CHAPTER 3

PROMOTION &
INCORPORATION OF
COMPANY
1. Who is the promoters of the company? Explain the legal position of the
promoter.
OR
Promoter is neither an agent nor a trustee of a co. Comment.
Ans:
A. Promotion is the first stage in the formation of the co. It is defined as the
process of discovering an idea to start a business in the form of co.,
organizing funds, properties and managerial abilities, getting MOA and AOA
prepared, printed and settling the list of first directors, preparing prospectus
for raising the capital. Entering into preliminary contracts and settling the
business run in the form of co.
B. The person who does the work of promotion is called as promoter.
C. Thus promoter is a person who takes necessary steps to start the business in
the form of a co. He can be any individual, a syndicate, an association of
persons or partnership or a co.
D. Acc. to Justice Bowen the term promoter is not of law but of business
summing up in single word all the business operations familiar to the
commercial world by which a co. is brought into existence.
E. Acc. to sec. 62(6), engineers, accountants, bankers, brokers, valuers,
solicitors, who help the promoter in the task of promotion are not included in
the word promoter.

LEGAL POSITION OF A PROMOTER:-

i. The given statement that “ a promoter is neither an agent nor the
trustee of the co.” is absolutely correct because there is neither the
principal nor the trust existing at the time of promotion (because co.
does not exist at the time of promotion. It is a non entity.). promoter is
in the position of a quasi trustee.
ii. Promoter stands in a fiduciary position with respect to the co. because
this position is of trust, honesty and confidence. He has to work in
such a manner that he does not hide any fact from the co., directors or
shareholders, etc. he has to work honestly for the co. he is promoting.
iii. The promoter can make profits from the contracts he enter into on
behalf of the co. but he should make full disclosure of the profits as it
is clear from the case of
GLUCKSTEIN VS BARNES
In this case a syndicate consisting of XYZ decided to promote a co.
which will purchase Olympia co. Olympia Co. was in bad shape and it
was running into heavy losses. The syndicate first purchased the
debentures of Olympia co. at a discount. The co. which the syndicate
promoted purchased Olympia Co. for 140000 pounds. Out of the
money provided by themselves, the promoters repaid the debentures
making a profit of 20000 pounds and this profit of 20000 pounds was
not disclosed to anyone. Then the Olympia Co. was sold to another co.
for 180000 pounds, thereby making profit of 40000 pounds. This
profit of 40000 pounds was fully disclosed. But in this case
thepromoters were held liable by co. for not making full disclosure of
profits. The court held them liable for making secret profit of 20000
pounds which they are supposed to return to Olympia Co.

iv. If the promoter does not make the full disclosure of profits, the co. can
camcel the contract with them or approve the contract with them and
ask them to return the profit with interest to the co.
v. The promoters shold disclose all the facts regarding the property they
are selling to the co. otherwise they will be held liable as held in the
case of
ERLANGER VS NEW SOMBRERO PHOSPHATE CO.
In this case E was the promoter of the syndicate co. which purchased
in island containing phosphate mines worth 55000 pounds. The
syndicate promoted a co. to which this island was sold for 110000
pounds thereby making a secret profit of 55000 pounds. In this case,
Mr. E was held liable for not disclosing the true value of island to the
co. which they promoted. So in this case the co. again cancel the
contract or accept the contract with the promoter asking him to return
the profit together with interest to the co.

vi. The full disclosure of the fact must be made by promoter to:-
a. Independent BOD who can take the independent and unbiased
judgement and not the mere nominees of promoters.
b. The whole body of the shareholders.
c. In the prospectus of the co.
 d. In the AOA of the co.
vii. The promoters should not make unfair use of their position as
promoters with the co. they are promoting.
2. What are pre incorporation contracts? What is the legal effect of these contracts?
What is the difference between pre incorporation and provisional contracts?
Ans:
A. Those contracts which are entered into, by the promoters of the co., before
incorporation of a co. are called as pre incorporation contracts.
B. They are also called as preliminary contracts.
C. They arise both in the case of public and private co.

LEGAL EFFECTS OF PRE INCORPORATION CONTRACTS:

i. These contracts are void ab initio from the point of view of the
company:
They are void ab initio and are a nullity because co. does not exist at the
time of these contracts. The co. can not sue or be sued for these contracts.
As it is clear from the following case:

ENGLISH & COLONIAL PRODUCE CO. LTD. CASE:

In this case, the promoters of the co. prepare AOA and MOA, pays
necessary fees, incurred the incidental for the registration of the co. on
the directions of those persons who later became the directors of the co.
The co. was registered and after some time was liquidated. The persons
who incurred the expenses and paid the registration fees, claimed the
money from the co. It was held that co. was not liable to pay anything
because it is a case of pre incorporation contracts for which co. is not
liable at all, co. did not exist at that time.

ii. The co. cannot take the benefits of the pre incorporation contracts
by ratification of thesecontracts after incorporation, because even
ratification requires the existence of the principal at the time of making of
contract and the co. does not exist at the time of these contracts. As will be
clear from the case of
NATAL LAND & COLONIZATION CO. VS PAULINE COLLIERY
DEVELOPMENT SYNDICATE & CO. LTD. CASE

In this case the promoters of Pauline Colliery Co. which was yet to be
incorporated enterd into a contract with Natal Land for getting the lease
of coal mining rights for 3 years. The co. Pauline Colliery was registered
and it asked Natal Land for the grant of coal mining rights, but Natal Land
refused. Pauline Colliery filed a case against Natal Land in the court. It was
held that Natal Land cannot be forced for the specific performance of
 contract because it was a case of pre incorporation contract and co.
cannot ratify this contract.

iii. The promoters are personally liable for pre incorporation contract
as held in following case:
KELNER VS BAXTER
In this case the hotel co. was yet to be registered. The agreement was
signed on 27 Jan, 1866 between the promoters of hotel co. and the
suppliers of wine for the supply of wine stock to the hotel co., payment to
be made on 28 Jan, 1866. The hotel co. was registered on 20 Feb, 1866
and some wine was consumed and it was liquidated before the debt was
paid to the suppliers of wine. The plaintiff filed a case into court against
the promoter who entered into contract with the plaintiff. The court gave
the decision in favour of plaintiff saying that the promoters are personally
liable to make the payment of wine supplied.

iv. After Specific Relef Act, 1963, the co. can adopt or ratify certain types
of pre incorporation contracts covered by section 15(h) and 19(c).
a. Those contracts which are for the purposes of the co. (necessary for
the registration of the co.)
b. As warranted by the terms of incorporation (mentioned in the object
clause of MOA)
c. The co. has accepted the contract after incorporation.
d. Communicated the acceptance to the other party.

As will be clear from the following case of

IMPERIAL ICE MANUFACTURING CO. LTD. VS MANCHERSHAW

In this case the promoters of ice manufacturing co. entered into contract
with Mr. M for the supply of ice manufacturing machinery. The ice
manufacturing co. was registered and after incorporation it accepted the
contract made by the peomoters with Mr. M and communicated the
acceptance. After sometime it asked Mr. M to supply the machinery. Mr. M
refused to supply. A case was filed by co. against Mr. M. The court gave the
decision in the favour of the co. asking Mr. M to supply the machinery
because this case is covered by sec 15(h) and 19(c) of the Specific Relief
Act.

DIFFERENCE BETWEEN PRE INCORPORATION CONTRACT AND

PROVISIONAL CONTRACTS:-
 i. Pre incorporation contract arise in case of public co. and private
co. where as provisional contract arise only in the case of public co.
ii. Pre incorporation contracts are always entered into before
incorporation (both in case of public and private co.) whereas
provisional contracts are entered into after incorporation (only in
the case of public co. before getting the certificate of
commencement of business).
iii. Pre incorporation contracts are also known as preliminary
contracts but provisional contracts have no other name.
iv. Pre incorporation contracts are not binding on the co. because co.
is a non entity at the time of these contracts, whereas in
provisional contracts public co. exist at the time of these contracts
but these provisional contracts are not binding on public co. till
CCB is obtained [section 149(4)].
3. How a co. is incorporated? The validity of COI cannot be disputed on any
grounds. Do you agree. Comment.
Ans:
i. For getting the co. registered, first of all the promoters of the co. have to
find out the suitable name which must not be undesirable in the eyes of
CG under sec. 20. The promoters have to submit a list of 3 names to the
ROC and any suitable name will be suggested to the promoters by ROC.
ii. The promoters have to make agreements with CAs, lawyers, etc., who will
help him in preparation of MOA and AOA.
iii. These two documents (MOA and AOA) are very important documents for
registration of the co. They have to be prepared with great skill and care,
and before getting their copies printed, they should be presented to ROC
for vetting (before finalizing the document ROC may make suggestions to
improve these documents.).
iv. After getting the MOA and AOA prepared and printed the promoter has to
file the documents with ROC which he can do online these days under sec.
601(b), 610(c), etc.
a. A copy of MOA and AOA
b. A copy of written agreement with manager, MD, secretary as named in
the articles.
c. A copy of written consent of all the directors to act in the capacity of
directors as well as the agreement to take up the qualification shares.
d. A copy of address of the registered office of the co.
e. A copy of the statutory declaration that co. has complied with all the
requirements of registration. This declaration must be signed by the
advocate of Supreme Court or High Court or a attorney or pleader of
HC, co. secretary or a CA in whole time practice or a person named as
the director or a secretary in the AOA.
 f. The necessary registration fees must be paid by bank draft according
to the amounts mentioned in schedule X of the Companies Act, 1956
depending on the nominal capital of the co.
v. When the ROC finds all the above documents in order he issues COI and
also CIN which is given to every co. by ROC for identification.

The given statement that the “Validity of COI cannot be disputed on any
grounds” is absolutely correct as will be clear from the following explanation:-

I. Once the co. gets COI under sec. 34, it is duly registered, it is conclusive
and final and nothing is to be enquired into the regularity of prior
proceeding, as will be clear from
a. Peel’s Case
In this case the MOA was duly registered and it was properly signed
by the signatories but subsequently altered without the permission of
the signatories. The co. got registered and got COI. The plaintiff filed a
case that co. is not duly registered because MOA was not properly
signed after the alterations. But it was held by the court that co. is duly
registered, COI is conclusive and final.

b. Moosah Ghulam Aariff VS Ebrahim Ghulam Aariff Case

In this case MOA was signed by two adults and one guardian for five
minors. The guardian signed separately for each of the five minors.
The co. got registered and got COI. The plaintiff filed a case saying that
COI was invalid because there were not 7 signatories to MOA. But the
court held in this case, that COI is perfectly valid once it is issued, co.
acquires separate legal existence, from the date mentioned on the
certificate. It is unimportant whether the conditions of registration
were complied by the co. or not.

c. Jubilee Cotton Mills Ltd. VS Lewis

In this case the documents were filed with ROC on 6th Jan. 1920, for
registration of co. The ROC issued the certificate physically on 8 th Jan.
1920. But the date mentioned on certificate was 6th Jan. 1920. On 6th
Jan., certain shares were allotted to Mr. Lewis. Question arose whether
the allotment of shares to Lewis was valid or not. It was held that
allotment was perfectly valid because co. can enter into legally binding
business from 6th Jan. 1920, the date mentioned on certificate.

NOTE: from the above discussion it is clear that COI is conclusive and
final but illegal objects of the co. do not become legal by getting COI.
The remedy in this case is cancellation of COI and also the winding up
of the co.