When is a promoter liable

A promoter acts on behalf of a corporation before it is formed. The promoter may be, but doesn't have to be, the same person as the corporation's incorporator. The corporation will not be liable for any contracts entered into by the promoter on its behalf prior to incorporation unless it adopts the contract, either by direct action of the board of directors, or through implied action, by accepting the benefit of the contract.

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Natalie Martinez, Esq. Filed Under: Uncategorized. This field is for validation purposes and should be left unchanged. Have a Question? Contact Us Today! Testimonials Extremely practical; great practice pointers. Nancy Naperville, IL. I hired the Trembly Law Firm to represent my business interests in a highly technical transaction, a… Read more Laurent B. Brett Trembly and his team exceeded all expectations in helping me structure my new business acquisi… Read more Ana Prellezo.

I wanted to express my gratitude towards the entire staff. I have obviously been working closely wi… Read more Paul M. First I want to thank David for the amazing job he has done!! The protection is provided by giving the third party an enforceable contractual obligation against the incorporated company. The implied warranty of the promoter can be taken advantage of unless a contrary intention of the third party to forego the protection is expressed in the contract.

If a promoter enters into a pre-incorporation contract on behalf of a yet-to-be incorporated company and the company chooses not to adopt or ratify the contract, then is the promoter personally liable? Section 10 CA does not deal with that situation. That is largely left to the common law. At the common law, a company cannot adopt or ratify a contract entered into prior to its incorporation by a person who professed to act as its agent on behalf of a non-existent principal.

See Kelner v. Baxter []. However, under the Roman-Dutch common law a company can adopt a contract made for its benefit by a person acting as a principal stipulatio alteri and such a contract is binding on a company. In short, if a promoter signed the contract as an agent on behalf of the proposed company, the promoter is personally liable under the common law.

However, if the promoter signed the contract as a principal stipulans for the benefit of a company, the promoter may not be personally liable provided certain conditions are met.

The object of the agreement must be to secure some advantage for the unformed company. The benefit may carry with it some corresponding obligation. In that case, a company cannot take the benefit without the corresponding obligation.

If a company accepted the benefit then it must notify the promisor. On such notification, the contract is binding on both the parties: the company and the promisor. However, a company may not be entitled to sue on a pre-incorporation contract under the common law when someone acting as an agent on behalf of the proposed company made the contract. The Companies Act is largely silent on the subject, merely imposing liability for untrue statements in prospectus.

The duties of a promoter, thus, are to be found in the common law, not in the Companies Act.