Professional Documents
Culture Documents
A COMPARITIVE ANALYSIS OF
INDIAN AND ENGLISH LAWS
I Introduction
8. (1851) 16 QB 655.
9. Supra note 3.
10. (1953) 1 All E R 708.
The judges said that they were not departing from the earlier cases cited
but held that in this particular case the plaintiff was not purporting to
contract as agent or as the principal. The lord judges ruled that the
plaintiff was making the contract for the company and it was the company,
which entered into the contract. The plaintiff raised the contention that
the company can act only through its agents but the court rightly overruled
this argument. However the court as regards the contract refused to
acknowledge the fact that Sensolid had in its actions as regards Newborne
acted as if he were the agent of the company. This is further made
obvious from the point that Sensolid did not even raise the point of the
non-existence of the company at the first instance.
The court held that in this case the company had entered into the
contract and the signature of Newborne was to authenticate the contract.
Newborne purported to sell the company's goods and not his goods. The
only contracting party was the company and Newborne just authenticated
the company's consent. Since the company was not in existence when the
contract was signed there never was a contract and the plaintiff cannot
come forward to say, "it was my contract". Therefore, the contract was
a nullity.
The differentiation made by the court was entirely incorrect. Now let
us take the instance, where the person acts as an agent of the company. 11
In such an instance the principal is not in existence therefore the agent has
no authority and hence the contract fails to come into existence. This is
because the agent has no independent existence separate from the principal.
The agent cannot do something that the principal could not have done.
The principal could not have entered into these contracts, as it was not in
existence at that time. Alternatively the company enters into a contract
that the promoter authenticates. 12 Such a contract is a nullity and therefore
in both situations there is no contract, which comes into existence.
However in the first instance the promoter has the option of declaring
himself to be the principal and continue to be party to the contract and
enforce it. It is interesting to note that in Phonogram v. Lane13 the
learned judges chose to more or less break down the distinction between
Kellner v. Baxter14 and Newborne's case, however, ultimately the decision
of the court was based on section 9(2) of the European Communities Act
1972. The court in its obiter dicta did rule that the promoter entering into
a contract could be considered as a party to the contract. Due to the fact
that the trial court had ruled that the contract couldn't be enforced against
the promoter the appellate court could not go again into the issue of facts
and chose to interpret the European Act.
The effect of this is that there is conflict as to what really is the
common law position. Is it the law with subtle differentiation as laid
down in Newborne v. Sensolid or is it the obiter from Phonogram, which
criticized the earlier judgment, but itself relied on the European Act to do
justice. The solution for this lies in saying that the common law position
does not depend on the way in which the contract on behalf of the
unformed company is made but depends on the real intent, as revealed in
the contract. The question should be "Did the party intend to make
himself personally liable, or was the intention that the unformed company
should be the only person liable, in which was there is no contract?"
Oliver.J in Phonogram made the same position very clear when he said:
"The question I think in each case is what is the real intent as revealed in
the contract?"
The coming into force of the statutory provision has also had an effect
on the court's perception of the common law in this area. In Phonogram
v. Lane18, OliverJ said that the "narrow distinction drawn" in Kellner v.
Baxter and the Newborne case19 did not represent the true common law
position, which simply was, but an analysis to find out whether the
contract purported to be one which is directly between the supposed
principal and the other party?20 The question should be answered by
"looking at the whole contract and not just at the formula used beneath
the signature"21
If this is taken to be the position then the difference between common
law and section 36(c) is narrowed. In common law, if the party intends
to contract with the non-existent company, the result will be a nullity and
the third party protected only to the extent that the law of restitution
provides protection.22 Under the statute, a contract, which purports to be
made with the company, will trigger the liability of the promoter, unless
the third party agrees to give up the protection. In other words, common
law approaches the question of the third party's contractual rights against
the promoter as a matter of the party's intentions with no presumption
either way, whereas the statute creates a presumption in favour of the
promoter being contractually liable. The common law position is still
important in those cases that fall outside the scope of the statute.23
The most important case that dealt with the provision of the statute
was Phonogram v. Lane?4 The facts of which were as follows. Prior to
the formation of a company to be called F.Ltd., which was for managing
a pop music group, negotiations took place between the defendant on
behalf of F. Ltd and the plaintiff regarding financing the pop group.
12,000 pounds was the amount agreed upon and a letter sent stating that
if the contract was not completed within certain period, the defendant will
undertake to repay the amount. The defendant signed a copy of the letter
"for and on behalf of F. Ltd." and returned the signed copy. The contract
was not completed. The defendant denied that he was personally liable
to repay the amount.
The trial court held that it couldn't enforce the contract based on the
letter.25 If this decision had been otherwise and reached the appellate
18. Ibid.
19 Supra note 10. "
20. Cotronic (UK) Ltd v. Dezonic, [1991] BCLC 721, Badgerhill Properties Ltd
v. Cottrell, [1991] BCLC 805.
21. Ibid
22. Supra note 15.
23. Supra note 20.
24. Supra note 13.
court on the issue of the letter the common law as regarding pre-
incorporation contracts would probably have been clarified. However
the trial court held that the payment can be enforced under section 9(2)
of the European Communities Act, 1972 because the agreement to repay
was "a contract [purporting] to be made ... by a person [i.e., the defendant]
as agent of a company [i.e., F. Ltd.] at a time when the company had not
been formed and accordingly in the absence of anything to the contrary"
the contract to repay had effect under section 9(1) as a contract entered
into by the defendant under which he was personally liable.26
Despite the statutory intervention through the introduction of section
36(c) in The Companies Act, 1956, there still persist considerable problems
with its operation. The foremost among this is that perhaps as a
consequence of the legislature's concern with the promotion of third
party protection, the section does not make it clear whether the promoter
acquires a right under the statute to enforce the contract as well as
contractual obligations. It is however submitted that if principles of
contract are applied, the concept of contractual mutuality will cover the
issue and the effect will be that the promoter will also be able to enforce
the contract.27
The second issue is that section 36(c) is only applicable when the
contract "purports"28 to be made on behalf of a company, which has not
been formed. Both the parts of this provision must be satisfied, the effect
being that where the parties thought the company existed, though it has
in fact been struck off the register, the court of appeal29 held that the
contract did not purport to be made on behalf of the company of the same
name which was hurriedly incorporated when the parties later discovered
their mistake. Since all were in blissful ignorance when the contract was
drawn up and signed, it could not be said that the contract purported to
be on behalf of the company, the need for whose existence was not felt
necessary at that time. The contract in truth purported to be made on
behalf of that company which had been struck off, but that was not a
company of which could be said, it "has not been formed". The plaintiff
thus failed in his suit. The section thus has not been construed as
protecting third parties in all situations not only where there is in fact
attempt to contract with non-existent companies, but only in those
situations where the contract identifies a specific company as the purported
contracting party and where that company is one which has not been
formed.30
26. Ibid
27. Supra note 20.
28. See s. 36C of The Companies Act, 1985.
29 Oshkash B'Gosh Inc v. Dan Marbel, [1989] BCLC 507.
30 ibi4
However the most serious of the defects of the new rule is that it has
done nothing to simplify the procedure for the companies to "assume"
the obligations of a pre-incorporation agreement. The European directive
left it to the member states to act upon such a provision, however, the
English legislature has chosen not to do anything about it in England.
The situation now is that a contract purporting to be made on behalf of
a company before it is incorporated cannot be adopted or ratified by it
after incorporation. It is necessary for a new contract to be made embodying
the terms of the old contract.31
In 1962 The Jenken's Committee Report recommended that the agent
who acted for the unformed company should be liable personally on the
contract. However once incorporated the company should be able to
adopt the contract unilaterally. At this point the promoter in the guise of
an agent would drop out. Such a proposal was also inset as clause 6 of
the Companies Bill, 1973, but the bill fell with defeat of the then
government and was not revived:32
We think that the Act should provide as do some Commonwealth
Acts, that a company may unilaterally adopt contracts which
purport to be made on it's name prior to incorporation and
thereby become a party to the same extent as if the contract had
been entered into alter incorporation. We also think that, unless
and until the company does so adopt such contracts the persons
who purported to act for the company should be entitled to sue
and liable to be sued thereon.
One of the common law jurisdictions where ratification of pre-
incorporation contracts by the company after it's formation is possible is
Singapore. The Singapore Companies Act, 1967 Section 35(1) after
amendment is:33
Any contract or other transaction purporting to be entered into by
a company prior to its formation or by any person on behalf of a
company prior to its formation may be ratified by the company
after its formation and thereupon the company shall become
bound by and entitled to the benefit thereof as if it had been in
existence at the date of the contract or other transaction had been
party thereto.
This provision was applied by the Privy Council on appeal from
Singapore in Cosmic Insurance Corporation Ltd v. Khoo Chiang Pob?4
31. Halsbury, Laws of England, Vol.9, Edn-4, (1973) 798 para 1366.
32. Extract from Report of the Company Law Committee.
33. Paul Davies & Palmer, Company Law, Edr-Geoffrey Morse, Sweet and
Maxwell, London, Edn-25, 3008 (1992).
34. July 10, 1980 [1981] New L J 286, c.f. Supra note 33
The expression promoter has not been defined in the Companies Act.
The definition in sub section (6) is meant for the purpose of the prospectus
only. The term promoter actually is not a part of the legal regime but one
borrowed from the business world. The word promoter points to a person
who forms a company and gets it started. It indicates a person, who
originates the scheme for the formation of the company, has the
memorandum and articles prepared, executed and registered, and finds
directors, settles the terms of the preliminary contracts and prospectus (if
any) and makes the arrangement for advertising and articulating the
prospectus and placing the capital.36 The promoter controls the formation
and future of the company.37
The promoter as defined above may need to enter into contracts so as
to incorporate the company. These contracts entered into for the purposes
of the company are what are referred to as pre-incorporation contracts. In
England there is one basic principle of law i.e., the legal technicality that
ratification dates back to the date of the transaction so that it is not
effective unless at that time, the ratifying person existed and had the
capacity to enter into the transaction.38
The position in India as regards this legal technicality is different.
Section 182 of the Indian Contract Act 1872 defines 'agent' and 'principal'.
If this is read with section 196 of the Act which reads:
Where acts are done by one person on behalf of another, but
without his knowledge or authority, he may elect to ratify or to
disown such acts if he ratifies them, the same effects will follow
as if they had been performed by authority.
contract only then will the third party be protected if the company does
not enter into a new contract with him. In present English law the
presumption is that promoter as agent is liable if there is no contract to
the contrary.44 In the Indian position, the presumption is just the opposite.
Therefore what is needed is that a new clause should be added to section
230 of the Indian Contract Act adding a presumption that agent will be
liable if he is the promoter of an unincorporated company. This can
protect the interests of the third parties who contract with the promoters
and help in the formation of the company.
Claim for specific performance by the company against the promoter
The promoter though he fulfils some fiduciary duties45 cannot be described
as a trustee as there is no beneficiary as defined under section 3 of The
Indian Trusts Act, 1882.46 He cannot also be strictly construed as agent
since there is no principal. -Hence the promoter occupies the peculiar
position of quasi-trustee,47 The important question, which arises now, is
whether the declaration made by the promoter constitutes transfer of
property and whether the company can claim any interest in the property.
The declaration of the promoter that the property is held by him for the
company to be formed does not constitute either a sale, mortgage, lease,
exchange or gift and the company before its incorporation is not a living
person and hence section 5 48 of the Transfer of Property Act, 1882 is not
attracted.49 Such a declaration also does not constitute a transfer to
himself and the company has not come into force as a beneficiary and
hence it will not become a trust. Hence the transaction is outside the
purview of section 5 of the Transfer of Property Act and also Trust Act
and it does constitute a conveyance as a vesting instrument or other
assurance of property and can be made orally under section 9 of the
Transfer of Property Act, 1882.50
If the promoter purchases property from the third party, he will be
acquiring the title though apparently in his name for the benefit of the
company yet to be formed. The property vests in him for the benefit of
the company though his assurance is sufficient to clothe the company
44. S.36(c) The Companies Act, 1985 also The European Communities Act, 1972
S. 9.
45. Erlanger v. New Sombero Phosphate Co, (1818) L. R App Cas 1218.
46. S.3 Indian Trusts Act, 1882, beneficiary- the person for whose benefit the
confidence is accepted.
47. Vishwas Sridhar Sohoni, Sohoni's The Specific Relief Act, 1963, Premier
Publishing Co, Allahabad, Edn-1, 309(1994).
48. S. 5 of the Transfer of Property Act, 1872 requires both transferor and
transferee to be living persons.
49. Supra note 47.
50. Ibid.
after its birth to claim full title. 51 In Weavers Mills v. Balkis Ammal52
the judge held that the benefit of the purchase made by the promoter
passed to the company, on its incorporation, without any registered deed.
The reasoning is that the company can claim property acquired by the
promoter after its incorporation without any need for conveyance. Even
if this reasoning is rejected just by the fact that the promoter is a quasi-
trustee he can be compelled to convey the property to the company and
if necessary on payment of consideration in view of the role of the
promoter for obtaining the benefit before its incorporation. 53
Until the coming into force of the Specific Relief Act the promoters
in India found it very difficult to carry on the work of incorporation.
Since contracts prior to the incorporation were void and also could not be
ratified, people hesitated to either supply goods or service for the cause
of incorporation. Promoters also felt shy of accepting personal
responsibility. 54
The clauses of the Specific Relief Act came as a relief to the promoters.
Section 15(h) of the Specific Relief Act, 1963 provides that:
Where 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 the incorporation of the
company:
Provided that the company has accepted the contract and has
communicated such acceptance to the other party to the contract.
The term "warranted by the terms of incorporation" means within the
scope of the company's object as stated in the memoradum. Thus in Vali
Pattabhirama Rao v. Sri Ramaija Ginning and Rice Factory Pvt Ltd.55
it was held that where a person who intended to promote a company,
acquired a leasehold interest for it, held it for sometime for partnership
firm, converted the firm into a company which adopted the lease, the
lessor was bound to the company under the lease. But it was held in
another case 5 6 that in a contract by the promoters of a company for
purchase of shares, when it came into existence, is not a contract for the
purposes of the company within the contemplation of s.15 (h) of the
51. Ibid
52. AIR 1969 Mad 462, Also see Income Tax Officers v. Bijli Cotton Mills, (1953)
23 Com Cases 114.
53. CIT\. Bijli Cotton Mills, (1953) 23 Com Cases 114.
54. A.K. Majumdar and G.K. Kapoor, Taxmann's Student Guide to Company
Law, Taxmann New Delhi, Edn-12, 61 (1998).
55. [1986] 60 Comp. Cas. 568 A.P.
56. Imperial Ice Manufacturing Co v. Mancheshaw, ILR 13 Bom 69
57. P.M. Bakshi, S. C. Bannerjee 's Law of Specific Relief The Law Book Company,
Allahabad, Edn.9, 229 (1992).
V Conclusion
Now that both the Indian and English positions have been analysed
and their faults identified it is necessary to see what could be the possible
reform. In England due to the intervention of the European Communities
Act, 1972 and subsequently the English Companies Act, 1985 the liability
of the promoter has been clearly and statutorily established and the
agreements entered into by the promoter purportedly for the company are
now deemed to be the contracts of the promoter and he is liable for them
as if he were the principal. This is so unless there is a contract to the
contrary. The English statute stops here and no ratification of the contract
by the company is possible. Therefore, the possibility of the company
taking over the contract from the promoter is completely ruled out. The
only way out for the company is the process of novation, i.e. the company
enters into a new contract with the other party to the same effect as the
contract made on its behalf before incorporation. However such a new
contract will not be inferred if the acts of the company after incorporation
are due to the mistaken belief that it is bound by the contract made before
incorporation.
The only change that the English statute has brought about is the
obliteration of the artificial difference created by the decision in the case
of Newborne v. Sensolid59 when it said that all promoters who enter into
58. R.K.Abichandani, Pollock and Mulla on Indian Contract and Specific Relief
Acts Vol-Il N.M. Tripathi Private Limited Bombay Edn-II, P 1303.
59. Supra note 10.
the contract are liable. More or less the same effect was achieved by
Justice Oliver in Phonogram v. Lane60 but in that case it was still
accepted that a contract with an unincorporated company is void but the
intention of the parties must be looked into rather than the technicality as
to the contract was signed.
India like other common law jurisdiction such as Singapore, allows
for ratification by the company. The main problem with Indian Law
arises in the fact situation where there is no ratification by the company.
What this does is push the third party back into the quagmire of English
common law, which has arisen due to the decision of Newborne v.
Sensolid. The decision of Phonogram cannot be relied upon since it is
based on statutory law. Also adding to the confusion of common law is
s. 280 of the Indian Contract Act, which says that an agent cannot be
made liable for the contract he enters into on behalf of the principal.
Therefore, both English and Indian law needs reform. Both the laws
cover complementary parts and what is needed is a combination of both
the laws in each of the two jurisdictions. In England they need to follow
the recommendations of the Jenkins Committee Report and allow for
ratification on the lines of the Indian legislation. India needs a statute
clarifying the position of the promoter and the third party when the
company does not ratify the pre-incorporation contract. India should
move away from the common law position and adopt the logic of the new
s.36 C of the Companies Act, 1985. As regards the property held by the
promoter for the company a relationship of quasi-trusteeship should be
declared as being established. Hence the company should be entitled to
take the property or benefits from the promoter. However this does not
mean that the promoters' interests should be harmed. The company
should be liable to pay the promoter consideration for taking the trouble
of entering into the contract for the company before its incorporation.
H.R. Saviprasad*