What does the term "novation" refer to in corporate law?

Novation in corporate law refers to the replacement of an existing obligation with a new one, and it typically involves the substitution of a new party in a contract, transferring the liability from one party to another. In the context of corporations, when we say that a corporation assumes the liability of a promoter, it implies that the corporation is stepping into the shoes of the original party, which is essential in enabling the corporation to operate without the liabilities that the promoter might have incurred prior to the corporation's formation.

This is particularly relevant during the formation of a corporation when promoters arrange for initial capital and business contracts. When the newly formed corporation assumes these liabilities, it is creating a new obligation that supersedes the original one the promoter had with the third parties or creditors. Therefore, this assumption of liability effectively constitutes a novation, as it replaces the original contractual relationship with one that includes the corporation as a party responsible for fulfilling the obligation.

This understanding establishes why the choice concerning the assumption of liability of the promoter by the corporation accurately reflects the concept of novation in corporate law.