Introduction

The meaning of the expression ‘promoter’, exclusively for the purpose of fastening civil liability
for misstatements in prospectus, is given in Section 62(6) of the Act, thus: ‘a promoter who was
a party to the preparation of the prospectus or of the portion thereof containing the untrue
statement, but does not include any person by reason of his acting in a professional capacity for
persons engaged in procuring the formation of the company’; but, otherwise the term is not
defined in the Act, nor precisely in any of the decided cases. Rule 405(a) framed by the Security
Exchange Commission in USA has it that a ‘promoter’ is “a person who, acting alone or in
conjunction with other persons directly or indirectly takes the initiative in founding or organizing
a business enterprise”. In Whaley Bridge Calico Printing Co. v. Green & Smith1, Bowen, LJ,
stated that the term ‘promoter’ connotes to sum up “in a single word a number of business
operations, familiar to the commercial world, by which a company is generally brought into
existence”. In Twycross v. Grant2 Cockburn, CJ, stated that “a promoter is one who undertakes
to form a company with reference to a given project and to set it going, and…….takes the
necessary steps to accomplish that purpose”.

In UK until about the 19th Century there used to be professional promoters engaged in raising
capital through public issues before the formation of companies, as a business in itself and who
used to make them over to the Boards of Directors of the Companies after formation and vanish
from the scene having filled their deep pockets, to repeat it, and were quite notorious and
hounded in law for it. This advance raising of capital is referred to in connection with both a
domestic company and a foreign company dealt in Sections 56 (1)(b) and 605 of our Act, too,
but it does not appear to have been put to use. In the present day legal framework in our country,
there is no advance raising of capital by public offer permissible for proposed companies, as
according the SEBI Guidelines for a maiden offering, track record of the company’s performance
is a must before going to the public even through the book-building route, and when it is done,
the promoter’s role is assumed by merchant bankers who handle the public offer in collaboration
with the Board of Directors of the company with greater transparency, virtually banishing the

1
(1880) 5 QBD 109
2
(1877) 2 CPD 469 at 541 (CA)

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erstwhile promoter to history so far as public offers are concerned, as it might appear, but still
the promoter is in place besides the Merchant Bankers in IPOs and subsequent public offers.

But, the promoters as understood in law are not those: a priori it is they who get up the company
by promoting and forming it with a project on hand and bring it forward to the initial public
issue, who are the subject-matter of this discussion. However, even these promoters do not really
fit into the structure of the companies they bring forth unless they are present as the subscribers
or controllers which as professional promoters they would not prefer to be in general, and they
are therefore not amenable to the control of the general body or the Boards of the companies for
any misdeeds to be settled as matters of indoor management without public disclosures or failing
that with recourse to the Courts, and whatever the nature of the public disclosures made the
recourse to Courts rarely happened in our country.

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Registration

The Documents required to be filed with Registrar for registration of a company are as follows,
together with the Memorandum and Articles of Association thus executed the following
documents and papers are required to be presented, accompanied by a demand draft for the
required fees to be paid as specified in Schedule X of the Act at current rates (presently the range
is from Rs. 4,000 to Rs. 2,00,04,000 at the top on the Memorandum plus the filing fee for each of
the other documents including the Articles ranging from Rs.100 to Rs.500 per document,
depending upon the authorized share capital), to the Registrar :
1. Two spare copies of memorandum and articles of association identical with the
stamped ones for vetting;
2. Declaration in Form No.1 signed by a practicing Chartered Accountant or
Company Secretary or an Advocate of the High Court who is engaged in the
formation of the company, or a Director named in the Articles, declaring that the
requirements of the Act and the rules thereunder have been complied with in
respect of registration and the matters precedent and incidental thereto (this needs
to be pre-stamped, appropriately);
3. Registrar’s letter intimating the availability of name;
4. Power-of-attorney, if any, pursuant to which any person has signed as agent for
any subscribers (these need to be pre-stamped, appropriately);
5. One power-of-attorney signed by all the subscribers authorizing, any one of
themselves or the Chartered Accountant, Company Secretary or Advocate
engaged by them in connection with the formation of the company, to carry out
the corrections, alterations, additions or omissions suggested by the Registrar in
the Memorandum and Articles of Association stamped, executed and presented
for registration, under the signature of the person authorized (this needs to be pre-
stamped, appropriately);
6. Notice of situation of the Registered Office of the Company in Form No. 18,
Section146 of the Act;

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 7. Any agreement entered into with any person for his or her appointment as the
managing or whole-time director or manager of the company (this needs to be
pre-stamped, appropriately);
8. Notice in Form No. 32 giving the names and the particulars of the directors,
including the chairman, managing or whole-time director or manager and the
secretary, Section303 of the Act;
9. Consents to act as director obtained from the directors in Form No. 29 under
Section264 (1) of the Act, or consent to act as a director and the undertaking to
take and pay for qualification shares, if any, under Section266, in the case of
public companies unless all the directors are named as such in the Articles (and in
all cases, consents duly filed with the company before acting as directors);
10. Bank’s certificate for the paid-up capital balance held in deposit;
11. Agreement, if any, forming the basis for consideration other than cash, if any, in
respect of the shares subscribed to the Memorandum (this needs to be pre-
stamped appropriately); and,
12. ‘No objection’ letter(s) from the promoter(s) named in the application for the
availability of name sent to the Registrar and subsequently dropped out, if any.
Documents mentioned at 6, 8 and 9 above may, alternatively, be filed within 30 days of the
company’s registration.

The Notices pursuant to Regulation 11 of Companies Regulations, 1956 are required to be

published within a week before or after the submission of the application in one or more local
newspapers. In the case of a proposed company, the application should be accompanied by the
drafts of the memorandum and articles previously scrutinized by an advocate of the Supreme
Court or High Court/attorney/pleader entitled to appear before the High Court or a CA or CS in
practice in India engaged in the company’s formation, together with a declaration from him
confirming his scrutiny of the application and the accompanying documents and their conformity
with the Act; and submitted to the Registrar under Regulation 10 for his scrutiny and forwarding
the same to the Regional Director along with his list of modifications to the draft memorandum
and articles and his advice on the grant of the license having regard to the promoters, directors

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and proposed members of the new company and the existence of other companies with similar
objects, within 15 days of the receipt of the same.

Statutory Requirements

Name of the Company

For a promoter intending to register a new company, choosing the name of the proposed
company is the first step, and, in fact, it is not just one name, it is one plus three other alternate
names, in the order of priority, to fill up the Form No. 1A of the Companies (Central
Government’s) General Rules & Forms, 1956, to be sent to the Registrar of Companies of the
State where the registered office of the proposed company is intended to be situated, giving the
main objects and details of the names and addresses of the promoters and/or directors as well as
the proposed authorized share capital and the fee of Rs. 500 through a demand draft obtained
from any bank or IPOs (Rule 4A). The Department of Company Law Administration through its
Circular No. 128/HCC/64 of 27th July, 1964 directed the Registrars to help and advise those who
approach them intending to form companies, to the extent possible.

A company’s name is important and as observed in Osborn v. The Bank of US,3 “the name of a
corporation is the symbol of its personal existence”. A company’s name is linked to its objects to
be chosen considering the Departmental instructions to the Registrars as a general norm to be
observed in new registrations: if the name reflects a specific class of product like ‘motors’,
‘paper’, ‘brewery’ or ‘sugar’ or ‘cement’, the main object should constitute only that class of
product and business, whereas if the name in addition also includes general words like
‘industries’ or ‘enterprises’ or it simply consists of the proper name of a person with the addition
of ‘sons’ or ‘brothers’, there will be no restrictions about the number or variety of the main
objects to be included in the memorandum. In any case, the main objects included in the
memorandum cannot miss out the objects given against column No. 5 in the Form No. IA sent to
the Registrar seeking his approval for the availability of the name. The name of a company to be
newly registered is always considered in the context of its main objects and the amount of the

3
9 Wheat (22 US) 738 at 877

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authorized capital chosen by the promoters: mini-operation with small capital with high sounding
name suggestive of the presence of the company in the business arena in a mega-size will not
pass off the Registrar’s scrutiny.

Emblems and Names, Trade Marks

The Emblems and Names (Prevention of Improper Use) Act, 1950, prohibits registration of any
company, firm or other association or other body corporate which bears any name, trade mark or
design or patent containing any title, emblem or name specified in the Schedule to the Act or any
abbreviation or colourable imitation without permission of the Central Government. The
Schedule lists 26 kinds of names and emblems including the National Flag, Ashoka Chakra etc.
This is the Act pursuant to which promoters of new companies are required to obtain the
availability of the name of the proposed new company from the Registrar of Companies, in
advance as the first procedural step, by filing the application in Form 1A, quite outside the
conditions of Companies Act. Further, under the Trade Marks Act, the name chosen for a new
company or as a new name of an existing company should not be a colourable imitation of the
trade mark of another.

Drawing up of Memorandum and Articles

By the time the Registrar’s communication regarding the name being available is received, the
promoters have to get the drafts of the memorandum as well as the articles of association and the
agreement, if any, which it is proposed to enter into with any individual entrepreneur for
appointment as the proposed company’s managing or whole-time director or manager made
ready in terms of Section 33 of the Act, if the proposed company is an unlimited company, or a
company limited by guarantee and/or share capital, or a private company, or, even if it is a public
company limited by shares the application of Table ‘A’ in the I Schedule to the Act is desired to
be excluded. Otherwise, if it is a public company limited by shares, adopting Table A as its
articles, the memorandum of association and the agreement, if any, with an entrepreneur for his
appointment as managing director or manager of the company, will do as the minimum
documents required to be drawn up for registration.

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Articles of association
In framing the articles of association, which is a must for a company unlimited or a company
limited by guarantee or a private company limited by shares or guarantee or both, as defined in
Section 2(2) of the Act, the provisions contained in Sections 26 to 30, and 3(1)(iii)(a) to (d), and
the model sets of articles given in Tables ‘A’ to ‘E’ in the First Schedule of the Act, as
applicable, have to be kept in view. In respect of public companies limited by shares, adoption of
Table ‘A’ avoids registration of articles separately, but it is optional, though unless its
application is specifically excluded in any separate set made the provisions contained in its
regulations will be applicable by default to the extent not excluded or modified (Section28 of the
Act) and it may hit clarity or cause conflict.

Minimum paid-up capital requirement

Minimum capital norms - Consequent to the amendment to Section 3 of the Act by the
Companies (Amendment) Act, 2000, effective from the 13th of December, 2000, there is a
minimum paid-up capital requirement of Rs. 5 lakhs and Rs. 1 lakh, respectively, for forming a
new public or private company, and the Central Government is empowered to raise these limits
by such as may be prescribed. No company limited by shares can be registered with a paid-up
capital lower than those current limits. It has to be noted that what the Act requires is ‘paid-up’
capital, and therefore a mere subscription to the memorandum and articles of association by the
minimum number of seven members for a public company and the minimum number of two
members for a private company agreeing to take the number of shares specified against their
names, respectively, in line with what is given in Table ‘B’ in I Schedule to the Act, without
payment, will not do, strictly, though the wording of the subscription clause to be incorporated as
the last clause in the memorandum remains untouched to reflect the paid-up nature of the capital
required in Section3 of the Act as amended.

A new concept - This introduces one more imponderable in the understanding of the meaning of
the term ‘capital’ in its presentation in our Company Law as ‘authorised’, ‘issued’ on offer,
‘subscribed’, ‘called up’, ‘uncalled’, and ‘paid-up’. That is, a company at its registration may
have a higher amount, if the promoters like it to have, as its authorized capital, in the Capital

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clause in the memorandum, or if they choose to go by the statutory minimum capital adequacy
norm for the company required they may provide nothing more; and in that case, it is paid-up
capital since birth of the company, and if it remains so the rest disappear, as one might suppose,
which they do not, and it is all-in-one.

Payment up-front by subscribers - It would, however, appear necessary for the subscribers to
deposit the money for the shares intended to be subscribed by them respectively up-front in a
dedicated joint banking deposit account and produce the bank’s confirmatory certificate to the
Registrar along with the other documents and papers for registration, in proof of the payment, as
otherwise it is difficult to conceive ‘paid-up’ capital at the company’s birth if such capital merely
remains subscribed in the memorandum without actual payment fully received, in accordance
with the definition of ‘paid up capital’ that includes capital credited as paid up given in
Section2(32) of the Act.

In the event of the capital falling below the minimum by way of reduction of capital covered by
Sections 100-105 of the Act, in the absence of anything provided in the Act, it will be for the
Company Court to include a direction in its order whether a public company becomes a private
company thereby, and about the consequence of what it could be in the case of a private
company.

Position of Promoters

Fiduciary Relationship
In Erlanger v. New Sombrero Phosphate Co. (1878) 3 App. Cases, 1218 at 1236, HL, Lord
Cairns said, the promoters “stand…….undoubtedly in a fiduciary position. They have in their
hands the creation and moulding of the company, they have the power of defining how, and
when, and in what shape and under what supervision, it shall start into existence and begin to act
as a trading corporation……I do not say that the owner of property may not promote and form a
joint-stock company and then sell his property to it, but I do say that if he does he is bound to

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take care that he sells it to the company through the medium of a board of directors who can and
do exercise an independent and intelligent judgment on the transaction……”

This verdict is nearly impossible to implement in actuality, and runs counter to the decision in
Saloman’s case, which is fundamental to Company Law. “After Saloman’s case I think it is
impossible to hold that it is the duty of promoters of a company to provide it with independent
board of directors, if the real truth is disclosed to those who are induced by the promoters to join
the company” said Lindley MR, in Lagunas Nitrate Co. v. Lagunas Syndicate4. This meant that
the fiduciary duty consisted of disclosure of the real truth to the members of the company, and it
is open for the promoter to do so either directly to the subscribers or to the independent Board
who then walk into his shoes to carry the truth to the subscribers. In this context the
pronouncement of Lord Halsbury in Gluckstein v. Barnes5 to the effect that the promoters are
liable to account for their profits to not only the existing but also to all prospective shareholders
stands included in the disclosure requirements of the prospectus (Section 56 read with Clause 11
of sub-part C in Part II of Schedule II to the Act) or the statement in lieu of prospectus (Part I of
Schedules III and IV to the Act) concerning the public companies, and any contracting out to
waive its compliance is declared void in Section 56(2) of the Act.

Promoter’s status
In Weavers Mills v. Balkis Ammal,6 it was held: “As to the exact legal status of promoters, the
statutory provisions, both in England and in this country, are silent in most parts except for a
couple of Sections in the Specific Relief Act, both old and new one. It appears that a promoter is
neither an agent nor a trustee of the company under incorporation but certain fiduciary duties are
imposed on him under the English Companies Act, 1948 and the Indian Companies Act, 1956.
He is not an agent because there is no principal and he is not a trustee as there is no cestui-que-
trust. It is on this ground that the doctrine of ratification by the company was regarded as
inapplicable to the actual promoter vis-à-vis the company under incorporation.” The reference to
Specific Relief Act ‘both old and new one’ is to Specific Relief Act, 1963 and the earlier Act of

4
(1899) 2 Ch, 392 CA at 426
5
[1900] AC 240 at 247
6
AIR 1969 Mad. 462

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1877 repealed by it. In that case, the company after incorporation took possession of the
properties purchased by the promoters on its behalf and improved them showing that the
company adopted the promoters’ contract, and therefore, it was held that the property was of the
company’s.
Where promotion of a company begins and ends are all questions of fact. For being considered
as a promoter, a person need not necessarily be the one associated with the initial formation of
the company, and the association could be at a much later stage when another person is arranged
to be a director, or when the actual capital is raised by way of placement of shares, or the
preliminary agreements are negotiated.

From a common sense point of view, in the ordinary way, this area continues to remain as a
deficiency in Company Law: the statute is silent on who a ‘promoter’ is, except in connection
with civil liability for misstatements in a prospectus that arises with respect to public companies;
and the Courts have pronounced about their nature, position and duties, not necessarily with
respect to public companies, only to go back to them, in the few cases that they do. No doubt, it
puts a fear in the minds of the promoters to steer clear of being caught, but the overall picture is
far from being clear, generally, it is understood though that those are the persons who promote
their own rather than the interests of the companies they help create and remain suspiciously
elusive.

Promoter’s Liability
In terms of Section 62 of the Act, the promoter, along with the persons who are the directors of
the company or the persons who consented to be directors and named in the prospectus and the
other persons who authorized the issue of the prospectus which contained any untrue statements
or misstatements, is fastened to civil liability to pay compensation to every person who
subscribed for any shares or debentures on the faith of the prospectus by way of loss or damage
sustained thereby subject to a contribution by the others, except in the case of fraudulent mis-
representation. Further, a promoter found guilty is subject to criminal liability of two years
imprisonment and a fine of Rs. 50,000, Section 63 of the Act. Apart from this, he is disqualified
to be a director of a company for a period of 5 years after the expiry of the sentence if it is for a

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period not less than six months in terms of Section 274(1)(d) of the Act, unless the Central
Government notifies the removal of the disqualification pursuant to sub-section (2) of the said
section.

Company’s Remedies
The duty of disclosure by a promoter is owed to the company and therefore, primarily, it is the
company, that is, the Board of Directors or the General Body, entitled either to accept the
promoter’s deal and claim the profits made in his immediate prior deals as well as the deals made
with the company while the company was under promotion and formation, or to reject the deal
with the company altogether, in toto, and recover the purchase money drawn out of the
company’s resources (Erlanger’s case and Gluckstein’s case, referred to above); and, in the case
of sale of promoter’s own properties to the company promoted by him which were acquired by
him before the date of his becoming the company’s promoter, either to affirm his contract with
the company or reject it, but not affirm the contract and at the same time demand to account for
profit or to compensate for damages, which amounts to asking the Court to vary the contract
terms to achieve lower price, Jacobus Marler Estates Ltd. v. Evatt7

Promoter’s Remuneration
There can be no contract with a company before its incorporation, and in Common Law in UK
even after incorporation the company cannot make a valid contract for promoter’s services as
these form past consideration; and any provision in the memorandum or articles of the company
providing for the remuneration of promoter does not hold because he as promoter per se is a
stranger. In our country too, the position is not very much different though past consideration is
no bar, because of the non-existence of the company when the promoter renders his services to
be a party to the contract which otherwise may be implied.

Often, the services of a promoter do involve great organizing skills in securing the wherewithal
to establish a new business, and are valuable requiring to be paid for properly and transparently.
But, the legal position being what it is, this aspect remains as one of the questions to which

7
(1971) AC 793 (PC)

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Company Law has no answer as the promoters prefer to keep away from the company that they
form. At best, the promoter can get commission paid to him by the vendors for his services, but
this route is independent of the company though the payment may be at its cost. Or, if he is
prepared to remain with the company, the usual way of his getting the remuneration settled is by
way of shares allotted to him for a consideration other than cash by the Board. As to expenses
incurred by the promoter, Regulation 67 in Table A of Schedule I to the Act provides that the
Board may pay all expenses incurred in getting up and registering the company, and even
otherwise it is to be taken that it is always within the general powers vested in the Board to pay
up such expenses by way of reimbursement to the promoter, but this cannot cover the
remuneration to the promoter himself for his services. Thus, there is no way to make a legally
valid claim by a promoter of a company against the company for his services even after it is
incorporated. But, promotion, formation and registration of companies can be no gratuitous or
free public service, for any promoter to get into, and he gets his due very well settled in various
ways, notwithstanding the requirement as to disclosure of the payments made or benefits given
to the promoter during the preceding two years in the prospectus or the statement in lieu of
prospectus.

Position in English Law

Before the formation and registration of the company, it is not a person in the eye of law, and
because it is an artificial person even after it comes into being, it cannot act otherwise than
through some human agent acting for and on its behalf; and, when it is not in existence in law, it
can have no agent to accept on its behalf any proposals for transactions in the nature of
agreements brought up by the promoter or others. Therefore, if the promoter accepts any
proposals connected with the company under formation though from third parties, it is only the
promoter who is bound but not the company even after ratification of the contracts on its
registration, and no suit lies against the company on the strength of such agreements, nor can the
company enforce such contracts for its benefit.

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Some persons, who became directors of the company after its registration, gave instructions to
the Solicitors to prepare the memorandum and articles of association and to register that very
company, which the Solicitors did paying the registration fee from their pocket. In a suit for the
recovery of their costs laid against the company by the Solicitors, it was held that the company
was not liable, Re English & Colonial Produce Co. Ltd.8. It is so because, “where a contract is
signed by one who professes to be signing ‘as agent’, but has no principal existing, at the time,
and the contract would be inoperative unless binding on the person who signed it, he is bound
thereby; and a stranger cannot by a subsequent ratification relieve him from that responsibility.”
Kelner v. Baxter.9 In that case, three persons signed a contract on behalf of a hotel company
under formation for purchase of 900 sterling worth of wine. The company was formed and the
wine was delivered to it and consumed, but the company was put to liquidation before the
payment. It was held that the three persons who signed the contract were liable and no
ratification could release them.
“A company cannot by adoption or ratification obtain the benefit of a contract purporting to have
been made on its behalf before the company came into existence”.-Natal Land & Colonisation
Co. v. Pauline Colliery Syndicate10

When the promoter signed the contract in the name of the unborn company adding his own name
to it, it was held “This Company was not in existence and….the signature on that document, and
indeed the document itself….is a nullity.”-Newborne v. Sensolid (Great Britain) Ltd11. Simply
signing the contract ‘per pro’ or ‘for and on behalf of’ the proposed company does not make the
person signing thus an agent and it depends upon the intendment and purport evident in the
contract, Phonogram Ltd. v. Lane.12
Pre-incorporation Contracts: Position in India
These preliminary contracts are inevitable and invariably arise with almost every new
registration and incorporation of a company, and probably in recognition of this, our legal system

8
(1906) 2 Ch 435 (CA)
9
(1866) LR 2 CP 174 at 183
10
(1904) AC 120.
11
(1954) 1 QB 45
12
(1982) QB 938 at 945.

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is pro-active so far as the procedure is concerned. These preliminary contracts are governed, as
discussed above, by the provisions of Sections 15(h) and 19(e) of the Specific Relief Act, 1963,
and are enforceable by or against the new company, respectively, subject to the fulfillment of the
conditions specified in the said Sections. As a general practice, these are novated after the
company’s incorporation, often supported by a clause inserted in the objects clause of the
company’s memorandum of association as providing the linkage beyond doubt. The other
general practices referred to above of reducing the operative terms in writing for clarity without
entailing any liability on the promoters, are also in vogue, alternatively.

Both the Sections 15(h) and 19(e) of Specific Relief Act, 1963, provide, in identical wording,
that when 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 sue or be sued, respectively, for specific performance, provided that the company
has accepted the contract and has communicated such acceptance to the other party to the
contract. Accordingly, the decision in Natal Land & Colonisation Co. v. Pauline Colliery
Syndicate13, to the effect that “A company cannot by adoption or ratification obtain the benefit of
a contract purporting to have been made on its behalf before the company came into existence” is
inoperative in India, Vali Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory (P.) Ltd.14

13
Supra n. 13
14
[1986] 60 Comp Cases 568 (AP)

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 Case Analysis
Natal Land and Colonization Company, Limited v. Pauline Colliery & Development
Syndicate, Limited [1904] A.C. 120

Facts
The appellants were an incorporated joint stock company, having their head office in London.
Mr. Rycroft was their general manager in Natal under a power of attorney dated October 26,
1888, by the terms of which he was empowered to sell and lease the company's lands in the
Colony and to make contracts for these purposes. Rycroft, on behalf of the appellants, made a
contract with Mrs. De Carrey respecting the coal mining rights in 3000 odd acres of land
belonging to the appellants, and known as the Coal Company's Lots. Mrs. De Carrey sold all her
interest in the land to one William Louch, provisional director of an as yet unregistered
Company, Pauline Colliery Syndicate. On May 30, 1899, the respondents commenced action
against the appellants for specific performance of the agreement.

Ratio
A company cannot by adoption or ratification obtain the benefit of a contract purporting to have
been made on its behalf before the company came into existence. In order to do so a new
contract must be made with it after its incorporation on the terms of the old one.
As has already been stated, this position does not stand in India and the same has been expressly
stated by the Andhra Pradesh High Court in the case Vali Pattabhami Rao. Therefore, this
position is not good law anymore.

Kelner v. Baxter & Ors. (1866), L.R. 2 C.P. 174

Facts
The plaintiff and the defendants were promoters of the Gravesend Royal Alexandra Hotel
Company, Limited. The plaintiff was to be the manager of the hotel under the new company.
Before the company was incorporated the plaintiff offered to sell a stock of wine to the proposed
th
company for £900 which was accepted by the defendants on January 27 , 1866 on behalf of the
st
Gravesend Royal Alexandra Hotel Company Limited. On February 1 the directors of the

- 15 -
Gravesend Royal Alexandra Hotel Company Limited ratified the agreement. However, the
promoters did not receive a certificate of incorporation for the Gravesend Royal Alexandra Hotel
Company Limited until February 20, 1866. The directors then purported to ratify the agreement
again on April 11, 1866 just days before the company made an assignment in bankruptcy.

Ratio
The court held that the ratification of February 1, 1866 was not a valid ratification because the
company was not in existence at the time. The ratification on April 11 was also held not to be a
valid ratification.

Reasoning
It was not a valid ratification because of the requirement that ratification can only be done by a
principal having capacity to contract at the time the contract was entered into as well as at the
time of the ratification. It was also not valid on the basis that the company was not in existence
at the time of the promoters purported to act on its behalf. The court nonetheless still felt there
was clearly an intended contract and the only way in which there could be a valid contract was
if the defendants were the other contracting parties. They thus held that there was a valid
contract in which the plaintiff was one party and the defendants were the other parties.
Kelner v. Baxter thus confirmed that a company cannot ratify a contract, or purported contract,
entered into on its behalf if the company was not in existence at the time a person purported to
enter into a contract on its behalf. Kelner v. Baxter also highlighted the potential for promoters to
be liable on contracts they purport to enter into on behalf of an as yet unincorporated entity.
What was not clear after Kelner v. Baxter was whether promoters were automatically liable in
these situations (sometimes referred to as the “rule of law” approach) or whether the promoter’s
liability depended on whether it was intended that the promoter be a party to the contract
(sometimes referred to as the “rule of construction” approach).

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Chapter 7:
Conclusion

The nomenclature of promoters and preferential allotments of shares to them is very much in
vogue in our country even decades after the company’s formation and successful working to
such an extent as to give the impression that whoever are the present controllers and managers of
the company holding the shares that gave them the edge are the promoters as successors not just
by transmission or gift of the very shares of the original archtypes but even when control
changed hands by takeover for valuable consideration, passing on the privilege as if it were
annexed by law to the chunk of shares held by the first acquirers of control over the company
even if they had nothing to do with the formation of the company, a super-class distinction of
equity shares which the Act has not conceded and not prohibited either to stop the subtle
operation of grabbing the shares pursuant to Section 81 (1A) of the Act whether by a special
resolution or an ordinary resolution coupled with the Central Government’s approval (and in the
case of unlisted public companies, the procedure being in conformance with the Unlisted Public
Companies (Preferential Allotment) Rules, 2003, while it is in conformance with the SEBI
Guidelines, 2000, Ch. XIII for the listed companies) at a coveted price and terms, thus, in a
frenzy that happened till the year 2000 independent of any public issue, and what the SEBI has
since officially conceded subject to parity and ‘lock-in’ in its Guidelines, 2000 with effect from
4.8.2000, rendering the preferential allotment almost lustreless in itself otherwise than as
strengthening the controlling interest.
The point is that the promoter-factor has come to be recognized as pervasively present in
connection with public offers long after the company was promoted and formed to run with the
company as a going concern, and since the person owns it up and present there should be no hide
and seek. That way or otherwise, company world is not free from promoters whether original or
rotated; and if it were to be, perhaps big companies that matter and become admirable would not
come into being, for it is the promoter who in their creativity and flamboyance in risk-taking
bring them into being as in the past for corporate growth. Therefore, the role of promoters is
becoming all the more important in the present age and the question of their remuneration and
compensation must be settled once and for all.

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 BIBLIOGRAPHY

STATUE:
1. The Companies Act, 1956
2. The Emblems and Names (Prevention of Improper Use) Act, 1950
3. The Companies (Amendment) Act, 2000
4. SEBI (Disclosure & Investor Protection) Guidelines, 2000
5. The Specific Relief Act, 1963

BOOKS:
 D.S.R. Krishnamurti, Taxmann's Company Law, (Taxmann Allied Serives, New Delhi,
edn. 1, 2006)
 AK Majumdar and Dr. GK Kapoor, Taxmann’s Company Law and Practice (Taxmann
Publications (P.) Ltd., New Delhi, 11th edn., 2005)

ARTICLES:
 Mark Gillen, Notes on Business Associations

WEBSITES:
 www.legalserviceindia.com/company%20law/com_1.htm
 http://www.calfirstholdings.com/Part4.html
 http://www.stamfordonline.com.my/courses/dca/dca212/DCA%20212%20Chapter%206.
pdf
 http://www.sebi.gov.in/guide/dipamendguide.pdf
 http://law.uvic.ca/mgillen /315/documents/Ch15-Pre-IncContracts.pdf

CASES ANALYSED:
1. Natal Land and Colonization Company, Limited v. Pauline Colliery & Development
Syndicate, Limited
2. Kelner v. Baxter & Ors.

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