the company shall be filed in

Form No.DIR. 12 along with the prescribed fees.

6. Furnishing verification of Registered Office – Section 12

A company shall, on and from the 15th day of its incorporation and at all times

thereafter, have a registered office capable of receiving and acknowledging all

communications and notices as may be addressed to it.

The company can furnish to the registrar verification of registered office with in

30 days of incorporation in the manner prescribed. As per rule 25(1) of Companies

(Incorporation) Rules 2014, the verification of registered office shall be filed in

Form no INC 22.

7. Where the location of the registered office is finalised prior to Incorporation of a company

by the promoters, the promoters can also file along with the Memorandum and Articles,

the verification of its registered office in Form no INC 22.

8. Power of Attorney: With a view to fulfilling the various formalities that are

required for incorporation of a company, the promoters may appoint an attorney


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empowering him to carry out the instructions/requirements stipulated by the

Registrar. This requires execution of a Power of Attorney on a non-judicial stamp

paper of a value prescribed in the respective State Stamp Laws.

Optional Documents:

The verification of address of registered office of the company. (Form no. 22)

Particulars of directors, managers and secretary (Form No. 32)

The above written documents are the documents that can be filed with the ROC

at the time of incorporation or within 30 days from the date of Incorporation.

Q. Aman, Raman and Shraman are three brothers. They are in the process of subscribing to

the memorandum of association of a proposed new company, Glamour (Pvt.) Ltd. They have been

asked to file an affidavit in this regard. Stating the contents of the affidavit decide whether

the affidavit has to be filed individually or jointly.(June, 16 - 4 marks)

Issue of Certificate of Incorporation:

The Registrar shall retain and register the documents filed with him if he is satisfied

that-

All the requirements have been complied with, and

The company is authorized to be registered under this Act.

On registration ROC shall allot a corporate identity number (CIN) to the company

which shall be a distinct identity for the company and which shall also be included in

the certificate.

Effects of Incorporation

The following are the effects of Incorporation:

1. The company becomes a body Corporate.

2. The Company acquires a legal recognition.

3. The Company gets a name in which it shall carry on business.

4. The Company comes into existence from such date is mentioned in the

certificate of incorporation.

5. The objects of the company are laid down.

Conclusiveness of Certificate of Incorporation

1. Certificate of Incorporation to be conclusive evidence


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a) The Certificate of incorporation shall be conclusive evidence of the fact that

everything required to be done as per law for the incorporation of the company is

actually done.

b) All requirements of the Companies Act have been complied with.

c) The association is a company authorized to be registered.

d) Once a company has taken the birth by following the procedure of law can’t be made

unborn on showing any irregularity in that procedure.

2.Meaning of conclusive Evidence:

1) The term ‘Conclusive Evidence’ means that no enquiry shall be allowed to be made

regarding the correctness or incorrectness of any particulars contained in the

certificate of incorporation.

2) The certificate of incorporation shall remain valid even in the following cases:-

a) Where one person has signed on behalf of all other subscribers

b) Where all the signatories to MOA are minors

c) Where all the signatures on the MOA are forged.

d) Where the MOA was altered after signature of the subscribers, but before the

Registration

e) Where illegal objects are incorporated in the MOA.

case law: MOOSA vs. EBRAHIM:

MOA was subscribed by 2 adults and guardian of 5 minors.

Certificate of incorporation issued by ROC by mistake.

Held, no one challenge the incorporation of the company.

case law: Jubilee Cotton Mills Vs. Lewis

The ROC issued the certificate on 8th January, which was dated 5th January.

Shares were allotted on 6th January by the company.

Held, allotment of the shares is valid.

Q. Based on the information given in the memorandum of association, Smart Ltd. was

incorporated and the certificate of incorporation was issued by the Registrar of Companies,

New Delhi. The memorandum of association was duly signed, except that X, Y and Z signed it

on behalf of five minors.

Examine the validity of the certificate of incorporation issued by the Registrar of Companies.

(June, 15 – 4 marks)

Hint: Certificate of incorporation is valid. Because certificate of incorporation is a conclusive

evidence that company is registered with after complying all the relevant provisions of law.

Q. A certificate of incorporation is the conclusive evidence that all requirements of the

Companies Act have been complied with. Comment.


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Some other documents that would be provided at the time of registration of OPC

Particulars Explanation

Name of the person who

shall act as member in

the event of subscriber’s

death or his incapacity to

contract

The memorandum of One Person Company is required

to indicate the name of the other person, with his

prior written consent in the prescribed form, who

shall, in the event of the subscriber’s death or his

incapacity to contract become the member of the

company and the written consent of such person shall

be filed with the Registrar at the time of

incorporation of the OPC along with its memorandum

and articles.

Such nomination shall be filed in Form No INC.2 along

with consent of such nominee obtained in Form No

INC.3 along with prescribed fees.

The member of One Person Company may at any time

change the name of such other person by giving

notice, change the name of the person nominated by

him at any time for any reason including in case of

death or incapacity to contract of nominee and

nominate another person after obtaining the prior

consent of such another person in Form No INC.3.

Similarly the other person may withdraw his consent

by giving a notice in writing to such sole member and

to the OPC.

The sole member shall nominate another person as

nominee within 15 days of the receipt of the notice of

withdrawal and shall send an intimation of such

nomination in writing to the Company, along with the

written consent of such other person so nominated in

Form No. INC.3.

The company shall within 30 days of receipt of the

notice of withdrawal of consent under sub-rule (3)

file with the Registrar, a notice of such withdrawal of

consent and the intimation of the name of another

person nominated by the sole member in Form No

INC.4.

OPC should be a Indian Only a natural person who is an Indian citizen and


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citizen or resident resident in

India-

(a) shall be eligible to incorporate a OPC;

(b) shall be a nominee for the sole member of a OPC.

Note: Resident means a person residing in India for 180

days or more during immediately preceding 1 calendar

year.

Not more than one OPC No person shall be eligible to incorporate more than a

OPC or become nominee in more than one such company.

No minor can become

member or Nominee

Only the person who has attained majority will become

member or nominee of OPC.

Cannot be converted into

sec. 8 company

OPC cannot be converted in to sec. 8 company.

Conversion in any other

company subject to some

conditions

No OPC can convert voluntarily into any kind of company

unless 2 years have expired from the date of

incorporation of One Person Company, except threshold

limit (paid up share capital) is increased beyond 50 lakh

rupees or its average annual turnover during the relevant

period exceeds 2 crore rupees.

Cannot carry out non-

banking financial

investment activities

Such Company cannot carry out Non-Banking Financial

Investment activities including investment in securities

of any body corporates.

COMMENCEMENT OF BUSINESS

A public as well as private company can start its business immediately after getting

certificate of incorporation. No company is required to get certificate of

commencement of business to start business.

Q. Private companies can commence business immediately after receipt of ‘certificate

of incorporation’. (Dec, 08 – 5 marks)

Hint: Yes, even a public company can start its business immediately after incorporation.

PRESERVATION OF DOCUMENTS OF INCORPORATION

Section 7(4) states that the company shall maintain and preserve at its registered

office copies of all documents and information as originally filed under sub-section (1)

till its dissolution under this Act.

As per Section 12(c) every company shall get its name, address of its registered office

and the Corporate Identity Number along with telephone number, fax number, if any, e-

mail and website addresses, if any, printed in all its business letters, billheads, letter

papers and in all its notices and other official publications.


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PUNISHMENT FOR FURNISHING FALSE OR INCORRECT INFORMATION AT

THE TIME OF INCORPORATION

The Companies Act, 2013 imposes severe punishment for incorporation of a company by

furnishing false or incorrect information. The persons furnishing false or incorrect

information shall be liable for following punishment:-

(i) If any person furnishes any false or incorrect particulars of any information or

suppresses any material information, of which he is aware in any of the documents

filed with the Registrar in relation to the registration of a company, he shall be

punishable for fraud under section 447. [Section 7(5)]

(ii) Without prejudice to the above liability, where, at any time after the incorporation

of a company, it is proved that the company has been got incorporated by furnishing

any false or incorrect information or representation or by suppressing any material

fact or information in any of the documents or declaration filed or made for

incorporating such company, or by any fraudulent action, the promoters, the persons

named as the first directors of the company and the persons making declaration

under section 7(1)(b) shall each be punishable for fraud under section 447.

[Section 7(6)]

POWERS OF TRIBUNAL IF COMPANY REGISTERED BY FURNISHING FALSE OR

INCORRECT INFORMATION– SECTION 7(7)

Tribunal on being satisfied (upon application made in this regard) that company is

incorporated on the basis of wrong information, may

(a) pass such orders, as it may think fit, for regulation of the management of the

company.

(b) direct that liability of the members shall be unlimited; or

(c) direct removal of the name of the company from the register of companies; or

(d) pass an order for the winding up of the company; or

(e) pass such other orders as it may deem fit.

Provided that before making any order under this sub-section,—

(i) the company shall be given a reasonable opportunity of being heard in the

matter; and

(ii) the Tribunal shall take into consideration the transactions entered into

by the company.

Q. Kamal, the promoter of Desire Ltd., has incurred ₹ 1 lakh for formation of the

company. The company refuses to pay all the expensed so incurred by Kamal since the


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company does not have any provisions in the Articles of Association for such payment.

Advise Kamal regarding remedy available to him for his claim. (Dec, 16 – 4 marks)

Ans. Pre-incorporation Contracts - Contracts made on behalf of the company before

its incorporation are called preliminary or pre-incorporation contracts. Preliminary

contracts are contracts purported to be made on behalf of a company before its

incorporation. Before incorporation, a company is non-existent and has no capacity to

contract. Consequently, nobody can contract as agent on its behalf because an act

which cannot be done by the principal himself cannot be done by him through an agent.

Hence, a contract by a promoter purporting to act on behalf of a company prior to its

incorporation never binds the company because at the time the contract was concluded

the company was not in existence. Therefore it has no legal existence. Even if the

parties act on the contract it will not bind the company. [Northumberland Avenue Hotel

Co., (1886) 33 Ch.D.16 (CA)].

Further even after incorporation such a purported contract cannot be ratified by the

company (Kelner v. Baxter (1866) L.R. 2 C.P. 174]. The persons purporting to act as

agents on behalf of the company would be personally liable.

Even if the company takes some benefit from a contract purported to have been made

before its formation, the contract is not binding on the company. The promoters

alone, therefore, remain personally liable for any contract they purport to make

on behalf of the company, unless the company enters into the contract in terms of

such agreement after incorporation. A company cannot ratify a pre-incorporation

contract, but it is open to it to enter into a new contract after its incorporation

to give effect to a contract made before its formation [Howard v. Patent Ivory Co.

(1888) 38 Ch.D.] Since the pre-incorporation contract is a nullity, even the company

cannot sue the vendor of property if he fails to carry out such a contract.

In India, however, Sections 15 and 19 of the Specific Relief Act, 1963, have

considerably alleviated the difficulty.

Section 15(h) provides that where the promoters of a company have, before its

incorporation, entered into a contract for the purposes of the company, and such

contract is warranted by the terms of incorporation, the company may, if it has

accepted the contract, and has communicated such acceptance to the other party to

the contract, obtain specific performance of the contract.

Under Section 19(e) under similar circumstances, specific performance may be

enforced against the company by the other party to the contract.

A company cannot acquire shares prior to its incorporation. Where a company was

named as the transferee in the share transfer forms prior to its incorporation, it was

held that such transfers could not be registered. [Inlec Investment (P) Ltd. v.

Dynamatic Hydraulics Ltd., (1989) 3 Comp LJ 221, 225 (CLB)].


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Any pre-incorporation agreement to subscribe to shares of a company to be formed,

cannot be enforced and is usually revocable unless accepted by the company after its

formation

Pre-incorporation contracts are void unless accepted by the company after incorporation.