PRE-INCORPORATION
CONTRACTS, PROVISIONAL CONTRACTS, AND PROMOTERS
Promoters
Promoters are the
creators of the company, thus they are also called the midwife for the birth of
the company. In public companies, the provisions order the public hearing of
the promoters. The early cases on the fraudulent acts of promoters were raised,
consequently, to hinder such incidents more precautions were taken by the legislation.
The different rulings of the court made figure out that promoters work in a
fiduciary relationship. Thus he should owe duties with royalty, and good faith
to promote the company. A person merely
acting in a professional capacity such as lawyers, accountants, and else can’t
be called the promoters.
Pre
incorporation Contracts
The English law under
common law and equity govern the rights of those involved in pre-incorporation
contracts. In Pakistan, the Specific Relief Act Section 27 provides the rights of specific performance of a
contract. Especially, when the promoters before the incorporation of the
company enter into the contract and have ratified and adopted it, the contract
becomes a warranty by the terms of the incorporations. Section 21 of the Act also deals with the matter in the same
manners
The contract made before the incorporation of
the company, such as contracts made to buy the property for the company is
considered a necessary dealing. However, generally, a contract is made by the
promoters on behalf of the company before its incorporation is void. A promoter
cannot be an agent nor a principle for a company that has not come into
existence. In such cases, a company can’t be sue or sued for contracts made
before incorporation.
A
company can’t enter into a contract before its existence
Before its legal
recognition, a company has no legal existence. Thereby, it can’t make a
contract through any of its agents and is also incapable of acting as an agent.
The person making any contract on behalf of the company before its
incorporation is personally liable.
Kelner v Baxter 1866
Baxter, Calisher, and
Dales were running a business and had proposed to form a company. On 27-1-
1866, John Kelner sold his products to the company. On failure of the payment,
Kelner brought the case. The court held that the promoters are personally
liable because the company wasn’t in existence before the formation of the
contract. When the company is formed it was a totally new creature having
rights and duties from onwards not before.
Newborne v Sensolid Ltd
Sensolid agrees to buy
tinned meet. In the contract, the company’s name was also mentioned. The market
fell and Sensolid refused to take delivery. Sensolid took the plea that during
the contract was made the company wasn’t incorporated, thus nor the company
neither the promoter can enforce it. The court accepted the plea.
A
Company wanting to get benefit from the preliminary contract must make a new
contract, it cannot ratify the earlier contract
A company must make a
new contract if it wants to enjoy the benefits of a preliminary contract.
Natal Land Co Ltd v
Pauline Colliery Syndicate Ltd
The Pauline Colliery
Syndicate Ltd company claimed specific performance of a contract made with the
appellant company. The company was not incorporated at the time of the contract
and it was a preliminary contract. The Privy Council held that there was no
contract to which the company was party to and refused to decree specific
performance.
A
promoter Stands in a fiduciary relationship with his company
The promoter is in a
fiduciary relationship with the company. If the promoter hasn’t disclosed all
the material facts relating to the contract to an independent board, the
contract can be void at the option of the company.
Erlanger v New Sombrero
Phosphate Co 1878
A
Promoter cannot make a Secret Profit
A promoter if makes a
secret profit while acting in the company is accountable to the company.
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