Formation of Company – Promotion and Incorporation

 

Formation of a Company refers to the legal process of creating a company as a separate legal entity under the applicable corporate law (in India, primarily the Companies Act, 2013). It involves completing a series of statutory steps through which a business organisation becomes legally recognised and capable of conducting business.

Table of Contents

1. Promotion
2. Registration/Incorporation of a Company

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The whole process of formation of a company may be divided into four stages, namely:

(i) Promotion

(ii) Registration

(iii) Floatation

(iv) Commencement of business.

1. Promotion

Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. A promoter may be an individual, syndicate, associa­tion, partner or company.

1.1 Who is a Promoter

Section 2(69) of the Companies Act, 2013 defines the term promoter as a person:

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

However, a person who is acting merely in a professional capacity shall not be treated as a promoter.

The aforesaid description of promoter does not bring out the nature of activities that a promoter is usually associated with. It may serve a good purpose for fixation of liabilities for wrong doings by the company.

To know about the nature of activities that the promoters usually do, study of some of the definitions advanced by the learned judges will be pertinent. Cockburn CJ., in Twycross v. Grant 1877 2 C.P.D. 469, page 541 C.A. described a promoter as

“one who under­takes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose”.

Another attempt was made by Bowen, L.J., in Whaley Bridge Printing Co. v. Green [1880] 5 B.D. 109 at page 111. He observed that the term promoter is

“a term not of law but of business”, usefully summing up, in a single word— promotion, “a number of business operations familiar to the commercial world by which a company is brought into existence”.

In USA, the Securities Exchange Commission Rule 405(a) defines a promoter as a person who, acting alone or in conjunction with other persons directly or indirectly takes the initiative in founding or organising the business enterprise.

To be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter¹.

However, the persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves. Thus, a solicitor who drafts the articles, or the accountant who values assets of a business to be purchased are merely giving professional assistance to the promoter. However, where he goes further than this, for example, by introducing his clients to a person who may be interested in purchasing shares in the proposed company, he would be regarded as promoter. In Palmer’s view, anyone who assists in the promotion, for example, by obtaining the services of a director, or agreeing to place shares or nego­tiating an agreement or merely by bringing a vendor in touch with persons who may form a company to exploit or purchase his goods may find himself as a promoter of a company which is consequently formed.

In conclusion, it may be said that word “promoter” is used in common parlance to denote any individual, syndicate, association, partnership or a company which takes all the necessary steps to create and mould a company and set it going. The promoter origi­nates the scheme for the formation of the company; gets together the subscribers to the memorandum; gets memorandum and articles prepared, executed and registered; finds the bankers, brokers and legal advisors; locates the first directors, settles the terms of preliminary contracts with vendors and agreement with underwrit­ers and makes arrangements for preparation, advertisement and circulation of the prospectus and placement of the capital. In India, the promoter or promoters or the principal of them are usually persons who, in forming the company, secure for them­selves the management of the company being formed or are persons who convert their own private business into a limited company, public or private and secure for themselves more or less a con­trolling interest into the company’s management².

A person cannot, however, become a promoter merely because he signs the memorandum as a subscriber for one or more shares [Official Liquidator v. Velu Mudaliar [1938] 8 Comp. Cas. 7].

1.2 When Promotion Begins and Ends

The relationship between promoter and the company that he has floated must be deemed to be fiduciary relationship from the day the work of floating the company starts³  and continues up to the time that the directors take into their hands what remains to be done in the way of forming the company [Twycross v. Grant (supra)].

The date upon which the person becomes a promoter can be a matter of great importance to him and the company. A number of sections impose civil as well as criminal liabilities on promoters for misrepresentations in a prospectus or a statement in lieu of prospectus, for misappropriation or misapplication of the monies collected.

The status of a promoter is generally terminated when the Board of Directors has been formed and they start governing the company. Chronologically, the first persons who control or influence the company’s affairs are its promoters. It is they who conceive the idea of forming the company, and it is they who take the neces­sary steps to incorporate it, to provide it with share and loan capital and acquire the business or property which it is to manage. When these things have been done, they hand over the control of the company to its directors, who are often themselves under a different name.

On handing over the control of the company to the directors, the promoter’s fiduciary and common law duties cease, and he is thereafter subject to no more extensive duties in dealing with the company than a third person who is unconnected with it⁴. Thus, where a promoter disclosed the profit which he made out of a company’s promotion to the persons who provided it with the share capital with which it commenced business, it was held that he was under no further duty to disclose the profit to persons who were invited to subscribe further capital a year later, and so the company could not recover the profit from him for his failure to do so⁵. Nevertheless, a promoter may remain subject to fiduciary and other duties to the company if he becomes a director or agent of it, but the duties are then owed only in that other capacity.

1.3 Legal Position of a Promoter

While the accurate descrip­tion of a promoter may be difficult, his legal position is quite clear. The promoters occupy an important position and have wide powers relating to the formation of a company. It is, however, interesting to note that so far as the legal position is con­cerned, he is neither an agent nor a trustee of the proposed company. He is not the agent because there is no company yet in existence and he is not a trustee because there is no trust in existence. But it does not mean that the promoter does not have any legal relationship with the proposed company. The correct way to describe his legal position is that he stands in a fiduciary position towards the company about to be formed. Lord Cairns has correctly stated the position of promoter in Erlanger v. New Sombrero Phosphate Co. (39 LT 269)

“the promoters of a company 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 whose supervision it shall come into existence and begins to act as a trading corporation. Similarly, it was observed in Lagunas Ni­trate Co. v. Lagunas Syndicate (1899 2 Ch. 392), that:

“The promoters stand in a fiduciary relation to the company they promote and to those persons, whom they induce to become share­holders in it.”

Lord Justice Lindley in Lidney & Wigpool Iron Ore Co. v. Bird [1866] 33 Ch. D 85 described the position of a promoter as follows:

“Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is perfectly well settled that a promoter of a company is accountable to it for all monies secret­ly obtained by him from it just as the relationship of the prin­cipal and agent or the trustee and cestui que trust had really existed between him and the company when the money was obtained.”

1.4 Duties of Promoters

The Companies Act, 2013 contains no provisions regarding the duties of promoters. It merely imposes liability on promoters for untrue statements in prospectus they are parties to (sections 34 & 35), and for fraudulent trading (section 339). The courts, however, have been conscious of the possibility of abuse inherent in the promoters’ position and therefore laid down that any one, who can properly be regarded as promoter stands in a fiduciary position towards the company with all the duties of disclosure and accounting. In particular, the two fiduciary duties imposed on a promoter are:

1. not to make any secret profit out of the promotion of the company;
2. to disclose to the company any interest which he has in a transaction entered into by it.

Duty to Disclose Secret Profits – The commonest way in which professional promoters used to make a secret profit was by purchasing property or business themselves and reselling it to the company at an enhanced price. But the difference between the two prices in such a case shall be a secret profit only if the promoter has begun to promote the company at the time he buys the property or business, so that he owes a duty to the company at that time not to profit on a re-sale to it [Re Cape Breton Co. [1885] 29 Ch. D 795]. If the promot­er purchases the property or business at a time when he merely has an intention of promoting a company to acquire it, he owes no fiduciary duty to the company [Erlanger v. New Sombrero Phosphate Co. [1878] 3 App. Cas. 1218]. The duty of disclosing the profits does not even extend to a situation where the contract with the vendor provides that the promoters shall form a company to which the property or business shall be transferred. [Re Coal Economising Gas Co. Gover’s case [1875] 1 Ch. D 182].

Promoters may obtain secret profits by other methods than reselling property to company. For example, the vendor may agree to pay a share of profit to the promoter.

A promoter is not forbidden to make profit but to make secret profit. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principal’s consent. In Gluckstein v. Barnes⁶  a syndicate of persons was formed to buy a property called ‘Olympia’ and re-sell this ‘Olympia’ to a company to be formed for the purpose. The syndicate first bought the debentures of the old Olympia company at a discount. Then they bought the company itself for £1,40,000. Out of this money provided by themselves, the debentures were repaid in full and a profit of £ 20,000 made thereon. They promoted a new company and sold Olympia to it for £ 1,80,000. The profit of £40,000 was revealed in the prospectus but not the profit of £ 20,000.

Held, profit of £ 20,000 was a secret profit and the promoters of the company would be bound to pay it to the company because the disclosure of the profit by themselves in the capacity of direc­tors of the purchasing company was not sufficient.

Disclosure to Be Made to Whom – As noted in the preceding paragraphs, a promoter is allowed to make a profit out of a promotion but with the consent of the company. But, the company being an artificial person, the problem is to discover as to who may consent on behalf of the company. In Erlanger v. New Sombrero Phosphate Co. (supra), it was held that it shall be sufficient if the disclosure is made to an independ­ent and competent Board of directors. Lord Cairns, in this case, observed that the promoters of a company

“stand . . . undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defending how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. It does not mean that the owner of property may not promote and form a joint stock company and then sell his property to it, but it does mean that if he does, he is bound to 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 . . .”.

However, at the time when promoters are involved, an entirely independent Board of directors would be impossible in the case of most private and many public companies. In such cases, the dis­closure should be made to the whole body of persons who provide the company with its initial capital [Lagunas Nitrate Co. v. Lagunas Syndicate Ltd. [1899] 2 Ch. 392]. The initial sharehold­ers’ consent may either be obtained individually or by way of an ordinary resolution to that effect. Consent to the retention of a promotional profit can only be given by the directors or shareholders (as the case may be) if the promoter makes full disclosure to them of the nature and amount of the profit he has made, and it is insufficient for him to give them information from which they could deduce that he has obtained a profit by making enquiries [Whaley Bridge Calico Printing Co. v. Green [1880] 5QBD 109].

If the company issues a prospectus, disclosure to shareholders may be made in it, and each shareholder’s subscription for shares on the basis of the prospectus would then be deemed to indicate his consent to the retention of profit disclosed by the promoter. Thus, the promoters have to ensure that the real truth is disclosed to those who are induced by the promoters to join the company.

Duty of Disclosure of Interest – In addition to his duty for declaration of secret profits, a promoter must disclose to the company any interest he has in a transaction entered into by it. This is so even where a promoter sells property of his own to the company, but does not have to account for the profit he makes from the sale because he bought the property before the promotion began [Re Lady Forest – (Mur­chison) Gold Mine Co. Ltd. [1901] 1 Ch. 582]. Disclosure must be made in the same way as though the promoter was seeking the company’s consent to his retaining a profit for which he is accountable.

Promoter’s Duties Under the Indian Contract Act – Promoter’s duties to the company under the Indian Contract Act have not been dealt with by the courts in any detail. They cannot depend on contract, because at the time the promotion begins, the company is not incorporated, and so cannot contract with its promoters. It seems, therefore, that the promoter’s duties must be the same as those of a person, who acts on behalf of another without a contract of employment, namely, to shun from deception and to exercise reasonable skill and care. Thus, where a promoter negligently allows the company to purchase property, including his own, for more than its worth, he is liable to the company for the loss it suffers. Similarly, a promoter who is responsible for making misrepresentations in a prospectus may be held guilty of fraud under section 17, of the Indian Contract Act and conse­quently liable for damages under section 19 of that Act.

Termination of Promoters’ Duties – A promoter’s duties do not come to an end on the incorporation of the company, or even when a Board of directors is appointed. They continue until the company has acquired the property or business which it was formed to manage and has raised its initial share capital – [Lagunas Nitrate Co. v. Lagunas Syndicate Ltd. (supra)], and the Board of directors has taken over the manage­ment of the company’s affairs from the promoters – [Twycross v. Grant (supra)]. When these things have been done, the promoter’s fiduciary and contractual duties cease, and he is thereafter subject to no more extensive duties in dealing with the company than a third person, who is unconnected with it. Thus, where a promoter disclosed the profit which he made out of a company’s promotion to the persons who provided it with the share capital with which it commenced business, it was held that he was under no further duty to disclose the profit to persons who were invit­ed to subscribe further capital a year later, and so the company could not recover the profit for his failure to do so – [Re. British Seamless Paper Box Company [1981] 17 Ch. D 467]. Never­theless, a promoter may remain subject to fiduciary and other duties to the company if he becomes a director or agent of it, but the duties are then owed only in that other capacity.

1.5 Remedies Available to the Company Against the Promoter for Breach of His Duties

Since the promoter owes a duty of disclosure to the company, the primary remedy in the event of breach is for the company to bring proceedings for rescission of any contract with him or for the recovery of any secret profits which he has made.

Rescission of Contract – So far as the right to rescind is concerned, this must be exer­cised on normal contractual principles, that is to say, the company must have done nothing to show an intention to ratify the agreement after finding breach involving non-disclosure or misrep­resentation.

To Recover Secret Profit – If a promoter makes a secret profit or does not disclose any profit made, the company has a remedy against him. This varies according to the circumstances which may be divided into the following two situations:

(1) Where the promoter was not in a fiduciary position when he acquired the property but only when he sold it to the company. If the property on which the profit was made was acquired before the promoter became promoter, there can be no claim for the recovery of the profit as such. [Re Ambrose Lake Tin & Copper Co. [1880] 14 Ch. D 390]. According to this view, it may be neces­sary for this purpose to make the determination of the exact moment of time at which the promotion began. The principle on which this view is based has been expressed as follows⁷:

“In any question as to the remedies available against a [promoter] who has sold his own property to the company, regard must be had to the relationship in which the [promoter] stood to the company when he acquired the property. If he was under no obligation at that time to acquire the property for the company instead of for himself then his non-disclosure of the fact that the property was his own would entitle the company to repudiate the sale and restore the original position, but would not entitle it to retain the property at a price reduced by a deduction of the [promoter’s] profit. When, however, the [promoter’s] default extends further than non-disclosure, when a breach of duty at­tended the original acquisition, the company may, if it chooses, retain the property purchased and also demand a refund of the profits.”

Thus, if a person acquires properties or had it before he takes any active steps in the promotion of a company and sells it to the company at a profit, he is entitled to retain that profit. Here the promoter, as in Solomon’s case must have had the property for a certain length of time. He can hardly be said to be in a fidu­ciary relation to the company.

(2) Where the promoter was in a fiduciary position when he ac­quired the property and when he sold it to the company. This may happen in any of the following circumstances:

(i) Where the promoter bought property with a view to selling it to the company which he intends to promote.

(ii) Where the promoter resells to the company at an increased price, the property which he purchased after he commenced the promotional activities.

(iii) Where a person is a promoter for acquiring the property for the company in the capacity of an agent.

In the aforesaid circumstances, the remedies of the company may include:

(a) rescission of the contract, and if the promoter has made a profit on some ancillary transaction that may also be recovered; or

(b) to retain the property, paying no more than what the promoter has paid for it, thus depriving him of his profit; or

(c) where the above remedies would be inappropriate, say, where the property has been altered so as to render rescission impossi­ble and the promoter has already received the inflated price, the company may sue for misfeasance (breach of duty to disclose). The measure of damages in such a situation will be the difference between the market value of the property and the contract price.

1.6 Liability of Promoters

A promoter is subject to following liabilities under the various provisions of the Companies Act:

1. Section 26 enumerates the matters that should be stated and the reports that should be set out in the prospectus. If this provision is not complied with, the promoters may be held liable under Section 35 to compensate the shareholders.
2. Section 35 provides for civil liabilities for any misstatements made in the prospectus. Under this section a promoter can be held liable for any false statements in the prospectus, by a person who has subscribed for the shares and debentures of the company acting on the faith of the prospectus. The promoter may be held liable to pay compensation to every person who subscribes for shares or debentures for any loss or damage sustained by him on account of the untrue statements made in the prospectus. However, Section 35 enumerates certain grounds on which the promoter can avoid his liability. These remedies are common to all persons who can be held liable for misstatement in the prospectus.
3. Section 34 contains provisions relating to criminal liabilities for issuing a prospectus which contains untrue statements. It is clearly provided that in addition to the civil liability mentioned in the above two cases, the promoters can be held criminally liable if the prospectus issued by them contained misstatements. They may thus be liable for imprisonment for a term which shall not be less than six months but which may extend to ten years. Besides, the promoter shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Further, the section provides that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

The promoter may have to bear this criminal liability for misstatements unless he can prove that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

The Madras High Court in Probir Kumar Misra v. Ramani Ramaswamy [2010] 104 SCL 174, has held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles of Association or a shareholder or a director of the company. Promoter’s civil liability to the company and also to third parties remain in respect of his conduct and con­tract entered into by him during pre-incorporation stage as agent or trustee of the company (as agent to third party and as trustee to the company).

1.7 Remuneration of Promoters

A promoter is not entitled to recover any remuneration for his services from the company unless there is a valid contract, enabling him to do so, between him and the company. Indeed, without such a contract, he is not even entitled to recover his preliminary expenses or the registration fees [Re English & Colonial Produce Company [1906] 2 Ch. 435 CA]. In practice, however, recovery of preliminary expenses and registration fees does not normally present any difficulty. The Articles generally contain a provision authorising the directors to pay them [Touche v. Metropolitan Railway Warehousing Company [1871] L.R. 6 Ch. 671]. The provision in the Articles does not impose any legal obligation on the company towards the promoters but as they or their nominees will usually be the first directors of the company, there is little risk of the power being not exercised in their favour. It may well be, however, that the promoters will not be content with merely their expenses; a professional promot­er expects to be handsomely remunerated. It cannot be said to be unreasonable either. As Lord Hatherly said:

“The services of a promoter are very peculiar; great skill, energy and ingenuity may be employed in constructing a plan and bringing it out to the best advantage”.

Hence, it is perfectly proper for the promoter to be rewarded, provided, as we have seen, that he fully discloses to the company the profits which he has made. Companies, after registration, may (and usually they do) pay or agree to pay some remuneration to the promoters for the services rendered. In practice, a promoter is remunerated in any of the following ways:

(a) He may sell his own property to the company for cash or against fully paid shares in the company at an overvaluation after making full disclosure to an independent Board of directors or to the intended shareholders.

(b) He may take commission on the shares sold.

(c) He may be paid a lump sum by the company.

Whatever be the nature of remuneration or benefit, it must be disclosed in the prospectus.

1.8 Pre-Incorporation Contracts

Sometimes, contracts are made on behalf of a company even before it is duly incorporated. But no contract can bind a company before it becomes capable of contracting by incorporation.

“Two consenting parties are neces­sary to a contract, whereas the company before incorporation is a non-entity” – [Kelner v. Baxter [1866] 15 LT 213].

The true legal position in respect of pre-incorporation contracts may be discussed under the following two heads:

(1) Position before 1963 (i.e., before passing of Specific Relief Act, 1963), and

(2) Position since 1963.

Position before 1963:

(a) A pre-incorporation contract never binds a company since a person (legal or juristic cannot contract before his or its existence and a company before incorporation has no legal exist­ence. Another reason is that promoters are proverbially profuse in their promises and if the corporation were to be bound by them, it would be subject to many unknown, unjust and heavy obliga­tions. [Parke v. Modern Woodman 181 All 214, 234].

(b) Even where there is a request purported to enforce such a contract, the company cannot be bound because ratification is not possible as the ostensible principal did not exist at the time the contract was made – [Kelner v. Baxter (supra)].

In re, English and Colonial Produce Company (supra), a solicitor was engaged to prepare the necessary documents and obtain the registration of a company. He paid the registration fee and incurred certain expenses incidental to registration. Held, the company was not bound to pay for his services and expenses.

(c) The company is also not entitled to sue on a pre-incorporation contract.

In Natal Land and Colonisation Company v. Pauline Colliery Syndi­cate [1904] AC 120, N Co. contracted with ‘A’, the nominee of the syndicate (which was not even incorporated) to grant a lease of certain coal mining rights for three years. After the syndi­cate was registered, it claimed the contracted lease which the N Company refused. In a suit for specific performance, it was held that the syndicate was not entitled to its claim as it was not in existence when the contract was made and a company cannot obtain the benefit of a pre-incorporation contract.

Position Since 1963 (After Passing of the Specific Relief Act, 1963) – Until the passing of the Specific Relief Act, 1963, in India the promoters found it very difficult to carry out the work of incor­poration. Since contracts prior to incorporation were void and also could not be ratified, people hesitated to either supply any goods or service for the cause of incorporation. Promoters also felt shy of accepting personal responsibility. The Specific Relief Act, 1963 came as a relief to the promoters. Section 15(h) of the Specific Relief Act, 1963 provides that where the promot­ers of a public company have made a contract before its incorpo­ration for the purposes of the company, and if the contract is warranted by the terms of its incorporation, the company may enforce it. “Warranted by the terms of incorporation” means within the scope of the company’s objects as stated in the memo­randum. Thus, where a person, who intended to promote a company, acquired a leasehold interest for it, held it for some time for partnership firm, converted the firm into a company which adopted the lease, the lessor was held bound to the company under the lease. [Vali Pattabhirama Rao v. Sri Ramanuja Ginning and Rice Factory Pvt. Ltd. [1986] 60 Comp. Cas. 568 (AP)].

Please note that it is not only the company which is allowed, under the Specific Relief Act, to adopt and enforce its pre-incorporation claims against third parties. Section 19 of the Specific Relief Act also allows the other party to enforce the contract against the compa­ny if:

(i) the company had adopted the same after incorporation, and

(ii) the contract is warranted by the terms of incorporation.

Con­tracts like preparation and printing of the memorandum, and articles, remunerating the professionals, if any, for securing the registration of the company, renting premises, hiring secre­tarial staff are envisaged under the Act.

Liability of Promoters vis-a-vis Pre-Incorporation Contracts – An important question that needs to be tackled is what is the posi­tion of a promoter vis-a-vis preliminary contracts? If the compa­ny does not execute a fresh contract after incorporation and the contract is not one warranted for the purposes of incorporation of the company, what will be the legal position of the promoter who brings about such a contract?

In Phonogram Limited v. Lane [1982] QB 938, it was observed that although a contract made before a company’s incorporation cannot bind the company, it is not wholly devoid of legal effect, even if all the persons who negotiated the contract are aware that the company has not yet been incorporated. In the referred case, a person attempting to incorporate a Pop Group had obtained finan­cial assistance from a recording company. He was held personally liable to refund the amount on his project failing to materia­lise.

The contract takes effect as a personal contract with the persons who purport to contract on the company’s behalf – [Kelner v. Baxter (supra)]. Promoters shall be liable to pay damages for failure to perform the promises made in the company’s name. This shall be so, even where the contract expressly provides that only the company’s paid-up capital shall be answerable for performance [Scot v. Lord Ebury [1867] LR 2CP 255].

The persons who make the contract are liable as parties to it, and are not merely liable to pay damages for breach of implied war­ranty that they had authority to contract on company’s behalf⁸.  This distinction may be of importance when the contract is spe­cifically enforceable (for example, a contract for the sale of land to the unformed company) for there seems to be no reason why the vendor should not obtain an order for specific performance against the persons who make the contract instead of suing them for damages.

Formerly, these consequences did not ensue when a contract was made in the name of a company before its incorporation by a person who did not purport to contract on its behalf or as its agents, but simply described himself in the offer or acceptance as an officer of the company or as being in some other way con­nected with it – [Newborne v. Sensolid (Great Britain) Ltd. [1954] 1QB 45]. Such contracts were declared void both against the company and the person authenticating the same by adding his name.

However, now, besides the judicial decisions on the subject, section 36(4) of the English Companies Act, 1985 specifically provides that such contracts take effect as contracts entered into personally by the persons who make them. Even the knowledge or ignorance of those persons of the fact that the company has not yet been incorporated is immaterial.

2. Registration/Incorporation of a Company

Section 3 states that, A company may be formed for any lawful purpose by:

(a) seven or more persons, where the company to be formed is to be a public company;

(b) two or more persons, where the company to be formed is to be a private company; or

(c) one person, where the company to be formed is to be One Person Company that is to say, a private company.

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1. Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392.
2. A. Ramaiya, Guide to Companies Act, 12th edn., p. 351.
3. CIT v. Bijili Cotton Mills Ltd. [1953] 23 Comp. Cas. 114.
4. Pennington’s Company Law, 5th Edn., p. 607.
5. Re, British Seamless Paper Box Co. [1881] 17 Ch. D. 467.
6. [1900] AC 240.
7. The quotation is from the headnote of Robinson v. Randfontein Estates [1921] A.D. 168 summarising the statement of Innes, C.J. at p. 179. ‘Promoter’ has been substituted for ‘director’.
8. Pennington’s Company Law, 5th edn., p. 105.