Definition and Role of Promoters in Company Formation
AS PER SECTION 2(69) OF THE COMPANIES ACT 2013, PROMOTER '' MEANS A PERSON-
a) WHO HAS BEEN NAMED AS SUCH IN A PROSPECTUS OR IS IDENTIFIED BY THE COMPANY IN THE COMPANY IN THE ANNUAL RETURN REFERRED TO IN SECTION 92;
ORb) WHO HAS CONTROL OVER THE AFFAIRS OF THE COMPANY, DIRECTLY OR INDIRECTLY WHETHER AS A SHAREHOLDER, DIRECTOR OR OTHERWISE; OR
c) IN ACCORDANCE WITH WHOSE ADVICE, DIRECTIONS OR INSTRUCTIONS THE BOARD OF DIRECTORS OF THE COMPANY IS ACCUSTOMED TO ACT: PROVIDED THAT NOTHING IN SUB-CLAUSE (c) SHALL APPLY TO A PERSON WHO IS ACTING MERELY IN A PROFESSIONAL CAPACITY.
PRE INCORPORATION CONTRACTS ARE AGREEMENTS ENTERED INTO BY INDIVIDUALS OR PROMOTERS ON BEHALF OF A COMPANY THAT IS TO BE INCORPORATED. PRE INCORPORATION CONTRACTS ARE MADE IN ANTICIPATION OF THE COMPANY'S FORMATION AND ARE INTENDED TO SECURE RIGHTS, OBLIGATIONS OR ASSESTS FOR THE FUTURE OF THE COMPANY.
BENEFITS OF PRE INCORPORATION CONTRACT
1.HELPS IN ESTABLISHING BUSINESS RELATIONSHIPS: PRE INCORPORATION CONTRACT HELPS IN PROVIDING AN OPPORTUNITY TO ESTABLISH RELATIONSHIPS WITH STAKEHOLDERS PRIOR TO INCORPORATION OF THE COMPANY. IT HELPS IN CREATING FUTURE FOUNDATION FOR BUSINESS OPERATIONS ONCE THE COMPANY IS INCORPORATED.
2.OBTAINING RESOURCES: PROMOTERS ARE ALLOWED TO SECURE RESOURCES OR SERVICES FOR THE COMPANY BEFORE ITS INCORPORATION.
3.CREDIBILITY ENHANCEMENT: PRE INCORPORATION CONTRACTS CAN ENHANCE THE CREDIBILITY AND PROFESSIONALISM OF THE COMPANY ABOUT TO BE INCORPORATED.
4. EFFICIENCY OF PROMOTERS: PREINCORPORATION CONTRACTS CAN CONTRIBUTE TO THE EFFICIENCY OF OPERATIONAL PHASE OF THE COMPANY. AS THE KEY RESOURCES OF THE COMPANY ARE SECURED IN ADVANCE IT PROVES TO EFFICENT BY REDUCING THE TIME AND EFFORTS REQUIRED TO SET UP THE COMPANY.
5.PROVIDES LEGAL CERTAINITY:PRE INCORPORATION CONTRACTS PROVIDES LEGAL CERTAINITY BY DOCUMENTING AGREEMENTS AND PROVIDING LEGAL CERTAINTY TO ALL THE PARTIES INVOLVED.
CHECKLIST FOR PREINCORPORATION CONTRACTS
1.IDENTIFICATION OF PARTIES: ALL THE PARTIES TO THE CONTRACT MUST BE IDENTIFIED BE IT PROMOTERS OR INDIVIDUALS ACTING ON THE BEHALF OF THE COMPANY.
2.PURPOSE OF THE CONTRACT : THE PURPOSE AND OBJECTIVES OF THE CONTRACT MUST BE DESCRIBED ALONG WITH THE AIMS WHICH ARE TO BE ACHIEVED.
3.RIGHTS AND OBLIGATIONS OF PRE INCORPORATION CONTRACT: THE ROLES AND RESPONSIBILITIES OF THE EACH PARTY TO THE CONTRACT MUST BE SPECIFIED.
4.TERMS OF THE CONTRACT: THE DURATION OF THE CONTRACT AND CONDITIONS UNDER WHICH IT MAY BE TERMINATED MUST BE SPECIFIED.
5. RESOLUTION OF THE DISPUTE: THE METHOD FOR RESOLVING ANY POTENTIAL DISPUTE MUST BE SPECIFIED, THAT MAY ARISE DURING PREINCORPORATION PHASE. FOR EXAMPLE THROUGH ARBITRATION, NEGOTIATION ETC.
6.GOVERNING LAWS: THE JURISDICTION AND GOVERNING LAWS THAT WILL APPLY TO THE CONTRACT MUST BE SPECIFIED.
7. LIABILITY CLAUSE: THE LIABILITIES OF EACH PARTY AND THE PROVISIONS FOR INDEMNIFICATION MUST BE SPECIFIED.
COMPLIANCES FOR PRE INCORPORATION CONTRACTS
1.LEGALITY: THE PREINCORPORATION CONTRACT MUST BE LEGALLY VALID AND ENFORCEABLE. IT MUST MEET THE REQUIREMENTS OF A VALID CONTRACT, SUCH AS OFFER, ACCEPTANCE, CONSIDERATION, INTENTION TO CREATE LEGAL RELATIONS AND LAWFUL OBJECT.
2.PROMOTERS RESPONSIBILITIES: PROMOTERS SHOULD ACT IN GOOD FAITH, DISCLOSE ANY CONFLICTS OF INTEREST AND AVOID TAKING ADVANTAGE OF THEIR POSITION FOR PERSONAL GAIN.
3.DISCLOSURE OF INTEREST: PROMOTERS MUST DISCLOSE ANY INTEREST THEY HAVE IN THE PRE INCORPORATION CONTRACT OR ANY RELATED TRANSACTIONS. IT INCLUDES DISCLOSING ANY BENEFITS, PROFITS OR REMUNERATION THEY MAY RECEIVE.
4.APPROVAL OF THE BOARD: AFTER THE INCORPORATION OF COMPANY, THE BOARD OF DIRECTORS MUST RATIFY OR ADOPT PRE INCORPORATION CONTRACT.ON:
5.SHAREHOLDER APPROVAL: IN CERTAIN CASES, SHAREHOLDER APPROVAL MAY BE REQUIRED FOR SPECIFIC PRE-INCORPORATION CONTRACTS.
6.REQUIREMENTS OF REGULATORY FILINGS: THERE MAY BE A NEED TO FILE RELEVANT DOCUMENTS OR AGREEMENTS WITH REGISTRAR OF COMPANIES, DEPENDING UPON THE NATURE OF PREINCORPORATION CONTRACT.
DOCUMENTS REQUIRED FOR PREINCORPORATION CONTRACTS:
1. MEMORANDUM OF ASSOCIATION: THE MOA STATES THE KEY OBJECTIVES, CAPITAL STRUCTURE AND SCOPE OF THE ACTIVITIES OF THE COMPANY.IT MUST BE SIGNED BY THE SUBSCRIBERS OF THE COMPANY WHO WILL BE PARTIES TO THE PREINCORPORATION CONTRACT.
2. ARTICLES OF ASSOCIATION: THE AOA PROVIDES INTERNAL MANAGEMENT OF THE COMPANY. IT MUST BE PREPARED AND SIGNED BY THE SUBSCRIBERS.
3.AGREEMENT OF THE PROMOTERS: THE PROMOTERS AGREEMENT IS THE CONTRACT AMONG THE PROMOTERS OF THE COMPANY.IT DEFINES THE TERMS AND CONDITIONS AGREED UPON BY THE PROMOTERS PERTAINING TO THE ORGANISATION AND INITIAL OPERATIONS OF THE COMPANY.
4.POWER OF ATTORNEY: THE SUBSCRIBERS MAY EXECUTE A POWER OF ATTORNEY IN FAVOUR OF A PARTICULAR PERSON TO TO ENTER INTO SPECIFIC CONTRACTS ON THEIR BEHALF , ACQUIRING PROPERTY OR EXECUTING DOCUMENTS RELATED TO THE PREINCORPORATION CONTRACTS.
5.OPENING OF BANK ACCOUNT: IF THE PREINCORPORATION CONTRACT INVOLVES OPENING OF BANK ACCOUNT ON BEHALF OF THE COMPANY, THE NECESSARY DOCUMENTS FOR BANK ACCOUNT OPENING,
SUCH AS KYC (KNOW YOUR CUSTOMERS) DOCUMENTS,PROOF OF ADDRESS AND IDENTITY OF THE AUTHORIZED SIGNATORIES IS REQUIRED.
FREQUENTLY ASKED QUESTIONS RELATED TO PREINCORPORATION CONTRACTS
1. WHAT IS PRE INCORPORATION CONTRACT?
A PRE INCORPORATION CONTRACT IS A CONTRACT ENTERED INTO BY INDIVIDUALS OR PROMOTERS ON BEHALF OF A COMPANY THAT HAS NOT BEEN INCORPORATED YET.THESE CONTRACTS ARE BINDING ON THE COMPANY ONCE IT IS INCORPORATED.
2.CAN PRE INCORPORATION CONTRACTS BE ENFORCED AGAINST THE COMPANY?
YES, PRE INCORPORATION CONTRACTS ARE ENFORCEABLE AGAINST THE COMPANY ONCE IT IS INCORPORATED.HOWEVER, IT IS IMPORTANT TO ENSURE THAT THE CONTRACT IS RATIFIED BY THE COMPANY AFTER ITS INCORPORATION.
3.CAN PROMOTERS BE HELD PERSONALLY LIABLE FOR PRE INCORPORATION CONTRACTS?
ONCE A COMPANY IS INCORPORATED, IT BECOMES A SEPARATE LEGAL ENTITY AND THE COMPANY IS INCORPORATED IT BECOMES A SEPARATE LEGAL ENTITY AND THE COMPANY IS PRIMARILY RESPONSIBLE FOR THE OBLIGATIONS UNDER THE PRE INCORPORATION CONTRACT.HOWEVER IF THE PROMOTERS HAVE EXPLICITLY AGREED TO BE PERSONALLY LIABLE OR HAVE ACTED IN A FRADULENT MANNER, THEY MAY BE HELD PERSONALLY LIABLE.
4.HOW CAN PRE INCORPORATION CONTRACTS BE RATIFIED BY THE COMPANY?
AFTER INCORPORATION THE COMPANY MAY FORMALLY APPROVE OR RATIFY THE PRE INCORPORATION CONTRACT THROUGH A BOARD RESOLUTION OR A SHEREHOLDERS RESOLUTION.
5.CAN PRE INCORPORATION CONTRACTS BE RATIFIED BEFORE INCORPORATION?
YES, PRE INCORPORATION CONTRACTS CAN BE TERMINATED OR MODIFIED BY MUTUAL AGREEMENT BETWEEN THE PARTIES BEFORE THE COMPANY IS INCORPORATED.
