PROJECT ON COMPANY

LAW-I
CASE: VALI PATTABHIRAMA RAO AND ANR. VS SRI
RAMANUJA GINNING AND RICE FACTORY P. LTD.

MADE BY:
KESHAV MAHESHWARI
B.B.A LL.B (HONS.)
Roll No. A038

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TABLE OF CONTENTS
SR. NO. PARTICULARS PAGE NO.

1. RESEARCH METHODOLOGY 3

2. TABLE OF CASES 6

3. ABBREVIATIONS 7

4. INTRODUCTION 8

5. LEGAL FRAMEWORK 11

5. CONCLUSION 21

6. BIBLIOGRAPHY 23

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RESEARCH METHODOLOGY
1. OBJECTIVE:

The objective of this paper is to conduct an in-depth study of Pre-incorporation of

contract in Company Law along with liability of the Promoter. Also to analyse the above
mentioned in the contemporary position and compare with the system of other countries. In
the end, to conclude what are the drawbacks to the system and how can the glitches be
removed.

2. SCOPE:

The legal status of a pre-incorporation contract is not easy to define. Going by the
definition of the contract, there have to be at least two parties/persons who enter into contract
with each other. So, the general principle goes that no contract is there if one of the parties to
the contract is not in existence at the time of entering into the contract. Hence, the company
cant enter into a contract before it comes into existence, and it comes into existence only
after its registration. It may be argued that, the pre-incorporation contract is entered into by
the promoters on behalf of the company. But here also, is a tangle. The promoters, while
entering into the contract, act as agents of the company. But when the principal, i.e. the
company is itself not in existence, how can it appoint an agent to act for it? So, the
promoters, themselves and not the company, become personally liable for all contracts
entered into by them even though they claim to be acting for the prospective company. But,
u/s 230 of the Indian Contract Act, an agent cannot personally enforce contracts entered into
by him on behalf of his principal, nor is he personally bound by them if he specifies clearly,
at the time of making the contract, that he is only acting as an agent and he is not personally
liable under the contract. So if this principle is applied, the contract becomes in fructuous as
neither of the parties is liable under the contract.

3. METHOD:

The method of research adopted in this research paper is the Doctrinal method of
research. The researcher has adopted secondary source of data collection for this project. The

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research is limited to books, websites and articles. Material has been collected through data
given by the Ministry of Law, Government of India.

4. HYPOTHESIS:

Pre-incorporation contracts, though at first, might appear to be with no legal status and
value, but they are very much important and legally valid as well as enforceable. Pre-
incorporation contracts may be undertaken by the company after its incorporation either by

a) Incorporating the contract in the terms of incorporation, or

b) By entering into a fresh contract with the other party or with the promoters, or
c) By accepting the benefits from the contract, either expressly or impliedly.

And hence, the pre-incorporation contract becomes legally enforceable against the company.

5. RESEARCH PROBLEM:

The promoter is obligated to bring the company in the legal existence and to ensure its
successful running, and in order to accomplish his obligation he may enter into some contract
on behalf of prospective company. These types of contract are called Pre-incorporation
Contract. Nature of Pre-incorporation contract is slightly different to ordinary contract.
Nature of such contract is bilateral, be it has the features of tripartite contract. In this type of
contract, the promoter furnishes the contract with interested person; and it would be bilateral
contract between them. But the remarkable part of this contract is that, this contract helps the
perspective company, who is not a party to the contract. One might question that why is
company not liable, even if it a beneficiary to contact' or one might also question that doesn't
promoter work under Principal-Agent relationship. Also in cases of pre-incorporation
contract when a conveyance would be required to transfer the property from the partnership
firm to the company which is one of the subject matters in this case.

6. RESEARCH QUESTIONS:
A. Whether a conveyance is necessary to vest the property of a firm when the same was
converted into a company?
B. Similarly whether such conveyance is necessary to claim title by the company in respect
of property acquired by the promoter before its incorporation?
7. REVIEW OF LITERATURE:

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Rogers, Roy L. Corporations: Pre-incorporation Contracts of Promoters and
Incorporators: Effect of Statute on Personal Liability of Incorporators. Michigan Law
Review, vol. 38, no. 8, 1940, pp. 12661274.

This theory is that the promoter is liable because such was the intention of the parties. If the
intention may fairly be deduced from the contract, no difficulty arises in holding the promoter
liable. The difficulty arises from the fact that it is rarely true that the parties in fact intend that the
promoter shall be liable personally upon the contract. The conventional method of solving the
difficulty is to presume the intention by requiring a clear showing to the contrary. The technical
argument in favor of this approach, first clearly enunciated in Kelner v. Baxter, takes the form of
a dilemma. Either the parties intended the promoter to be personally liable or no one is intended
to be liable. But to permit the inference that no one is intended to be liable renders the contract a
nugatory act, a situation which the parties do not generally intend. Therefore, unless there is a
clear showing that the parties did intend a nugatory act, they must be taken to have intended the
per-specified sum. The somewhat different purpose of the Michigan statute may be to permit
contracts facilitating the business of the corporation, not merely organization, to be made by the
incorporators without waiting for incorporation. The practical utility of this power may be
considerable.

However, personal liability upon the contract as if it were the personal contract of the promoter
does not follow from the argument. It has already been pointed out that, even if the promoter is
liable in no manner, the contract may be construed as a continuing offer to the corporation and
thus not entirely nugatory. Moreover, even accepting the proposition that unless the promoter is
intended to be liable the contract is a nugatory act, it does not follow that his liability is intended
to be the same as if the contract were made without mention of the corporation.

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TABLE OF CASES
1. Addanki Narayanappa v. Bhaskara Krishnappa MANU/SC/0281/1966
2. Kelner v Baxter 1866 L.R.2 CP 174
3. Phonogram Limited v Lane 1982 QB 939
4. Ramasundari Ray v. Syamendra Lal Ray ILR [1947] Cal 1.
5. UOI & Anr. Vs. M/S Mahalaxmi Saw Mills P. Ltd. LPA 2514/2005
6. Weavers Mills Ltd. v. Balkies Ammal AIR 1969 Mad 462

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ABBREVIATIONS
1) A.I.R- All India Report
2) Anr. - Another
3) BOM- Bombay
4) IBID- in the same source
5) Ltd. - Limited
6) Mad- Madras
7) Ors. - Others
8) S.C- Supreme Court
9) S.C.C- Supreme Court Case
10) Sec. - Section
11) T.N- Tamil Nadu
12) U.K- United Kingdom
13) U.O.I- Union of India
14) Vis--Vis- In relation to
15) Vs. - Versus
16) WWW- World Wide Web

INTRODUCTION

1. FACTS ABOUT THE CASE:

1.1 The plaintiffs in O. S. No. 36 of 1969 on the file of the Subordinate Judge's Court,
Vijayawada are the appellants in this appeal. The suit is laid for eviction of the defendants
from the plaint schedule site after declaring the suit lease as duly terminated, removing
the structures and deliver vacant possession of the same. The plaintiffs are grandsons of
one Vali Subbarayudu and it is averred that the said Subbarayudu granted a lease to one
Nidumukkala Subbarayulu the suit land for the purpose of constructing and running a

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Ginning and Rice and Oil Factory under a lease deed dated 10-7-1903 and the said lease
though called a permanent lease was a tenancy at will and the said lease will enure to the
life of the original lessee only and the original lessee constituted the 1st defendant firm
with himself and other sharers and erected the factory of the 1st defendant and the 1st
defendant paid the rents due till 1-1-1969 and committed default in payment of half
yearly rents and the 1st defendant also committed breach of covenants of the aforesaid
lease and the lease aforesaid offends the rule of perpetuities and consequently void. It was
further alleged that handing over of the leased premises by the original lessee to the 1st
defendant is unauthorised and hence the 1st defendant cannot claim to continue to be in
possession and hence the plaintiffs terminated the tenancy in respect of the plaint
schedule properties and hence the defendants should deliver possession of the property
and that the 2nd defendant maliciously set up the claim to a portion of the plaint schedule
site and the 1st defendant failed to set off the rents due against the decretal dues in O. S.
No. 1 of 1966 and hence the suit.

1.2 The first defendant, a private limited company, registered under the Indian Companies
Act, 1913, filed a written statement contending that the lease dated July 10, 1903, was a
permanent lease in favor in Nidumukkala Subbarayudu and the said property is
continuously under the possession and enjoyment of the lessee and his successor-in-
interest and is being used for the purposes contemplated in the original lease and there is
no default in payment of rent and the allegation of breach of covenants of the lease deed
is incorrect. The original lessor, his son and the present plaintiffs know that the first
defendant is running the factory and acquiesced in the manner of enjoyment by the first
defendant and, hence, they are stopped from questioning the rights by the first defendant
and the plaintiffs have taken considerable amounts by way of advance from the first
defendant and having committed default in payment of those amounts, the first defendant
obtained a decree in O.S. No. 1 of 1966 on the file of Principal Subordinate Judge's
Court, Vijayawada, against the plaintiffs and the same is being executed and the plaintiff's
suit for the adjacent land on the basis of trespass passed in O.S. No. 79 of 1969 is
frivolous and vexatious and the second defendant has no rights in the property and is not
a necessary party and the same is liable to be dismissed.

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1.3 On the material issues framed by the trial court, it found that the lease deed dated July 10,
1903, is a permanent lease and it can enure beyond the lifetime of the original lessee and
the first defendant did not commit any breach of covenants of the lease, the plaintiffs and
their predecessors-in-interest have acquiesced in the mode of enjoyment of the plaint
schedule property by the first defendant and, hence, they are estopped from filing the
present suit and there is no default in payment of the rent by the first defendant, and the
second defendant and their legal representatives have no rights in the suit property and
the plaintiffs have no right to terminate the lease and obtain possession of the property
and consequently dismissed the suit. Issues Nos. 4 and 6 were deleted and issue No. 11
was found to be unnecessary which relates to the validity of lease deed as being opposed
to public policy and the rule of perpetuity, and the termination of the lease, and validity of
the quit notice, issued by the plaintiff respectively.

2. ISSUES INVOLVED:

A. Whether a conveyance is necessary to vest the property of a firm when the same was
converted into a company?
B. Similarly whether such conveyance is necessary to claim title by the company in respect
of property acquired by the promoter before its incorporation?
3. JUDGMENT OF THE COURT:

It was held that the property of the firm vests in the company, which is incorporated by
partners of firm and in which company all assets and liabilities of firm are vested, under
Section 575 of Companies Act and no separate conveyance is necessary. It was further held
that Section 5 of the Transfer of Property Act requires a transfer to be inter vivos i.e. between
living persons; since a company is not a living person before its inception, vesting of
property in the company at the time of its inception, is not transfer within the meaning of
Section 5 and hence does not require an instrument or Conveyance Deed and is a transfer
within the meaning of Section 9 of the Transfer of Property Act which is possible without an
instrument or Conveyance Deed. The suit is not maintainable without terminating the lease.
The grounds of forfeiture of lease are found to be factually incorrect and legally untenable.
The plaintiffs have not sued any heir of the lessee and we cannot accept that he died heirless
though he may not have any progeny and hence the suit against the first defendant must be
treated as one based on private of estate. We also alternatively hold that even assuming that

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the assignment is invalid and inoperative, the first defendant perfected title by adverse
possession for permanent lessee's interest as he continued in possession of the property since
the death of the original lessee in 1951 till the date of suit. Hence, we see no legal basis on
which the plaintiffs' suit can be decreed and hence the appeal is dismissed but, in the
circumstances, without costs.

LEGAL FRAMEWORK
1. PRE-INCORPORATION OF CONTRACTS
1.1 Introduction:

In order to get the benefits of a corporate personality', it is very necessary for an

association of persons' to become incorporated under the Companies Act, 1956. After the
incorporation of association of persons the company comes in existence, and it can start its
business operations as company only after that. The simple reason behind it is that before
incorporation company do no has any legal existence before incorporation, and if the
association of persons' enters into an agreement in the name of company before
incorporation; the agreement would be void ab initio.

It would be a matter of inconvenience that an association of persons' cannot perform any

official business operation in the name of company before its incorporation or the issue of

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certificate of commencement of business; they may have to make arrangement for office,
place of work, worker, etc. In order to do away with these inconveniences, the promoter can
enter into the agreements in the benefit of association of persons' or prospective company;
these agreements are known as pre-incorporation contract.

Under the strict principles of contract law, the promoter is solely liable for the breach of
contract. The reason behind is that the promoter is party who enters into the contract, and not
the company. The rule of privity of contract keeps away the company from pre-incorporation
contract. But recent development in corporate law and contract law makes the company
liable for pre-incorporation contract.

1.2 Meaning of Promoter:

The Company Act, 1956, does not provide a common definition of Promoter. Although
few section like 62, 69, 76, 478, 519 of Company Act and SEBI Guidelines 2000 Chapter VI
Explanation I to III to clause 6.4.2(k) does discuss about promoter, but definition provided
under those section would be restricted to the area of those section. Resent Company Bill
2013 does have the definition of Promoter in the definition clause under section 2(69), it
says that promoter means a person

a) Who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
b) 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.

According to Bowen J., the Promoter' is not the term of law but it is a term of business,
who play main role in the setup of a company. Whereas Cockburn CJ in Twycross v Grant 1
observed that a promoter is one who undertakes to form a company with reference to a given
project and to set it going and who takes the necessary steps to accomplish that purpose'.

1 http://www.uniset.ca/other/cs3/2CPD469.html

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In conclusion, one can say that promoter connote any individual, syndicate, association,
partnership or a company, which takes all the necessary steps to create company and mould a
company and set it going.

1.3 Pre-incorporation Contract:

The promoter is obligated to bring the company in the legal existence and to ensure its
successful running, and in order to accomplish his obligation he may enter into some contract
on behalf of prospective company. These types of contract are called Pre-incorporation
Contract'. Nature of Pre-incorporation contract is slightly different to ordinary contract.
Nature of such contract is bilateral, be it has the features of tripartite contract. In this type of
contract, the promoter furnishes the contract with interested person; and it would be bilateral
contract between them. But the remarkable part of this contract is that, this contract helps the
perspective company, who is not a party to the contract.

One might question that why is company not liable, even if it a beneficiary to contact or
one might also question that doesn't promoter work under Principal-Agent relationship'.
Answer to all those questions would be simple. The company does not in legal existence at
time of pre-incorporation contract. If someone is not in legal existence, then he cannot be a
party to contract, and Privity to Contract' doctrine excludes company from the liability. In
Kelner v Baxter2, Phonogram Limited v Lane3 this position was confirmed.

In pure common law sense, Pre-incorporation contract does not bind the company. But
there are certain exceptions to this contract, and these exceptions were developed in USA,
India and later in England.

In India it is clear from the provision in Section 196 of the Indian Contract Act 1872,
that a company may ratify a pre-incorporation contract and thereby absolve the promoter
from liability. The section reads as follows: Right of person as to acts done for him
without his authority. Effect of ratification 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
2 1866 L.R.2 CP 174

3 1982 QB 939

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acts. If he ratifies them, the same effects will follow as if they had been performed by his
authority. It is not however sufficient to stop here since in India there is no presumption that
the promoter of a company would be acting as an agent for the company while entering into
pre-incorporation contracts. Thus it is questionable if Section 196 of the Contract Act would
even apply to cases of pre-incorporation contracts being entered into by promoters.
Fortunately there are two provisions in the Specific Relief Act, 1963 which deal expressly
with pre-incorporation contracts. Section 15(h) of the Specific Relief Act, 1963 clearly
allows for the Company to obtain specific performance of a pre-incorporation contract.

Similarly Section 19(e) of the Specific Relief Act, 1963 allows for the third party to
obtain specific performance of the pre-incorporation contract against the company. The
language is similar to that of Section 15(h). Thus in India pre-incorporation contracts can be
specifically enforced against the once un-incorporated company upon incorporation and then
ratification by the now incorporated company.

1.4 Liability of Promoter:

Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-
incorporation contract, was similar to the English Common Law. This was based on the
general rule of contract where two consenting parties are bound to contract and third party is
not connected with the enforcement and liability under the terms of contract. And because
company does not come in existence before its incorporation, so the promoter signs contract
on behalf of company with third party, and that is why the promoter was solely liable for the
pre-incorporation contract under the established ruling of Kelner v Baxter.

Promoters are generally held personally liable for pre-incorporation contract. If a

company does not ratify or adopt a pre-incorporation contract under the Specific Relief Act,
then the common law principle would be applicable and the promoter will be liable for
breach of contract. Although under common law promoter is personally liable for the pre-
incorporation contract, but there are some scope where the promoter can shift his liability to
company. He can shift to company his liability under the Specific Relief Act 1963 or he can
go for novation under contract law.

1.5 Exception under Specific Relief Act 1963:

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Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important
sections for pre-incorporation contract. Section 15 is about stranger's right to sue if he
entitled to a benefit or has any interest under the contract, although it has certain limitation.
Section 15(h) talks about the company, being a stranger to pre-incorporation contract, has the
right to sue to the other contracting party. But the necessary condition is that the contract
should be warranted by the terms of its incorporation. This provision clearly negates the
common law doctrine which says that the company cannot ratify or adopt the pre-
incorporation contract. Under this provision promoter can give his right to sue to sue to the
company. In Vali Pattabhirama Roa v Sri Ramanuja Ginning and Rice Factory Pvt. Ltd this
position was accepted.

1.6 Weavers Mills Ltd. v. Balkies Ammal4

The Madras High Court extended the scope of this principle through its decision. In this
case, promoters had agreed to purchase some properties for and on behalf of the company to
be promoted. On incorporation, the company assumed possession and constructed structures
upon it. It was held that even in absence of conveyance of property by the promoter in favor
of the company after its incorporation, the companys title over the property could not be set
aside.

1.7 Brief Comparison Between Indian And Other Countries Law Regarding Promoter's
Liability For Pre-Incorporation Contract:

Although under the English Common Law, the American law and the Indian Law
recognize the rule that promoter is personally liable for pre-incorporation contract, American
Laws and Indian laws are much more innovative and effective to solve the problem of Pre-
incorporation Contract. Whereas the English Courts still follow the principle of Kelner v.
Baxter. Although in UK, Contracts (Rights of Third Parties) Act 1999 brought some relief,
but it is not as broad as the American and Indian Laws are.

Under English Common Law, the ratification or adoption, after the incorporation, did not
release the promoter from liability of pre-incorporation contract. Whereas in American Court

4 AIR 1969 Mad 462

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recognize that if the after the incorporation company can ratify or adopt the contract, and this
would bound the company and not the promoter. Indian Law the rule of Kelner v Baxter is
applicable but under the Specific Relief Act 1963, section 15(h) and 19(e) promoter can
shift his right and responsibility to the company, if it is warranted by the terms of
incorporation.

The principle of novation of pre-incorporation contract is applicable in above three

counties, the reason behind is that; the novation replace the old contract with the new
contract, so there is no problem of non-existence of company. Now after the Contracts
(Rights of Third Parties) Act 1999, English laws may also allow company to become the part
of pre-incorporation contract, when it acquire its legal existence.

2. Absence of a registered deed conveying interest of the original lessee to the firm:

It is clear that the main principle is that the property brought into the stock of the firm by
the partner becomes the property of the firm. On the other hand, the previous section 253(1)
is more specific in stating that all partners are joint owners of all properties originally
brought into the partnership stock and thus we have no doubt in our mind.

The second limb of argument of the learned counsel is that in the absence of a registered
deed conveying interest of the original lessee to the firm, the title will not pass to the firm
and inasmuch as the firm was formed prior to the Indian Partnership Act 9 of 1932 and
section 14 of the said Act has no application and the decisions rendered by courts on the
construction of section 14 have no application as the transaction in question is governed by
section 253 of the Indian Contract Act of 1872. It is true that the partnership in question is
governed by the provisions of the Indian Contract Act of 1872 that embodied the rules of
partnership in sections 239 to 266. The section corresponding to section 14 of the Partnership
Act is section 253(1) of the Indian Contract Act, 1872. It is necessary to notice the said
provision: S. 253. In the absence of any contract to the contrary the relations of partners to
each other are determined by the following rules:

a) All partners are joint owners of all property originally brought into the partnership
stock, or brought with money belongings to the partnership, or acquired for the
purposes of the partnership business. All such property is called partnership

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property. The share of each partner in the partnership property is the value of his
original contribution, increased or diminished by his share of profits or loss.

2.1 Addanki Narayanappa v. Bhaskara Krishnappa5

Holding (at p. 1303) that whatever may be the character of the property which is brought
in by the partners when the partnership is formed or which may be acquired in the course of
the business of the partnership, it becomes the property of the firm, and since a firm has no
legal existence, the partnership property will vest in all the partners and in that sense every
partner has an interest in the property of the partnership. During the subsistence of the
partnership, however, no partner can deal with any portion of the property as his own, would
usually apply to a firm formed prior to the coming into force of the present Partnership Act
and governed by the provisions of the Contract Act. In fact, no words of dispositive
character are necessary to bring the property to the common stock (Vide State v.
Chidambaram6). The declaration of the rights of partners in exhibit B-53 is enough to make
the property as the property of the firm.

2.2 We have already held that the partnership firm in which the original lessee is partner was
legally constituted, and the firm continues to be lawful and the properties belonging to all
the partners have become the properties of the firm. The question is whether the property
of the said firm had vested in the first defendant company when the firm was registered
under the provisions of the Indian Companies Act, 1913. For that it is necessary to notice
the terms of section 263 of the Indian Companies Act, 1913, that corresponds to section
575 of the present Companies Act, 1956. Section 263 reads as follows :

All property, movable and immovable, including all interests and rights in, to and out of
the property, movable and immovable, and including obligations and actionable claims as
may belong to or be vested in a company at the date of its registration in pursuance of this
part, shall, on registration, pass to and vest in the company as incorporated under this Act
for all the estate and interest of the company therein.

5 MANU/SC/0281/1966

6 MANU/TN/0071/1970: AIR1970Mad5 [FB]).

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2.3 A partnership which was treated as a company for the purposes of the Companies Act can
be registered under Part 8 of the previous Act (Part 9 of the present Act) and the vesting is
provided by section 263 of the 1913 Act (section 575 of the present Act). The provision is
mandatory and there will be statutory vesting in the corporation so incorporated under the
provisions of the Companies Act. The Registrar is bound to give a certificate of
registration under section 262 (present section 574) which is a conclusive proof of
incorporation; vide section 35 of the present Act that corresponds to section 24 of the
previous Act. Hence, it is clear that no conveyance is necessary when a partnership is
converted and registered as a company. However, it is not possible to acquire such title
statutorily under this section if the previous firm purports to convey title to the company
in which event a separate deed of conveyance is necessary. Thus, we hold that if the
constitution of the partnership firm is changed into that of a company by registering it
under Part 9 of the present Act (Part 8 of the previous Act), there shall be statutory
vesting of title of all the property of the previous firm in the newly incorporated company
without any need for a separate conveyance.

2.4 Ramasundari Ray v. Syamendra Lal Ray7

In the above case it was held that if the constitution of the partnership firm is changed
into that of a company by registering it under Part 9 of the present Act (Part 8 of the previous
Act), there shall be statutory vesting of title of all the property of the previous firm in the
newly incorporated company without any need for a separate conveyance

2.5 Section 575 of Companies Act 1956:

Vesting of property on registration: All property, movable and immovable (including

actionable claims), belonging to or vested in a company at the date of its registration in
pursuance of this Part, shall, on such registration, pass to and vest in the company as
incorporated under this Act, for all the estate and interest of the company therein..

2.6 Let us turn to Section 9 of Transfer of Property Act, 1882:

7 ILR [1947] Cal 1.

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It states that a transfer of property may be made without writing in every case in which
writing is not expressly required by law. It lays down that if a transaction is transfer of
property and there is no express provision of law requiring it to be in writing, section 9 will
enable it to be made without writing. But, if on the other hand, the transaction is not a
transfer of property and there is no express provision of law requiring it to be in writing, then
it can also be done without writing. Thus, there are innumerable instances where courts
recognised oral transfers such as release, relinquishment, surrender, compromise, partition,
transfer of easementary rights, settling maintenance claims, creating charge, dedication to an
idol and family settlements to name a few. Thus, we see a promoter of a company though
fulfills some fiduciary duties; he cannot be described as a trustee as there is no beneficiary as
defined under section 3 of the Indian Trusts Act. He cannot also be an agent as there is no
principal born by that time. Hence, the promoter occupies a peculiar position of a quasi-
trustee. Hence, the question is whether the declaration made by him constitutes transfer of
property and whether the company can claim any interest in the property so declared
belonging to it by the promoter. The declaration of the promoter that the property is held by
him for the company to be formed does not constitute a sale, mortgage, lease, exchange or
gift and the company before its incorporation is not a living person and, hence, section 5 is
not attracted. Such declaration also does not constitute a transfer to him 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 the
Trusts Acts 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.

2.7 Weavers Mills v. Balkis Ammal8

Justice Veeraswami, as he then was, held that the benefit of the purchase made by the
promoter passed to the company on its incorporation without any registered deed. But, in that
case, the claim of the company was negatived on the ground that the previous proceedings
operate as res-judicata and, hence, the company lost its claim for the said property. We find
from the reasoning of the learned judge a clear supportable legal principle to sustain the
claim of a company in respect of the property acquired by a promoter on its behalf. Hence the

8 MANU/TN/0244/1969:AIR1969Mad462

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property acquired by the promoter can be claimed by the company after its incorporation
without any need for conveyance.

2.8 Addanki Narayanappa v. Bhaskara Krishnappa9

It was held that (at p. 1303) whatever may be the character of the property which is
brought in by the partners when the partnership is formed or which may be acquired in the
course of the business of the partnership, it becomes the property of the firm, and since a firm
has no legal existence, the partnership property will vest in all the partners and in that sense
every partner has an interest in the property of the partnership. During the subsistence of the
partnership, however, no partner can deal with any portion of the property as his own, would
usually apply to a firm formed prior to the coming into force of the present Partnership Act
and governed by the provisions of the Contract Act. In fact, no words of dispositive character
are necessary to bring the property to the common stock.

2.9 UOI & Anr. Vs. M/S Mahalaxmi Saw Mills P. Ltd.10

The learned Single Judge has based his judgment on Vali Pattabhirama Rao. The
questions for adjudication in the said judgment were, whether a conveyance is necessary to
vest the property of a firm when the same was converted into a company and whether such a
conveyance is necessary for the company to claim title to the property. The said questions
arose in a suit for eviction. It was inter alia the contention of landlord that though the lease
granted was permanent and transferable but upon conversion of the tenant which was a
partnership firm into a company, there was no assignment / conveyance of leasehold rights to
the company and hence the company did not become a tenant under him. It was held that the
property of the firm vests in the company, which is incorporated by partners of firm and in
which company all assets and liabilities of firm are vested, under Section 575 of Companies
Act and no separate conveyance is necessary. It was further held that Section 5 of the
Transfer of Property Act requires a transfer to be inter vivos i.e. between living persons; since
a company is not a living person before its inception, vesting of property in the company at

9 MANU/SC/0281/1966

10 LPA 2514/2005

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the time of its inception, is not transfer within the meaning of Section 5 and hence does not
require an instrument or Conveyance Deed and is a transfer within the meaning of Section 9
of the Transfer of Property Act which is possible without an instrument or Conveyance Deed.

CONCLUSION
As soon as a company is incorporated, whether public or private limited, it becomes a juristic
person. It has its own name and property. It is a separate legal entity distinct from its members
who incorporate it. A company does its business through its Directors. The directors are also
called the ears, eyes and hands of the company. The directors of a company are in fiduciary
position. On the one hand they run the company as its owner (Policy maker) and on the other
hand they are merely a servant of the company and take remuneration. They are entitled to do
any work on behalf of the company, what a company can do in ordinary course of business.
There are certain items for which Board is not empowered to do. Such items are done by the
company in general meeting. Any action done by the directors in the ordinary course of business
are treated as done by the Company. But wrong done by the Directors (criminal action) are the
responsibility of the Directors and not the responsibility of the Company.

Sometimes contracts are made on behalf of a company even before it is duly incorporated. These
are called as pre-incorporation contracts. Two consenting parties are necessary to a contract,
whereas a company before incorporation is a non-entity. Therefore, following are the effects of
pre-incorporation contracts:

Company cannot be sued on pre-incorporation contracts: A company, when it comes into

existence, cannot be sued on pre-incorporation contracts. In English and Colonial

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Produce Co, Re, a solicitor on the request of promoters prepared a companys documents
and spent time and money in getting it registered. But the company was not held to be
bound to pay for those services and expenses.
Company cannot sue on pre-incorporation contracts: A company cannot by adoption or
ratification obtain the benefit of a contract made on its behalf before the company came
into existence.
Agents may incur personal liability- The agents who contract for a proposed company
may sometimes incur personal liability.
Ratification of a pre-incorporation contract: So far as the company is concerned it is
neither bound by nor can have the benefit of a pre-incorporation contract. But this is
subject to the provisions of the Specific Relief Act, 1963.

Thus, so far as the company is concerned, it is neither bound by, nor can have the benefit of, a
pre-incorporation contract. Also that, promoter is personally liable for the pre-incorporation
contract, because at the time of formation of pre-incorporation contract, the company does not
come in existence, so neither the principle agent relationship exist not the company become the
party. It is also found that promoter is personally liable for the pre-incorporation contract in
American Law, English Law and Indian Law. By virtue of Sections 15 and 19 of the Specific
Relief Act, 1963, a company is bound by, and entitled to take the benefit of, the pre-incorporation
contracts made by its promoters if such contracts are warranted by the terms of incorporation.
Warranted by the terms of incorporation means within the scope of the objects of the company
as stated in the memorandum. The contract should be for the purposes of the company.

Secondly, all property, movable and immovable (including actionable claims), belonging to or
vested in a company at the date of its registration in pursuance of this Part, shall, on such
registration, pass to and vest in the company. A partnership which was treated as a company for
the purposes of the Companies Act can be registered under Part 8 of the previous Act (Part 9 of
the present Act) and the vesting is provided by section 263 of the 1913 Act (section 575 of the
present Act). The provision is mandatory and there will be statutory vesting in the corporation so
incorporated under the provisions of the Companies Act. The Registrar is bound to give a
certificate of registration under section 262 (present section 574) which is a conclusive proof of
incorporation; vide section 35 of the present Act that corresponds to section 24 of the previous

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Act. Hence, it is clear that no conveyance is necessary when a partnership is converted and
registered as a company.

BIBLIOGRAPHY
1. scribd.com
2. legalservicesindia.com
3. corporatelawcorpus.blogspot.in
4. lawteacher.net
5. lobis.nic.in
6. rmlnlulawreview.wordpress.com
7. blog.ipleaders.in
8. mondaq.com
9. indiankanoon.org
10. indialawjournal.org

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