Examine legal validity of contrast executed by promoters

CASE Issue:

Ø  in present case we are require to examine legal validity of contrast executed by promoters

Ø  as well here we are  also require to examine the promoters liability for pre incorporation contracts

Ø  One additions point for consideration in light of above legal requirements is to determined Personal liability of directors, as well liability of shareholders and promoters for the contract executed by company after incorporation of company.  


Ø  Pursuing to provisions of Corporation Act 2001, a body corporation comes in to existence only after incorporation 

Ø  Further section 119 of afforded act, state that body corporation is known as separate legal entity after successfully incorporation under the act and shall be regard as responsible body for acts done in a name of company.

Ø  Moreover aforesaid act consider a body corporation as separate legal entity and call legally qualified Lady for execution of contract.

Ø  Contract Act is also consider a body corporation as legally qualified Ladya for execution of valid contract

Ø  A legal statues of separate legal entity allows a corporation to create right and liability in name of corporation, this clearly indicates members are not entitle or responsible for rights or liability created in name of corporations.

Ø  The legal states of separate legal entity are also considered as court of Law, in case of Salomon v A. Salomon & Co Ltd.

Ø  the concept of separate legal entity has following implications

1)      The liability of shareholder are limited, this includes the liability as stated in Memorandum of Association. This indicates that members are not liable for act of company.

2)      Member are not an agent for company hence company works independently through duly constitute boards. 

Ø  For pre-incorporated contracts:

  • All contracts executed by promoters of the company before the incorporation of body corporate are knows as pre incorporation contract as stated in Corporation Act 2001
  • Pursuing to provisions of Corporation Act promoters are Ladys who participates in formation of body corporate
  • All the contract executed by promoters on behalf of Body Corporation before incorporation of company are adopted by corporation after incorporation subject to satisfaction of Board of directors.
  • pursuing to provisions of Contract Act, an right and liability in respect of any contact shall be created only when parties to contract are in existence, but in respect pre incorporation contract, body corporation is not in existence hence corporation shall not be consider party to contract.
  • General Act contains a provisions for legal statues of promoters. Pursuing to provisions of general law in order to have principal agent relation it is necessary to create valid principal agent relations, likewise, the promoter can't be considered as agent of the proposed partnership. This is on the grounds that at the time of acting in the capacity of promoter, principal is not yet in presence. General Law requires presence of both agent and principal to make legitimate relationship of agency. Because of absence of substantial relationship of principal and agent, the partnership on its presence can't sanction the agreement executed by the promoter before incorporation and in addition company can't be bound by outsider for the pre incorporation contracts.
  • Afore said statutory requirement clearly indicates that promoter is Ladyally liable for all pre incorporation contracts unless such contracts are validly adopted by corporation after incorporation. Reason for Ladyal liability of promoters is that while execution of contract by and on behalf of propose corporation, the corporation is not in existence so promoters are not legally authorise to do such acts as agents.
  • Followings are the legal position found in Corporation Act

a)      Company may after incorporation adopt either with same term or with  variation in  term of contracts executed by promoters, the adoption of pre incorporation contracts are at wish of body corporation

b)      If company adopts this pre incorporation contracts with variation in terms then such variation should be carried out within reasonable time limit or with the time as stated in pre incorporation contracts.

c)      In case after execution of pre incorporate contracts body corporate does not register itself then promoters shall be Ladyally liable

d)     Moreover after incorporation of corporation, company refuse to adopt the pre incorporate contracts then promotes shall be Ladyally liable for pre contracts.

e)      One of the sections of Corporation Act empowers a promoters to file a suit in for loss suffer by him due to non-adoption of contract by corporation after incorporation.    



In this case, the Steve Jones has incorporated company WA Gold Exploration Ltd. The company was incorporated on July 10. As Steve Jones has taken requires steps to incorporate company, he can be considered as promoter as per the provision of Corporation Act 2001. In the capacity of promoter he owes fiduciary duty towards the proposed company.

In the capacity of the promoter he has executed contract with Thor Mining Machinery Ltd. The said contract was executed on July 6. As the company was incorporated on July 10, the said contract will be considered as pre-incorporation contract. As per the provision of Corporation Act, on incorporation of company, the company has to decide whether to adopt the contract or not. The liberty is given to company. In case if the company adopts the contract, company will be liable for contract. At the same time if company decides not to adopt the contract, there will be no liability of the company. In the given case, directors of WA Gold Exploration Ltd have decided not to accept the pre incorporation contract executed by Steve Jones in the board meeting. In this case, the contract executed by Steve Jones will attract Ladyal liability for Steve Jones. The liability is because of section 131 of the Corporation Act 2001.

As the consequences of incorporation, company will be considered as separate legal entity. Because of the separate legal entity, the company is entitled to execute the contract. According to Corporation Act, 2001 the liability of the contract executed by the company is of its own. The company can be held responsible for the contract executed by it. As the corporation Act considered company as separate from its member, member cannot be held Ladyally liable for the contract executed by the company. The board of directors of WA Gold Exploration Ltd has executed contract with Volvo Trucks Ltd on 14th July. This contract can be considered as company's own contract. WA Gold Exploration Ltd can be held liable for obligation arising out of this contract. In this case after execution of contract with Volvo Trucks Ltd, the board has decided not to move ahead with the contract. In this case it amounts to breach of contract on the part of company and for this company can be held liable. Because of separate legal entity Steve Jones, promoter cannot be held Ladyally liable for this contract as the same was executed after incorporation.Conclusion:

Ø  Section 131 empowers Thor Maine to recover amount personally from Steve Jones

Ø  While Volvo truck is not in legally authorised to recover any amount for Steve Jones  for the contract executed after incorporation of company   

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