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Judgment
Anantanarayanan, J.—Can a promoter of a private limited company, prior to its incorporation and when it is not even in existence, make a
valid application on its behalf for the grant of a stage-carriage permit u/s 57 (2) of the Motor Vehicles Act? If such an application is made, is the
Regional Transport Authority bound to treat it as the application of a legal person, it being conceded that such applications may be made only by
individuals whom the law recognises, such as persons, partnerships or firms, or authorised agents of such individuals? Can a private limited
company, which came into existence and was incorporated subsequent to the last date notified under the Act for receipt of such applications, ratify
the application of the promoter in such manner that the ratification dates back to the date of the application itself and thereby qualifies the company
for the grant of a stage-carriage permit? These are certain of the significant questions that arise for our determination in these writ appeals. We
might immediately state. that, in disposing of Writ Petition Nos. 475, 555 and 1249 of 1960 before him, Veeraswami J., took the view that such
an application by a promoter of a company, not yet in existence, would be valid, in the sense that later the company, after incorporation, could
ratify the application and qualify for the grant of a stage-carriage permit. If this view is not to prevail, the writ appeals will have to be allowed, with
the consequence that the order of the State Transport Appellate Tribunal setting aside the grant in favour of the first Respondent (Sri Nandi
Transports (P) Ltd.) and granting the permit, instead, to the Appellant in both the writ appeals (G.K. Palaniswami) must be restored. We have had
the benefit of exhaustive arguments in this matter both by learned Counsel for the first Respondent (Sri V.K. Thiruvenkatachari) and learned
Counsel for the respective Appellants (Sri K. Rajah Ayyar).
We might immediately commence with two vital questions which are also closely related to the development of the law on the subject in the
United Kingdom. Actually, that development has exhibited certain remarkable vicissitudes, prior to Kelner v. Baxter (1886) 2 C.P. 174, and
subsequently to it. The first question is, who is a promoter and what are his rights and obligations vis-�-vis the company that may subsequently
come into existence by incorporation? Is he the agent of the unborn company or trustee, or a quasi-trustee, or a person who merely stands in some
indeterminate fiduciary relationship to it? Has he any rights, in regard to the unborn company, either of representation, or of commitment as far as
third parties are concerned? The second, an equally vital question is, can a company, which subsequently comes into birth, ratify the act of the
promoter in such manner that the ratification dates back to the date of the act? Finally, we have a third crucial aspect: Whether, even assuming that
there can be such an act of the promoter on behalf of an unborn corporation, which is valid and capable of subsequent ratification by the company,
the incorporation and ratification ought not to occur within the period fixed by statute for the act or legal process?
The fact of the circumstances under which these writ petitions were instituted, are not in dispute. We shall refer, for the sake of conciseness, to
the most essential facts alone. The route in question is Gobi to Nambiyur via Kurumanthur in Coimbatore district, which is fourteen miles long. The
last date for the receipt of applications for the grant of a stage-carriage permit on this route was 8th December 1958. On that date, a certain C.S.
Jayaraman, made an application to the Regional Transport Authority, in the prescribed form, on behalf of a firm styled Nandhi Transports (P),
Limited (under incorporation). Certain facts of this application are of cardinal significance. Firstly, it is not in dispute that no such organisation
existed on that date. The words under incorporation were added in brackets after the name of the firm. Even the memorandum and articles of
association, admittedly had not been drawn up. C.S. Jayaraman signed the application on behalf of the unborn corporation as managing director,
but, this was a pious aspiration and not a fact on that date. In his affidavit this individual has frankly conceded that he signed the application as
promoter and would be managing director. It appears that C.S. Jayaraman submitted another application in his personal capacity, but that was
ultimately not pressed and was withdrawn. The memorandum and the articles of association of the unborn firm were drawn up and presented for
registration on December 15, 1958. The certificate of incorporation was issued on December 24, 1958. All the applications, including the
application on behalf of Nandhi Transports (P) Limited, were notified by the Regional Transport Authority on December 27, 1958. On January
15, 1959, the firm itself as duly incorporated, filed its representation u/s 57(3) of the Motor Vehicles Act; this is an act of ratification of the
application of the promoter, which has been held to date back. The Regional Transport Authority, at a hearing on 30th April 1959 chose the
company for the grant.
We think, it is essential to trace, however, tersely the vicissitudes of the law on this aspect, in the United Kingdom for that has an intimate
bearing upon the law, in this country, particularly with reference to Sections 21 (f), 23 (h) and 27 (e) of the Specific Relief Act. But before
proceeding to this aspect, we consider it essential to point out that the word promoter is itself not a legal expression and that it is more than
doubtful if a promoter could really represent an unborn corporation in any significant sense, so far as third parties and statutory bodies are
concerned.
There is a description of a promoter by Cockburn C.J., in Twycross v. Grant (1877) 2 C.P.D. 469 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 VI Halsbury''s Laws of England (third edition) page 91, it is observed that the term promoter is not a term of law, but of business and that it is
merely a short and convenient way of designating the person who sets in motion the machinery by which the incorporated company could be
brought into existence. A very similar description would be found in Palmer''s Company Law (nineteenth edition) page 322. There is abundant
authority for the view that a promoter is not an agent of the unborn company, authorised or unauthorised nor a trustee or quasi-trustee.
...his relation to the company is not that of trustee and cestui que trust, or agent and principal. VI Halsbury, page 94 paragraph 194: Lydney and
Wigpool Iron Ore Co. v. Bird (1886) 33 Ch. D. 85; Lagunas Nitrate Company v. Lagunas Syndicate (1890) 2 Ch. 392 etc.,
Again,
...since a corporation cannot, before its organization, have agents, contract for itself, or be contracted with, it is not liable upon any contract which
a promoter attempts to make for it prior to its organisation....(XIII American Jurisprudence, page 245). It has been decided that a promoter is not
an agent for a company before its formation and this contract did not, therefore, bind the company...vide The Imperial Ice Manufacturing
Company Limited v. Munchershaw Barjorji Wadia I.L.R (1889) 13 Bom. 415
But there are several authoritative expositions of the obligations of a promoter vis-�-vis the company, which is later incorporated, which
underline a certain fiduciary capacity, which he no doubt possesses. Lord Cairns stressed this fiduciary position of promoters in Erlanger v. New
Sombrero Phosphate Company (1878) 3 A.C. 1218. Also see Pennington''s Principles of Company Law (1959 edition page 364). In Corpus
Juris Secundum, volume XVIII, page 531, there is a Section (129) dealing with the liability of promoters in general. Two propositions would
appear to be established beyond doubt by the relevant authorities. Firstly, a promoter is not an agent or trustee of an unborn corporation; he has
no representative status, so to speak, and cannot bind that corporation by any act. Actually, the idea of an agent, however unofficial, for a principal
who is non-existent, and whose later birth itself is hypothetical, is repugnant to the fundamental principles of the law of agency. Secondly, the
subsequent ratification that we shall discuss later, can be legally contemplated at all, only when the original act of the agent was on behalf of a
principal ascertainable at that time.
The person ratifying need not necessarily have been a named individual at the time when the act was done, but must have been ascertainable. (I
Halsbury, Simonds edition, page 177.)
Again, upon the same authority at page 175:
It is essential to an agency by ratification, that the agent shall not be acting for himself, but shall profess to be acting on behalf of a named or
ascertainable principal, and one who is actually in existence at the time when the act is done. (Wilson v. Tumman 134 E.R. 879; Royal Albert Hall
Corporation v. Winchelsea and Anr. (1891) 7 T.L.R. 362; etc.)
Before tracing the development of the law in the United Kingdom, upon this aspect of a contract by a promoter on behalf of an unborn
company, and the extent to which it could be validated by the subsequent ratification of the incorporated company, we might refer to the metaphor
used by LORD JEFFREY in a Scottish case, which would appear to underlie the first phase of this development; this was that a promoter, in
relation to a company, was as a Chrysalis to the butterfly state. Lord Cottenham enunciated the principle thus in 1836 in Edwards v. The Grand
Junction Railway Co. 40 E.R. 525
... It is clear that the company have succeeded to, and are now in possession of, all that the projectors had before; they are entitled to all their
rights and subject to all their liabilities So here, as the company stand in the place of the projectors, they cannot repudiate arrangements into which
such projectors had entered....
But, very soon after this, the succeeding phase commenced, of doubt and distrust concerning this exposition of the law. As Street has pointed
out in his Doctrine of Ultra Vires (1930 edition), page 105, when the matter came up about the year 1856 in the House of Lords, Lord
Cottbnham''s statement was held in doubt; but this was confined to the situation that the doctrine would, in any event, be wrong in cases where the
contract made by the promoter was ultra vires the company. In 1856 as Street observes, all prior decisions were superseded by the ruling in
Kelner v. Baxter (1866) 2 C.P. 174. Earlier in 1865, Kindersley, V.C. discussed the dortrine of Lord Cottenham in Earl of Shrewsbury v. North
Staffordshire Railway Co. (1865) 1 Eq. Cas. 593 and laid it down (at page 616):
...that contracts of the promoters with landowners are not binding on the company unless sanctioned by the Act constituting the company.
It was at this stage of the law that we have Kelner v. Baxter (134) E.R. 879 and the following passage from the judgment of Willes J., at page 184
may be taken as the most trenchant statement of the law:
That brings one to consider whether the company could be legally liable. I apprehend the company could only become liable upon a new contract.
It would require the assent of the Plaintiff to discharge the Defendants. Could the company become liable by a mere ratification? Clearly not.
Ratification can only be by a person ascertained at the time of the act done, by a person in existence either actually or in contemplation of law;....
Byles J., observed (page 185):
There could, however, be no ratification ...ratification must be by an existing person, on whose behalf the contract might have been made at the
time.
As far as the United Kingdom is concerned, the subsequent law can hardly be held in doubt. A contract entered into by a promoter is a nullity
under the law and can neither be ratified nor adopted. A fresh contract by the Company, after its incorporation, would, therefore, be essential. The
following authorities will be sufficient, on this aspect; Pennington''s Principles of Company Law, page 74; Bowstead on Agency (twelfth edition),
page 36; in In Re Empress Engineering Company (1880) 16 Ch. D. 125 though the contract of the promoters undertaking to pay money to a third
party was ratified, it was held a nullity which did not bind the company. Authorities to the same effect are: In re Northumberland Avenue Hotel
Company (1886) 33 Ch.D. 16, Natal Land and c., Company v. Pauline Colliery Syndicate (1904) A.C. 120, North Sydney Investment and
Tramway Company v. Biggins (1899) A.C. 263 and Newborne v. Sensolid (Great Britain) Ld. (1954) 1 Q.B. 45. In XIII American
Jurisprudence, page 245, the matter has been put in the form that a corporation, prior to the issue of the certificate of incorporation, has no being,
franchise or faculties. The promoters do not represent it in any relation of agency, and they have no right to enter into any contracts on its behalf.
Again,
It is not liable upon any contract which a promoter attempts to make for it prior to its organisation.
In Natal Land and c, Company v. Pauline Colliery Syndicate (1904) A.C. 120 (H.N.) earlier referred to, it has even been laid down that a
company could not, by adoption or ratification, obtain the benefit of a contract made by a promoter purporting to be on its behalf, before it came
into existence,
In order to do so, a new contract must be made with it after its incorporation on the terms of the old.
Nevertheless, Sri V.K. Thiruvenkatachari has argued that the law in this country is different, and that certain provisions of the Specific Relief
Act recognise and embody this difference in the law. His argument may be, summarised in the following form. It is Lord Cottenham''s doctrine
which has found expression in Sections 196 to 200 of the Indian Contract Act, which render ratification possible, and make it clear that the
ratification dates back to the original act. When a matter is dealt with by statute, the Court must go by the wordy and not by the case law or the
common law. The authorities for this are: State of West Bengal Vs. B.K. Mondal and Sons, ; Satyabrata Ghose Vs. Mugneeram Bangur and Co.
and Another, Shamsuddin Ravuthar v. Shaw Wallace and Co. ILR (1939) Mad. 282 and V.R. Mohanakrishnan Vs. Chimanlal Desai and Co., .
As will be clear from a perusal of Section 196 of the Contract Act, ratification is recognised by that provision; necessarily by implication it dates
back to the actual date of the act. The limitations in this respect are to be found in Section 200 (third clause) and the illustrations to that section.
Sections 21(f), 23 (h) and 27(e) of the Specific Relief Act recognise that contracts by promoters may be enforced by the corporation if intravires
the company and if ratified. Specific performance is a remedy additional to remedies provided for under the Contract Act. When a contract is
ratified, what is ratified is the act of the agent in entering into the contract, and hence, the principal ratifies the offer or acceptance by the agent, and
not what the third party did; therefore, necessarily, ratification dates back to the date of the contract. It is on this basis that learned Counsel
contends that, in Indian law, a company under contemplation has an adequate relation to the person engaged in the formation of the company
(promoter), to enable the company to ratify the act of the promoter subsequent to the incorporation. The decision of a Bench of the Patna High
Court in Commr. of Income Tax Vs. Bhurangiya Coal Co., , which was affirmed, though on an altogether independent aspect, in I.T., Commr. v.
Bhurangiya Coal Co. AIR 1959 S.C. 251 has been relied on; the learned Judge (Veeraswami J.) has also referred to this decision. But, on a very
careful consideration of this aspect, we are unable to hold that the law in this country is different, in the sense that the Indian law recognises some
inexplicable manner by which a promoter can still be an agent for a non-existent principal or an unborn corporation, and can bind that corporation
by his acts. On the contrary, we consider that this cannot be the law, and that a great deal of the difficulty arises because of the use of the word
ratification in this context. What has to be really explained here are the provisions of Sections 21(f), 23(h) and 27(e) of the Specific Relief Act and
we feel that they could be very satisfactorily explained upon the principle of adoption or even of novation. Before proceeding to this aspect,
however, we might briefly deal with the reference by Sri V.K. Thiruvenkatachari to Sections 196 to 200 of the Indian Contract Act.
We are unable to see that these sections introduce, or express, any radical departure from the fundamental principles of agency, whether
authorised or unauthorised. Actually, the provisions of the Contract Act relating to agency are not intended to be exhaustive; T.S.P.L.S. Tinnappa
Chettiar, by his authorised agent, A.S. Arunachalam Chettiar Vs. Putti Krishna Rao by guardian and mother Padmavati Ammal and Others, . It is
only where an act is done by one person on behalf of another ascertainable person, who may be any kind of legal person, then in existence, that
ratification is at all possible, as we have already seen. The third part of Section 200 introduces the limitation to such subsequent ratification of an
unauthorised act, namely, that it cannot injuriously affect the rights of third parties (see the illustrations to this section). This principle of limitation is
expressed in such cases as Dibbins v. Dibbins (1896 2 Ch. 848) where the terms of a partnership provided that, on the death of one of the
partners, the surviving partner should have the option of purchase of his share upon notice in writing before a specified date, it was held, on the
facts, that as the option to purchase had not been exercised within the time limited, there was no contract which could be confirmed by the second
notice. Reference may also be made, in this context to Doe v. Walters 109 E.R. 583 and Holland v. King 136 E.R. 1438. Clearly the limits
enacted in Section 200 have application, only 1 where the ratification itself is legally possible. It is not possible in circumstances such as the present
case, where a promoter applies on behalf of a corporation not in existence, and which, conceivably, may never come into existence. Sri Rajah
Ayyar argues, with plausibility and force, that on this aspect, the law in this country is not different. Kelner v. Baxter (1866) 2 C.P. 174 was
followed in Lakshmishankar v. Motiram (1904) 6 Bom. L.R. 1106. The other authorities are: Barasat Basirhat Light Railway Co. Ltd. v. District
Board, 24 Parganas ILR (1944) 2 Cal. 101; Ramkumar Potdar v. Sholapur Spinning and Weaving Go. Ltd. I.L.R (1934) 09 Bom. 218 and
Surendro and Company v. Liquidator, Punjab Tannery Co. Ltd. (1922) 68 I.C. 787. We do not think that either a power in a promoter to
represent or commit the unborn corporation or a power in the company, subsequently to ratify the act, can be spelt out of Sections 196 to 200 of
the Indian Contract Act.
How then are Section 21(f), 23(h) and 27(e) of the Specific Relief Act to be explained. The learned Judge (Veeraswami J.) himself did not
think that the underlying principles of these sections had any relation at all to the law of agency or of trust. He observed:,
To my mind, the underlying principles of Sections 23(h) and 27(e) do not belong to the law of agency or of trust, but are founded on a principle sui
juris peculiar to the relationship of promoters with the company when incorporated....
But it appears that applying the principle of ratification to such a situation itself proceeds on a misconception, because this word was originally
used synonymously with adoption, and the distinction between the two concepts emerged only in the subsequent development of the law: See
Street''s, Doctrine of Ultra Vires (1931 edition page 109).
The matter has been very lucidly expounded, if we may say so, in XIII American Jurisprudence, page 247 (Section 103), (Theories of
Liability) and onward. There are four grounds advanced, upon which the liability of a corporation on contracts entered on its behalf of promoters
prior to its organisation could be rested, namely, ratification, adoption, novation and continuing offer. Of these, the first is clearly unsatisfactory.
A ratification, properly so called, implies an existing person on whose behalf the contract might have been made at the time.
Adoption, or better still novation, by the substitution of the corporation for the promoters in the contract with third parties, would be far more
satisfactory basis, juridically speaking, for the right of a corporation to accept a promoter''s contract provided that the contract is intra vires its
articles. The least objectionable theory supporting this assumption by a corporation, of liability on a contract made by a promoter, according to
American Jurisprudence, is that of continuing offer. Hence, we do not think that the provisions of the Specific Relief: Act, that we have referred to,
involve any necessary implication that a company, after incorporation could ratify the act of a promoter prior to its birth upon some legal fiction of
an agent and some non-existent or unborn principal.
However, this might be, it appear to us to be indisputable, in any event, that the adoption of the act of the promoter must be within the time
fixed by statute, beyond which the act would be quite unrelated to the company subsequently incorporated, and cannot be claimed as an act on its
behalf. This has been very clearly laid down in Bowstead on Agency, eleventh edition Article 28(1) at page 36:
Where it is essential to the validity of an act that it should be done within a certain time, the act cannot be ratified after the expiration of that time, to
the prejudice of any third person.
In I Halsbury, page 177 (Section 415) it is observed that the time for ratification must be within a period fixed by the nature of the particular
case.
A contract cannot be ratified after the time fixed for its performance has passed....
(See Treital on the Law of Contract, 1962 edition page 484.) On this aspect, the learned Judge (Veeraswami J.) was apparently of the view that
this objection might not be crucial, because
Section 57(2) of the Motor Vehicles Act has no analogy to the law of limitation applicable to acts or situations or cases in which time limit involves
acquisition, extinguishment or enforcement of rights and liabilities. Section 57 is but a procedural section fixing the procedure for making a choice
among rival Applicants, keeping in view the considerations in public interest enjoined by Section 47.
With great respect, we are unable to accept this interpretation of the effect of Section 57(2) of the Act, in the context of the date specified by
the relevant authority within which applications have to be made. Indeed, the learned Counsel for the first Respondent did not urge that where the
Regional Transport Authority fixes a time limit, this is not crucial, or that it does not involve the rights of third parties, who might have applied in
time for the stage-carriage permit. Indisputably every Applicant has to apply within the period specified in Section 57(2) of the Act. There is no
power or provision to extent the time, and on the contrary, an application made beyond time can be immediately rejected under Rule 134(A) of
the rules framed under the Act. In other words, as was pointed out during the course of arguments, the Regional Transport Authority would
undoubtedly be justified not merely in declining to receive any application beyond the last date, but also in taking up for consideration only those
applications which were in time. Third parties who might have applied in time, would have a right to insist that the enquiry relating to the issue of the
permit should be confined to persons who had made applications in time. It is conceivable that a person might, for unavoidable reasons, apply
beyond the date specified, and his credentials might be excellent and claims worthy of recognition. But it is not pretended that the Regional
Transport Authority, who is a quasi-judicial Tribunal, would have the power to condone the delay, and to grant the permit to such an Applicant.
The right to apply is a personal right and, if the Applicant dies, it cannot be continued by his legal representatives. This was clearly laid down by
Rajagopalan J., in Ulaganathan v. State Transport Appellate Tribunal, Madras (1957) 2 M.L.J. 60 In a situation like that which has prevailed in
this case, we foresee startling consequences, on the contrary, which would have grave effects on public policy, if any other interpretation of the
subsequent ratification by an unborn corporation, is to be accepted by us. Conceivably, the promoter might merely be a person with the most hazy
idea of forming a company in due course, or none; he might merely have been impelled by the notification of the route, to apply on behalf of an
unborn company, in the hope that he would be able to persuade some financiers to bring it into existence, with benefit to himself. Since its later
existence is hypothetical it may never be borne. If the company could be incorporated and could ratify the act of the promoter with the effect of
dating back, even after the last date fixed for filing applications, grave prejudice might be caused to rights of third parties, who had applied in time.
For all these reasons we are definitely of the view that the application of the promoter of an unborn company, in the context of a notification of
a route, and the fixing of a date for receipt of such applications u/s 57(2), can only be regarded by the relevant Regional Transport Authority as
some kind of advance intimation that a legal person, namely, a company, proposes to apply or intends to apply. Certainly if the company comes
into existence by incorporation before the determined date, and applies in any form, it may even be by a letter approbating and accepting that act
of the promoter, that would make the application by the company a perfectly valid one. It could be justified, either on the principle of adoption, or
novation by a substituted application. But if the company is incorporated subsequent to the last date, it cannot ratify the application of the
promoter, and the Regional Transport Authority would not merely be justified in rejecting the application of the promoter as not valid, but would
be constrained to do so, as the legal person or individual was not in existence at all on or before the last date.
For these reasons, we allow the writ appeals and direct the restoration of the order of the State Transport Appellate Tribunal, awarding the
permit to the Appellant, G.K. Palaniswami, the other qualified Applicant. We notice from the record that a certain Messrs. Ramu Transport was
also a party who agitated the matter of this grant in Writ Petition No. 1249 of 1960 before the learned Judge (Veeraswami J.) But we desire to
place it on record that there was no appearance on behalf of this party, and no arguments were advanced, or claim put forward.
There will be no order as to costs.