- What is the role of a Promoter when it comes to pre-incorporation
- What are pre-incorporation contracts?
A pre-incorporation contract refers to a contract where one party of the
contract is a company that is yet to be incorporated or
we can say that a pre-incorporation contract is a contract, made between persons
other than the subject incorporated company, in connection with the company ,
Simply put, a pre-incorporation contract arises where a promoter deals with a
third party on behalf of the unformed company.
An example of a pre-incorporation contract is a co-founders' agreement. The
person who is signing the agreement on behalf of the company intends to bind the
company to the agreement in future when the company is finally incorporated.
The pre-incorporation agreement outlines who will own what and how profits will
be split for all parties involved. It also ensures that each party understands
their role in the company, their rights and responsibilities as well as any
compensation or benefits they are to receive during their time with the company.
Before a company is incorporated, it has no legal existence. Accordingly, it has
no capacity to enter into a contract. The company cannot sue or be sued on a
pre-incorporation contract. However, persons who conclude contracts for the
unborn company can be held personally liable on such contracts.
In order for a pre-incorporation contract to be valid, it must be entered into
by the promoters of the company, in their capacity as promoters of the company
that they intend to create.
Who is a Promoter?
According to section 2(69) of the Companies Act, 2013 the term
'Promoter' can be
defined as the following:
- A person who has been named as such in a prospectus or is identified by
the company in the annual return in section 92; or
- A person who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
- A person who is in agreement with whose advice, directions or
instructions the Board of Directors of the company is accustomed to act.
Role of a Promoter
Promoters are usually the first persons who envision the idea of business. They
perform the compulsory investigation to find out whether the formation of a
company is probable and profitable.
Afterward they systematize the resources to convert the idea into a reality by
founding a company; or in other words we can declare that it is the promoter:
- who settles the name of the company thus determine the name, will be
acceptable by the registered official of the office.
- who decides the content or details as to the Articles of the companies.
(here, articles refers to Articles of association & Memorandum of
- who proposes the directors, bankers, auditors and etc.
- who decides the place where registered office or head office has to be
- who prepares the Memorandum of Association, Prospectus and other
essential documents and file them for the reason of incorporation.
- In conducting the necessary transactions to the formation of a
corporation, a promoter who may not be an incorporator, frequently enters
into pre-incorporation agreements, including agreements with third
parties, formal agreements and resolutions to incorporate, and stock
The promoters occupy a significant position and have wide range of powers
related to the formation of a company. It is, nevertheless, interesting to note
that so far as the legal position is referred, he is neither an agent nor a
trustee of the proposed company. However it does not signify that the promoter
does not have any legal relationship with the proposed company. The promoters
stand in a fiduciary relation to the company they support and to those persons,
whom they persuade to become shareholders in it.
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
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.
The Company may replace the promoter from the pre-incorporation contract in the
situation of Novation of Contract. Though it could be said that such a contract
would not be called a pre-incorporated contract, but it should be called a
post-incorporation contract; as novation of contract results in a new contract.
Company is not liable for the pre-incorporation contract when it come in
existence, but under the arrangement of section 15(h) and 19(e) of the Specific
Relief Act 1963, company can take the rights and liability of promoter.
Now we can say a promoter is someone, who is connected with the business from
the start. He can also be referred to as the starter of a business or the
founder. He is responsible for raising capital from various sources and entering
into the first agreements for the start of a business and pre-incorporation of a
The status of the promoter is generally terminated when the Board of Directors
has been formed and they start governing the company.