Mr. Shah, a promoter of Star Industries Ltd., entered into a contract on behalf of the company before its incorporation.

(D)Mr. Shah, a promoter of Star Industries Ltd., entered into a contract on behalf of the company before its incorporation. After incorporation, the company refuses to ratify the contract. (i) Can the company be held liable? (ii) Is the promoter personally liable?

Situation

Mr. Shah (promoter) contracts on behalf of Star Industries Ltd. before incorporation. Company, after incorporation, refuses to ratify the contract.

(i) Can the Company be Held Liable?

No, the company cannot be held liable through mere ratification.

A company is a legal person only from the date of its certificate of incorporation. Before incorporation, the company has no legal existence and therefore cannot authorise, enter into, or ratify any contract. The principle of ratification in agency law requires the principal to have existed at the time of the act. Since Star Industries Ltd. did not exist when Mr. Shah entered into the contract, there was no principal — and therefore no power to ratify.

Kelner v. Baxter (1866) — Promoters contracted on behalf of a hotel company not yet incorporated. After incorporation, the company failed to ratify. The Court held that ratification was legally impossible and the company could not be held liable.

However, the company can choose to adopt the contract through novation — entering into a fresh contract on the same terms with the third party after incorporation. Only if the company enters into such a novation will it be bound. Since the company has refused to do so, it remains not liable.

(ii) Is the Promoter Personally Liable?

Yes, Mr. Shah is personally liable on the pre-incorporation contract.

When a promoter enters into a contract on behalf of a company that does not yet exist, the promoter is treated as personally liable under common law principles.

Kelner v. Baxter (1866) — Since the company could not be a party, the promoters who signed on its behalf were held personally liable to perform or pay damages for breach of the contract.

In India, under the Specific Relief Act read with general contract law principles, the third party may enforce the contract against Mr. Shah personally. Mr. Shah remains personally liable unless and until the company incorporates and enters into a fresh novation agreement releasing him.

Conclusion: (i) The company cannot be held liable since it cannot ratify a pre-incorporation contract. (ii) Mr. Shah, as the promoter who contracted before incorporation, is personally liable on the contract.