pre-incorporation contracts

Pre-Incorporation Contracts and Promoters

Company promoters are not directors. They do not own the company and cannot receive dividends as if they are members.

When a possible client requested information regarding promoters, the above response excited him until he heard me mention about ‘pre-incorporation contracts’. He froze.

‘Why should I pay him for business that never commenced? It was botched!’

Who are Company promoters?

These are people whose role is to formulation or help to formulate companies.

The role of promoters is slowly fading into intending Company Directors because the latter assume both roles. However, promoters had a great responsibility back then when companies needed marketing and investments from potential business partners. Today, Companies contract services of marketing agencies without offering shareholding rights.

Simply put, they help to create the business but neither own nor are part of it.

Pre-Incorporation Contracts

Promoters aren’t entitled to recover payment for promoting the company-in-formation.

Even when a valid contract exists, it will be between the promoter and intending directors, since a company is not registered (incorporated) at this stage.

A promoter will be entitled to recover any claim against an individual, not the Company (registered) despite rigorously helping in its formation.

Rationale: An unregistered Company does not have legal personality to enter into contracts with another party.

Ratification

A Company is not allowed to ratify or adopt a pre-incorporation contract because it did not exist in the first instance.

What usually happens is a matter of personal liability between the promoters and the intending Directors. The promoter undertakes to enable the formation of the Company but is not part of the Company, anyway.

Gentleman’s Agreement

Most promoters tend to recover payment under this precinct because they do not have remedies from the Company, in spite of its eventual legality.

Conclusion

Pre-incorporation contracts are contracts; but they are contracts between individuals and do not involve the Company. Should the Company be incorporated, it cannot be forced to pay a promoter for services previously offered while it sought legal entity.

BY ATUHAIRWE AGRACE

This article appears in our digital law newsletter, The Deuteronomy Vol 7, Issue 4 of July 28th, 2017

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