Liability of Promoters During Pre-Incorporation Contracts

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Topic: Liability of Promoters During Pre-incorporation contracts Table of Contents
Research Methodology6
Research Questions7
Chapter 1: Promoters and Pre-incorporation Contracts8
Chapter 2: Fiduciary duty of the promoter11
Chapter 3: Breach of the pre-incorporation contract and the Liability of Promoters13

A company is an entity which is recognized and created by the law. It can only contract when the law deems it to come into existence. This is the time when the company receives whatever powers the law and its constitution accords to it. Until a company is registered it has no existence of any kind. Many a times, promoters wish to enter into contracts which are intended to be for the benefit of the company. To get the things going in a normal way, when the public is asked to subscribe for shares immediately after the company is formed, it is necessary that the contracts are entered into for the public to know that the Company is more than the empty shell. A company cannot be held liable on a pre-incorporation contract and that the promoters were personally liable on a contract made before the incorporation of the company. There is no reasoning within the realm of agency and jurisprudence, which can justify this decision. Two consenting parties are necessary to contract, whereas the company before incorporation is a non-entity. Historically, the difficulty of faulty pre- incorporation has been handled by the common law principle of de facto corporation and corporation by estoppels. The de facto set of guidelines is the more significant of these two and permits the title-holder of the company to have the safeguard of limited liability generally provided by a corporation. De facto corporation cases usually list three requirements:

I. The existence of a statute permitting incorporation;
II. The existence of a statute permitting business organizers to undertake business in...
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