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Embezzlement in Your BusinessIf you own or run a business sooner or later someone will embezzle from you. Most embezzlements are small, often only office supplies or expense account abuse, but the number of significant embezzlements-theft of thousands if not tens of thousands of dollars via abuse of books or access to funds-is not only growing but is widely unreported for reasons stated later in this article.Our office, which has been practicing in this locale for close to a hundred years, recently computed that of the various business clients we represent at least ten percent have suffered some employee theft in the average year while we are asked to represent a victim of major embezzlement on the average once a quarter, often more.The average business person, suspecting something may be wrong while studying the profit-loss statement or hearing a rumor about an employee is usually shocked to discover that the police, not to mention the district attorney, are less than enthusiastic to investigate and disinclined to prosecute the wrong doer absent a full confession.The reason is simple: with violent crime taking much of their time and funds, and with prosecution of embezzlement both boring and difficult (being based in most instances on financial records, financial statements, calculations, etc.) the average criminal prosecutor seeks to avoid the time consuming and frustrating prosecution as much as possible.Does that mean there is no effective relief? Absolutely not. If investigated and prosecuted by the victim correctly, with the police and district attorney used usually as an adjunct to efforts at relief, it is quite possible to get adequate restitution and some modicum of justice.This article shall describe what our office has found to be effective means to investigate, remedy and obtain damages for the typical embezzlement in a company in California. A companion Retainer Page article shall go into great depth in terms of tactics to adopt if one suspects embezzlement in one’s life.Embezzlement: What Is It?Embezzlement is theft of your property but a type of theft that requires some breach of trust. “Embezzlement is the fraudulent appropriation of property by a person to whom it has been entrusted and the gist of the offense is the appropriation to one’s own use of property delivered to him for devotion to a specified purposed other than his own enjoyment of it.” People v Hodges, 315 P.2d 38 (1957).“Essential elements of “embezzlement” are fiduciary relationship arising where one entrusts property to another and fraudulent appropriation of that property by the latter.” People v Darling, 41 Cal. Rptr. 219 (1964).While larceny or theft is merely the taking of another person’s property, embezzlement normally is larceny achieved via a breach of trust, a taking from someone who trusted the embezzler with access to the funds. It can be an employee taking from an employer, a fiduciary from a beneficiary, a spouse from another spouse, a lawyer from a client, a trustee from a trust, etc, etc. The reader should review the article on Fiduciary Duty to see how that concept ties into the typical embezzlement.From the criminal law point of view, embezzlement is merely a variation of theft all of which is subsumed in the same Penal Code statute relating to theft. Criminal punishment for embezzlement is the same as for any other form of theft and is based on the amount stolen, though additional penalties may lie if governmental embezzlement is established. Penal CodeSection 503 defines the crime as the fraudulent appropriation of property by one to whom it has been entrusted and Section 484 of the California Penal Code provides the definition of theft in general which states that anyone who, “…fraudulently appropriates property which has been entrusted to him or her or who shall knowingly and designedly, by any false or fraudulent representation or pretense, defraud any other person of money, labor or real or personal property…is guilty of theft.”Most states create significantly greater penalties if the amount is not minor (it requires a theft of four hundred dollars to be “grand larceny” in California) with felony conviction possible if such theft is proven. Felony conviction normally means incarceration for over one year is possible in California.From the civil relief point of view, embezzlement creates many causes of action of the victim against the perpetrator, from simple conversion (a wrongful taking of property) to breach of fiduciary duty (breach of the highest duty known to law.) Punitive damages often may be obtained. The reader should review our article on Torts for a general description of the relief available when one sues someone for committing an intentional tort.The Unique Problems in Proving Embezzlement:The essence of embezzlement in most business contexts is that the perpetrator had access to the monies and the company books and was able to achieve the thefts over time by “cooking the books,” namely altering payees of checks or vendor bills or some other type of accounting document so as to allow monies to be paid directly to the embezzler. This, in turn, creates a double problem of proof.First, access to the accounting documents and/or funds was often voluntarily entrusted to the perpetrator by the employer thus the easy job of proving theft by showing that the criminal achieved access to your property via stealth does not work. As one client put it, “I put her in charge of my check book, she didn’t steal access to it.” Of course, proof that the money went to the embezzler is the vital element that must be demonstrated; thus tracing sources of money, a prolonged and expensive proposition, often comprises the bulk of the evidence in embezzlement cases.Secondly, the very accounting documents that would normally demonstrate in trial that the theft occurred and who took the money are distorted quite often by the embezzler and can hide his or her activities.One thus cannot prove guilt by access to property or by the normal records kept in business. Instead, unless one can obtain a confession, one must laboriously demonstrate the theft by a full and complete audit and accounting (to show the money was misspent) and then compare that accounting with the actual books kept or distorted by the embezzler. Further, one must show that the false books or misuse of money was intentional, not mere sloppiness. A recent case involving this office saw the embezzler claim that she was simply incompetent and paid monies to a third party by mistake, failing to enter previous payments correctly. The “third party” was her accomplice of course, and it was only in showing communications between that accomplice and the embezzler that we were able to obtain a confession.It is by no means impossible to demonstrate intentional embezzlement and this office has done so by such circumstantial evidence many times. The problem is that it is time consuming, requires expert assistance by CPAs who are capable of testifying in court…and is expensive. A recent audit of a small business demonstrated theft of one hundred and ten thousand dollars-but cost forty thousand dollars in accountant fees alone.Further, we have found many clients are embarrassed by the embezzlement and are afraid that the reaction of customers and competitors to the discovery may further hurt them in business. This is particularly true in professional offices such as accounting offices, doctor officers, law offices, etc. where the victim has the concern that a client or patient may conclude that an accountant who can not keep his own books accurately certainly should not be entrusted with others’ books.The desire to avoid publicity combined with the difficulty of success in court leads many victims to conclude that discretion is the better part of valor and to simply terminate the culprit and not to seek further relief. This, in turn, allows most embezzlers to continue in their efforts from company to company and it is not uncommon to discover, when some employer finally decides to prosecute, that the embezzler has conducted the same activity in a dozen or more companies.Thus, with both the district attorney and the employer hesitating due to the difficulty and cost of prosecuting the embezzler, it may seem that this particular form of theft is one that allows the perpetrator to usually succeed and that the business person or other victim of such theft has little practical relief.And embezzlers are often charming and educated culprits, not easily made into villains before judge and juries. See our story Embezzlers are Nice People.Our office has found, however, that such is not the case and that vigorous and intelligent action can more often than not result in both justice being achieved and significant restitution being made.Relief From EmbezzlementAs with any project, the key to catching and obtaining a judgment against an embezzler is careful planning and a realistic assessment of how to achieve one’s goal. And, as with any plan, a primary factor in a successful result-is defining precisely what one’s goals are. Do you want restitution or do you want vengeance and can you have both?That is not an idle question. The sad fact is that most embezzlers are not wealthy but combine their thefts with a life style that often results in spending all they have-often more than what they have. Many embezzlers begin their activities due to being in debt and begin to “borrow” money from the boss to tide them over to the point where they can repay the monies. At least that is what they say to themselves and quite often really believe it. The problem, of course, is that the reason they are in debt has nothing to do with cash flow but is predicated on the same type of personality that seems inherent in most embezzlers.Our experience is that the average embezzler is intelligent, often quite intelligent, and it is an ironic fact that if they had dedicated the same energy to building a career that they do to stealing, they would probably be successful. There often is a tendency to become arrogant and careless as the years of embezzlement progress and, as one of our clients mentioned, perhaps a desire to be caught for various psychological reasons.But the overwhelming majority of embezzlers are discovered when they become ill or take a vacation and the books are reviewed by the boss or a temporary worker in the office and errors are found-then patterns of errors…then it becomes apparent that the errors are not errors at all.And at that point of discovery is when key decisions have to be made. Our companion article on the Retainer Page will go into precise detail into the relief methods and tactical plans we often suggest, but this article will outline the basics of what we have discovered is an effective program for maximizing the recovery of embezzled amounts.1. STEP ONE: THE GOALSThis is a key question. If you want your money returned you have to carefully determine if the embezzler has assets that are attachable. If money is less important than vengeance, a very different approach is required as discussed below. One client was more concerned with correcting the accounting records than either vengeance or money, commenting that it would cost hundreds of thousands to recreate ten years of falsified records and, above all, he needed the expert embezzler to help recreate the books, many of which were fiduciary records.Thus your first step is to itemize your priorities in seeking relief. It is likely you will find that recovering money and reestablishing the books is more vital to you than punishing the wrongdoer.Why is this important? The embezzler cannot help you if in prison; the embezzler cannot pay your judgment if in prison. On the other hand, if vengeance is your goal, prison is the only place you want the embezzler.2. STEP TWO: THE PLANOnce you know your goals, it is time to get expert advice. A good accountant, investigator and attorney is the usual team since confronting an employee is a dangerous event, both in terms of the effect on the case and the danger of being sued for slander or libel.Further the confrontation, if artfully done, can often cut short the entire procedure by eliciting a confession from the culprit. Note that a confession, if reduced to writing, maximizes your freedom of action in that you no longer have to worry about convincing the District Attorney of the strength of your case or if you can win before a jury.Do confessions happen? Remarkably often. This writer has noted that in the majority of cases, if done with advanced planning and the team in place, confessions are obtained. The key issue is whether one can prepare the “confrontation” without the embezzler knowing and whether one can get powerful evidence with which to confront the embezzler to “break them” immediately.A typical method used by this writer is NOT to accuse the embezzler but to show them the evidence in silence and then begin with words to the effect, “We are not going to discuss whether you did this. We know you did. We are going to discuss how you will repay it. If you refuse to repay it, then we know what we have to do. Do you have any assets you can pledge?”In a remarkable number of cases, the embezzler, after some hesitation, immediately begins discussing how to pay it back. Note that neither side has discussed guilt…only restitution. But the moment restitution is discussed, guilt is admitted tacitly and later in the meeting, in discussing the stipulated judgment, the guilt is explicitly stated.One must be very careful. In California, one cannot threaten to go to the police unless someone pays you money. That is a crime called extortion. Be sure to seek legal advice before seeking to use this method. Indeed, without witnesses in the room, usually professionals, the meeting is likely not to work since the embezzler, with time later to consider the ramifications, may deny the admissions were made.The goal is to get a written confession as part of a repayment program. If the repayment program is not adhered to, the confession can be used in court. One cannot promise not to go to the police if paid. But one can make clear that one does not have intentions of going to the police at this time.Assuming the confession gambit does not work, then one must accumulate as much evidence as possible and one can go to the authorities with the case nearly complete (thus you have done most of the work for the District Attorney who may thus be more inclined to prosecute) or one can file civil suit or both. Again, the method of termination of employment must be careful scripted since one can expect countersuits from the embattled embezzler as a typical tactic to avoid liability.Ideally, the criminal case, which normally goes much faster, will conclude long before the civil case and the conviction in the criminal case can be used as evidence in the civil case. Remember, however, that an acquittal in the criminal case will not necessarily stop your civil case since the burden of proof is so much higher in the criminal matter that one can win civilly even if one loses the criminal action. (Recall O.J. Simpson lost the civil case after winning the criminal case.) See our article on Criminal Law and Procedure.Often the plan does not include prosecution precisely to allow restitution. As one client commented, “If she does not work for someone else, she can’t afford to pay my judgment.”The moral dilemma facing some clients is the issue of the culprit actually stealing from the next employer to pay off your own judgment. This concerned one client so greatly that she felt she had to warn the next employer, which resulted in the embezzler leaving the country and disappearing.We have found that absent a real desire for vengeance, the plan comprises two stages: first, the carefully orchestrated effort to obtain a confession and recovery; and if that does NOT succeed, the careful cost benefit analysis of whether to push for criminal followed by civil prosecution.3. STEP THREE: THE RECOVERY OF RECORDSThis is more complicated than one thinks. First, the thefts often go over several years and quite often the embezzler throws away critical document or alters them. Secondly, for tax reasons, one must have accurate records and the cost of the audit, even if possible, can be remarkable. One auditor forced a client not to prosecute simply because the auditor needed the embezzler’s help in recreating proper tax records! Thirdly, tax planning may be essential, both because income and expenses may have been misreported, but also because sales tax and the income tax of the embezzler may become vital issues to confront.Remember that the embezzler owes income tax even on stolen gains. And recall that tax payments, just as your judgment for theft, cannot be discharged via bankruptcy. As one client commented, the tax authorities were competitors for the same scarce dollars he was trying to retrieve from the embezzler.Part of any judgment one must seek from an embezzler is the cost of recreating the books and paying any resulting taxes and penalties that may be due. There is one bright spot: the cost of chasing and convicting the embezzler is a deductible business expense.Conclusion:The detailed plan we recommend is outlined in our Retainer Page series of in depth articles but the point we make here is that relief is certainly available for victims of embezzlement but must be sought with a carefully implemented plan. Becoming enraged, feeling foolish, lashing out, or ignoring the event are all equally useless and self-destructive. Embezzlement will hit every business sooner or later and mastering the skill of seeking relief and appropriate punishment is, regrettably, a skill that every businessperson must eventually achieve.

Section 2(69) in the Companies Act, 2013 gives right to Promoter/Promoter company to appoint an individual as director/represantative (from/by the promoter company) in board who take all decision in behalf of Promoter companyDefination of PromoterThe expression ‘promoter’ has been defined under Section 2(69) in the Companies Act, 2013 as:“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; orb) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; orc) 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;The term is used expressly in sections 35, 39, 300 and 317.In the case of Bosher v. Richmond Land Co., the term Promoter has been defined as:“A Promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscription, and sets in motion the machinery which leads to the formation itself.”“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.”L.J. Brown in the case of Whaley Bridge printing Co. observed that the term promoter is “a term not of law but of business”.To be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter. However, a person assisting the promoters by acting in a professional capacity do not thereby became promoters themselves. The relationship between a promoter and the company that he has floated must be deemed to be fiduciary relationship from the day the work of floating the company starts and continues up to the time that the directors take into their hands what remains to be done in the way of forming the company.The status of the promoter is generally terminated when the Board of Directors has been formed and they start governing the company. Chronologically, the first persons who control or influence the company’s affairs are its promoters. It is they who conceive the idea of forming the company, and it is they who take the necessary steps to incorporate it, to provide it with share and loan capital etc. when these things have been done, they handover the control of the company to its directors, who are often themselves under a different name. on handling over the control of the company the promoter’s fiduciary and common law duties cease, and he is thereafter subject to no more extensive duties in dealing with the company than a third person who is unconnected with it.PromoterMeaning of PromoterA promoter is a generic term associated with the person who starts a business. In common parlance, this person is also referred to as the founder of the business. A promoter typically is responsible for raising capital, targetting initial leads and chasing initial business opportunities, entering into the initial contracts for the business formation and incorporating the company.The Substantial Acquisition of Shares Takeovers (SEBI) Regulation states that the promoter is:(a) any person who is in control of the target company(b) any person named as promoter in any offer document of the target company or any shareholding pattern filed by the target company with the stock exchanges pursuant to the listing agreement, whichever is later;In the old Companies Act, 1956 there was no static definition of promoter although it was mentioned in various section, but in the new Companies Act, 2013 Section 2(69) defines promoter.Position of promoter in Companies Act, 1956 and in different StatuesThe expression ‘promoter’ has not been defined under the Companies Act, 1956, although the term is used expressly in sections 62, 69, 76, 478 and 519. Section 62 of Companies Act, 1956 defines ‘promoter’ for the limited purpose of that section only. Section 62(6)(a) defines the expression ‘promoter’ to mean a promoter who was a party to the preparation of the prospectus or of a portion thereof containing the untrue statement, but does not include any person by reason of his acting in a professional capacity in procuring the formation of the company.In Twycross v. Grant promoter was described as “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.”In USA, the Securities Exchange Commission Rule 405(a) defines promoter as a person who, acting alone or in conjunction with other persons directly or indirectly takes the initiative in founding or organizing the business enterprise.In Lagunas Nitrate Co. v. Lagunas Syndicate [1889] 2 Ch. 392 (p. 428, C.A.), it was stated that “to be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.The difficulties in defining the term led the judges to state that the term promoter is not a term of art, nor a term of law, but of business.Position of promoters in Companies Act, 2013The new Companies Act, 2013 has defined promoter in Section 2(69) as;“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; orb) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; orc) 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;A person who acts in a professional capacity is not a promoter. Thus a solicitor, who prepares on behalf of the promoters the primary documents of the proposed company, is not a promoter. Similarly an accountant or a valuer who helps the promotion in his professional capacity is not a promoter. But any such person may become a promoter if he helps the formation of the company by doing an act outside the scope of his professional capacity.A person cannot; however become a promoter merely because he signs the memorandum as a subscriber for one or more shares.In conclusion, it may be said that word “promoter” is used in common parlance to denote any individual, syndicate, association, partnership or a company which takes all the necessary steps to create and mould a company and set it going.3. Duties of PromoterThe promoters occupy an important position and have wide powers relating to the formation of a company. It is, however, interesting to note that so far as the legal position is concerned, he is neither an agent nor a trustee of the proposed company. But it does not mean that the promoter does not have any legal relationship with the proposed company. The promoters stand in a fiduciary relation to the company they promote and to those persons, whom they induce to become shareholders in it.Following are the major Duties of the promoter:3.1.Duty to disclose secret profitsA promoter is not forbidden to make profit but to make secret profits. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principle’s consent.A promoter is allowed to make a profit out of a promotion but with the consent of the company.3.2.Duty of disclosure of interestIn addition to his duty for declaration of secret profits, a promoter must disclose to the company any interest he has in a transaction entered into by it. This is so even where a promoter sells property of his own to the company, but does not have to account for the profit he makes from the sale because he bought the property before the promotion began. Disclosure must be made in the same way as though the promoter was seeking the company’s consent to his retaining a profit for which he is accountable.3.3.Promoter’s duties under the Indian Contract ActPromoter’s duties to the company under the Indian Contract Act have not been dealt with by the courts in any detail. They cannot depend on contract, because at the time the promotion begins, the company is not incorporated, and so cannot contract with its promoters. It seems, therefore, that the promoter’s duties must be the same as those or a person, who acts on behalf of another without a contract of employment, namely, to shun from deception and to exercise reasonable skill and care. Thus, where a promoter negligently allows the company to purchase property, including his own, for more than its worth, he is liable to the company for the loss it suffers. Similarly, a promoter who is responsible for making misrepresentations in a prospectus may be held guilty of fraud under section 17, of the Indian Contract Act and consequently liable for damages under section 19 of the Act.3.4.Termination of Promoter’s DutiesA promoter’s duties do not come to an end on the incorporation of the company, or even when a Board of directors in appointed. They continue until the company has acquired the property or business which it was formed to manage and has raised its initial share capital and the Board of directors has taken over the management of the company’s affairs from the promoters. When these things have been done, the promoter’s fiduciary and contractual duties cease.3.5.Remedies available to the company against the promoter for breach of his dutiesSince a promoter owes a duty of disclosure to the company, the primary remedy in the event of breach is for the company to bring proceedings for rescission of any contract with him or for the recovery of any secret profits which he has made.3.5.1. Rescission of contractSo far as the right to rescind is concerned, this must be exercised on normal contractual principles, that is to say, the company must have done nothing to show an intention to ratify the agreement after finding breach involving non-disclosure or misrepresentation.3.5.2. To recover secret profitIf a promoter makes a secret profit or does not disclose any profit made, the company has a remedy against him.4. Liabilities on PromoterA promoter is subjected to liabilities under the various provisions of the Companies Act.· Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus. A promoter may be held liable for non-compliance of the provisions of the section.· Under section 34 and 35, a promoter may be held liable for any untrue statement in the prospectus to a person who subscribes for shares or debentures in the faith of such prospectus. However, the liability of the promoter in such a case shall be limited to the original allottee of shares and would not extend to the subsequent allotters.· According to section 300, a promoter may be liable to examination like any other director or officer of the company if the court so directs on a liquidator’s report alleging fraud in the promotion or formation of the company.· A company may proceed against a promoter on action for deceit or breach of duty under section 340, where the promoter has misapplied or retained any property of the company or is guilty of misfeasance or breach of trust in relation to the company.The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy [2010] 104 SCL 174, has held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles of Association or a shareholder or a director of the company. Promoter’s civil liability to the company and also to third parties remain in respect of his conduct and contract entered into by him during pre-incorporation stage as agent or trustee of the company.5. Status of pre-incorporation of contractsThe 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 these entire 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.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.However, the provisions of the specific relief Act, 1963 makes the pre-incorporation contracts valid. Section 15(h) and Section 19 (e) of the Specific Relief Act of 1963, deviat from the common law principles to some extent,Under section 15 (h) of the Specific Relief Act, 1963,Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by--(a) any party thereto;(b) the representative in interest or the principal, of any party theretoProvided that where the learning , skill, solvency or any personal quality of such party is a material ingredient in the contract, or where the contract provides that his interest shall not be assigned, his representative in interest or his principal shall not be entitled to specific performance his part of the contract, or the performance thereof by his representative in interest, or his principal, has been accepted by the other party; when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company.Under Section 19 (e) of the Specific Relief Act, 1963,Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against the company, when the promoters of a company have, before its incorporation, entered into a contract for the purpose of the company and such contract is warranted by the terms of the incorporation.In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], 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 company’s title over the property could not be set aside.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.In Kelner v Baxter, where the promoter in behalf of unformed company accepted an offer of Mr. Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and he brought the action against promoters. Erle CJ found that the principal-agent relationship cannot be in existence before incorporation, and if the company was not in existence, the principal of an agent cannot be in existence. He further explain that the company cannot take the liability of pre-incorporation contract through adoption or ratification; because a stranger cannot ratify or adopt the contract and company was a stranger because it was not in existence at the time of formation of contract. So he held that the promoters are personally liable for the pre-incorporation contract because they are the consenting party to the contract.In Newborne v Sensolid (Great Britain) Ltd, Court of Appeal interpreted the finding of Kelner v Baxter in a different way and developed the principle further. In this case an unformed company entered into a contract, the other contracting party refused to perform his duty. Lord Goddard observed that before the incorporation the company cannot be in existence, and if it is not in existence, then the contract which the unformed company signed would also be not in existence. So company cannot bring an action for pre-incorporation contract, and also the promoter cannot bring the suit because they were not the party to contract.This case created some amount of confusion that, if the contract was sign by the agent or promoter, then he will be liable personally and he has the right to sue or to be sued. But if a person representing him as director of unformed company enters into the contact then the contact would be unenforceable.These principles were found applicable in Indian case.In Seth Sobhag Mal Lodha v Edward Mill Co. Ltd., the High Court of Rajasthan followed the approach of Common Law regarding liability of pre-incorporation contract. This case was criticized by A. Ramaiya in Guide to Companies Act (Sixth Edition), he found that learned judges did not noticed the Specific Relief Act.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. In Howard v Patent Ivory Manufacturing, the English Court accepted the novation of contract.In conclusion we can say that, a 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. Company is not liable for the pre-incorporation contract when it come in existence, but under the arrangement of section 15(h) and 19(e) of the Specific Relief Act 1963, company can take the rights and liability of promoter. It is also found that promoter is personally liable for the pre-incorporation contract in American Law, English Law and Indian Law.