CHAPTER 3PROMOTION &

INCORPORATION OF COMPANY

1. Who is the promoters of the company? Explain the legal position of the promoter.

ORPromoter 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 ofGLUCKSTEIN 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 ofERLANGER 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 ofNATAL 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 BAXTERIn 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 AOAb. 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 froma. 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 CaseIn 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 LewisIn this case the documents were filed with ROC on 6th Jan. 1920, for registration of co. The ROC issued the certificate physically on 8th 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.