Promoters, Pre-incorporation Contracts and Corporate Personality
Promoters, Pre-incorporation Contracts and Corporate Personality
The exam tests the promoter’s fiduciary role, liability on contracts made before incorporation, and the separate legal entity principle with its exceptions.
Core rules
- A promoter is not defined exhaustively; the term covers a person who takes the initiative to form a company and set it going. Promoters stand in a fiduciary position and must disclose secret profits and conflicts.
- A pre-incorporation contract is made when the company does not exist. The company cannot ratify it. It may adopt it only by a fresh contract/novation with the other party; otherwise the promoter remains personally liable.
- Corporate personality: on incorporation the company is a separate legal person (Salomon v Salomon), owns property, contracts, sues and is sued, and has perpetual succession.
- The veil may be lifted for fraud, tax evasion, enemy character, alter ego, or statutory purposes.
Worked example
P signs a lease “for and on behalf of ABC Ltd (proposed)” before incorporation. ABC is later incorporated and occupies the premises but does not sign a new lease. The landlord cannot enforce the lease against ABC merely because it took benefit; P remains liable unless the landlord agrees to a novation.
Traps
Do not say the company “ratifies” a pre-incorporation contract; ratification requires an existing principal. Promoter is not automatically a trustee of the company. Veil lifting is exceptional, not routine.