ASSIGNMENT

CASE ANALYSIS- THE WEAVERS MILLS LTD. V BALKIS AMMAL AND ORS. AIR
1969 MAD 462

505 Company Law

Submitted by

Dipshikha Borah

UID- SF0121020

3rd year 5th semester

Submitted to

Mrs. Monmi Gohain

Assistant Professor of Law

National Law University and Judicial Academy Assam

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Case Name- The Weavers Mills Ltd. v Balkis Ammal And Ors.
Citation: AIR 1969 Mad 462
Bench: Veeraswami, K Reddy

Facts

Before the business was incorporated, the promoters and Weavers Mills had an informal agreement
for the promoters to purchase properties on the company's behalf. The managing director of
Weavers Mills was the other defendant. In order to enforce the money decree against the second
respondent, the first respondent attached the suit property. The second defendant argued that he
had no authority to attach the land since it belonged to Weavers Mills, but this argument was
dismissed. Following its establishment, the business seized ownership of the properties and began
to expand on them. The promoters did not own conveyance of properties. The court decided that
the company's ownership of the properties cannot be revoked in spite of this. The primary
contention in this case was that no conveyance had occurred at the time of incorporation and the
promoters had been in possession of the properties for an extended length of time. Regarding the
promoters' purchases of properties, there was no formal contract in place. The plaintiff claimed
that the two respondents attempted to commit fraud and that there was further coordination
between them. Additionally, he claimed that the company's directors were kept in the dark about
the issue by the promoters.

Issue

Can the company’s title over the property be set aside even in the absence of conveyance of property
by the promoter in favour of the company after its incorporation?

Rule

According to the ruling in this instance, the firm would get the benefit of the acquisition when it
was incorporated. In the 1877 Twycross v. Grant decision, the judges made the assumption that a
company's promoter is the one who initiates and completes the essential processes to incorporate
the business. The judge determined that a promoter is the person who conducts the commercial
operations that give rise to a firm in Whaley Bridge Printing Co. v. Green, 1880. A promoter is the

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one who initiates and organises a business, as per Securities Exchange Commission (USA) Rule
405(a).

The promoter is a quasi-trustee and may be required to transfer the property, according on the
reasoning that was used. Some relief was given to the Promoters by the 1963 Specific Relief Act.
A public company may enforce a contract it made with the promoters before to incorporation,
according to section 15(h) of this act. It states that the firm will gain from the contracts the
promoters went into. The contract's conditions ought to be accepted by the business. Pre-
incorporation contracts are not only enforceable by the corporations themselves, but also by other
parties acting on the company's behalf.

Analysis

Common law held that businesses could not enter into contracts since they were nonexistent prior
to their formation. As a result, a promoter's options for pre-incorporation contracts were two. They
can serve as the company's agents and enter under the company's name as well as their own names
in contracts. The firm is unable to enter into contracts since it does not have a distinct existence.
Furthermore, since the principle is incapable of performing the act, no one else may enter into a
contract on behalf of the firm. Furthermore, a firm cannot even approve the contract after
incorporation. However, it may novate into a new contract to enforce the conditions of the pre-
incorporation contract. It is a procedure wherein the parties decide to swap out the existing contract
with a new one. Therefore, if someone signs a contract on behalf of an unincorporated business, it
will be worthless since that business lacks the legal capacity to do so. It lacks a distinct existence
and is unable to carry out tasks that the corporation is unable to. A promoter may elect to enforce
the terms of the agreement by designating itself as a principal.

According to Indian law, the person in charge of a company's formation is known as the promoter.
Pre-incorporation transactions in India were formerly governed by common law. The promoters
did not feel comfortable conducting business for a corporation before 1963 since they may be held
accountable for it. Because the contracts had not been approved, they were hesitant to offer any
services. According to the law, a corporation that isn't incorporated has no legal existence. If it
didn't exist at the time, it couldn't be held accountable. After 1963, the role of promoters in India

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underwent a significant transformation. A contract entered into by the promoters cannot bind a
firm since it did not exist at the time the contract was executed, according to the ruling in the
Kelner v. Baxter case.

According to Section 230 of the Indian Contract Acts of 1872, an agent cannot be personally bound
by a contract. There may be a contract between an agency and a third party in which the principal's
identity is withheld. After being obligated by the pre-incorporation contract, a promoter may be
held personally accountable in following circumstances. This creates a dilemma as, since the firm
is nonexistent, any contract formed in its name will be null and invalid. Furthermore, unless a
separate agreement specifies otherwise, an agent acting as a representative cannot be sued under
section 230 if the contract is formed on their behalf. This implies that the promoter is an agent of
the corporation and will be held accountable for his acts; otherwise, the third party would not be
protected.

As a result, the property was transferred in the Weavers Mill case without a valid sale document.
The promoter is a quasi-trustee and may be required to transfer the property, according on the
reasoning that was used. Some relief was given to the Promoters by the 1963 Specific Relief Act.
A public company may enforce a contract it established with the promoters before to incorporation,
according to Section 15(h) of this act. It states that the firm will gain from the contracts the
promoters went into. The conditions of the contract should be accepted by the firm. Pre-
incorporation contracts are not only enforceable by the corporations themselves, but also by other
parties acting on the company's behalf.

Conclusion

It is quite evident from Section 51 of the Companies Act 2006 (UK) that a promoter is personally
liable for contracts signed before to incorporation. In English law, ratification is currently not
feasible. A business may carry out contract novation. India allows corporations to be ratified. The
promoter should receive payment from the corporation in exchange for going to the hassle of
signing the contract. Contracts signed prior to formation are essential for any firm. Should the
corporations require the promoters to perform the ratification activity, they ought to be
compensated for it.