TABLE OF CONTENTS

1. INTRODUCTION

2. CHARACTERISTICS OF A PROMOTER IN COMPANY

3. LEGAL POSITION OF A PROMOTER

4. FUNCTIONS OF PROMOTERS OF A COMPANY

5. RIGHTS OF PROMOTER

6. DUTIES OF PROMOTER

7. REMEDIES AVAILABLE TO COMPANY AGAINST PROMOTER

8. LIABILITIES OF PROMOTERS
INTRODUCTION

According to Companies Act 2013, A Promoter in Company refers to the person who:-

 Has been named in the Prospectus of the company or is identified by the company in its
Annual Return.
 Directly or indirectly, has control over the affairs of the company.
 Advises, instructs, or directs the Board of Directors of the Company.

A promoter of a company can be defined as the one whose function is to form a company with
reference to a given object and to set it going. He has some duties and liabilities.

According to Justice C. Cockburn. “Promoter is one who undertakes to form a company with
reference to a given object and to set it going, and who takes the necessary steps to accomplish
that purpose.”

The carrying of persons on the ground of profit to run a business is called promoters. The role of
the promoter is to make a detailed investigation of the weakness and the strongest of the idea and
determine the amount of capital to be invested and estimate the operating expense and probable
income

The concept of the promoter is a term of business and not that of law. It has not been defined
anywhere in the act.

According to L.J. Brown. “The term promoter is a term not of law but of business, usefully
summing up in a single word a number of business operations familiar to the commercial world
by which a company is generally brought into existence.”

Promoter- Meaning

A Promoter is a person who is engaged in promoting the formation and incorporation of the
Company. He conceives the idea of setting up the business and took the steps for the formation
of the Company. However, the persons who assist in the incorporation of the company are the
Professionals and not the promoters.
CHARACTERISTICS OF A PROMOTER IN COMPANY

1. Promoter conceives the idea for the formation of the Company.

2. He takes all the preliminary steps for the formation of the company.
3. A Promoter may be:-
 Any Individual
 Any Firm
 Association of persons
 A Company
4. A Promoter is neither agent nor trustee of the Company.
5. The promoter can be more than one person.
6. He acts in a fiduciary position for the Company

LEGAL POSITION OF A PROMOTER

A Promoter is neither an agent nor a trustee of the Company. He acts in a fiduciary position
towards the Company. He takes steps for the formation of the Company and incurs the
preliminary expenses for the Incorporation of the Company like Registration expenses, Stamp
duty payment, professional fees, etc.
FUNCTIONS OF PROMOTERS OF A COMPANY

1. He generates the idea for the formation of a company and explores the opportunities.
2. The promoter makes a feasibility study for the Business.
3. He drafts or gets drafted the Memorandum of Association, Articles of Association, and
other required documents for the proposed company.
4. He arranges finance for the Company.
5. Promoter arranges for the Subscribers of the company.
6. He takes steps to make preliminary contracts for the proposed company.
7. He defrays preliminary expenses.
8. Promoter decides about the following
 Name of the Company
 Type of Company
 Location of Registered Office
 Amount and form of Share Capital
 The brokers or underwriters for capital issue, if necessary,
 The bankers,
 The auditors,
 The legal advisers.
9. To conduct the necessary negotiation for the purchase of business in case it is intended to
purchase as existing business. In this context, the help of experts may be taken, if
considered necessary.
10. To collect the requisite number of persons (i.e. seven in case of a public company and
two in case of a private company) who can sign the ‘Memorandum of Association’ and
‘Articles of Association’ of the company and also agree to act as the first directors of the
company.
11. To get the MOA and the AOA drafted and printed
12. To arrange for the minimum subscription
13. To arrange for the registration of the company and certificate of incorporation.
RIGHTS OF PROMOTER

1. Right to Indemnity :

The promotors are severally and jointly liable for any false statement given in the
prospects therefore when more than one person acts as the promoter of the company, one
promoter can claim against another promoter for the compensation and damages paid by
him.

2. Right to Receive the legitimate Preliminary expenses

He has the right to recover the legitimate expenses which had to spend during the process
of the company in cost of advertisement, fees for the solicitor, etc. The right to receive
the preliminary expenses is not a contractual right. It depends upon the discretion of the
directors of the company

3. Right to receive the remuneration

The right to receive remuneration is not a contractual right. It completely depends on the
company to make sure to provide the same or not. and some cases, articles of the
company provide for the directors to pay a specified amount to promoters for their
services but this does not give the promoters any contractual right to sue the company.
In the case of more than one Promoter, he has the right to recover the proportionate
amount from the co-promoter if he pays the entire expenses.
4. The promoter can enter into preliminary contracts on behalf of the company.

However, the promoters are usually the directors, so that in practice the promoters will
receive their remuneration. The remuneration may be paid in any of the following ways:

 A commission may be paid to the promoter on the purchase price of the business
or property taken over by the company through him.
 The promoters may be granted by the company a lumpsum amount.
 The promoters may be given fully or partly paid shares in consideration of their
services rendered.
 The promoter may be given a commission at a fixed rate on the shares sold.
 The promoter may purchase the business or other property and sell the same to the
company at an inflated price. He must disclose this fact.
 The promoters may take an option to subscribe within a fixed period for a certain
portion of the company’s unissued shares at par.
  Whatever be the nature of remuneration, it must be disclosed in the prospectus if
paid within the preceding two years from the date of prospectus.

DUTIES OF PROMOTER

The duties of promoters are as follows:

1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret profit, it is
his duty to disclose all the money secretly obtained by way of profit. He is
empowered to deduct the reasonable expenses incurred by him.
2. To disclose all the material facts:
The promoter should disclose all the material facts. If a promoter contracts to sell the
company a property without making a full disclosure, and the property was acquired
by him at a time when he stood in a fiduciary position towards the company, the
company may either repudiate the sale or affirm the contract and recover the profit
made out of it by the promoters.
3. The promoter must make good to the company what he has obtained as a trustee:
A promoter stands in fiduciary position towards the company. It is the duty of the
promoter to make good to the company what he has obtained as trustee and not what
he may get at any time.
4. Duty to disclose private arrangements:
It is the duty of the promoter to disclose all the private arrangement resulting him
profit by the promotion of the company.
5. Duty of promoter against the future allottees:
When it is said the promoters stand in a fiduciary position towards the company then
it does not mean that they stand in such relation only to the company or to the
signatories of memorandums of company and they will also stand in this relation to
the future allottees of the shares.
REMEDIES AVAILABLE TO COMPANY AGAINST PROMOTER

If the Company promoter acts against its duties, the Companies Act provides some remedies to
Companies against the promoters. Those remedies are:-

 Rescission of Contract
 Recovery of secret profits
 Suit against promoter
 Cancel right of receiving remuneration by the promoter

LIABILITIES OF PROMOTERS

1. Liability to account for profits

The promoter is liable to account to the company for all secret profits made by him
without full disclosure to the company. They will sue the promotor for the amount of
profit and recover the same with interest

2. Personal Liability

The promoter is personally liable for all contracts made by him on behalf of the company
until the contracts have been discharged or the company takes over the liability of the
promoter.

3. Liability of the misstatement in the prospectus

In the case of Mismanagement of the prospectus, the promotor is liable and needs to pay
compensation of every share and debenture for any loss or damage sustained due to the
wrong information on the prospectus.

4. Liability at the time of winding up the company

In the Case of winding up of the company, on an application made by the official

liquidator, the court may make a promoter liable for misfeasance or breach of trust.
 Further, where fraud has been alleged by the liquidator against a promoter, the court may
order his public examination

The company has no legal existence until it is incorporated. It therefore follows:

1. That when, the company is registered, it is not bound by the preliminary contract.
2. The company when registered cannot ratify the agreement. The company was not a
principal with contractual capacity at the time of contract. A contract can be ratified only
when it is made by an agent for a principal who is in existence and who is competent to
contract at the time when the contract is made.
3. That if the agent undertook any liability under the agreement, he would be personally
liable notwithstanding that he is described in the agreement as an agent and that the
company may have attempted to ratify the agreement.
4. The company cannot enforce the preliminary agreement.
5. The preliminary contracts made by promoters generally provided that if the company
adopts the agreement the promoter’s liability shall cease and if the company does not
adopt the agreement within a certain time either party may rescind the contract. In such a
case promoter’s liability would cease after the lapse of fixed time.

Position of promoters in Companies Act, 2013

The 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 the Companies Act,
1956 defines ‘promoter’ for the limited purpose of that section only.

Legal Position of a Promoter:

The promoter is neither a trustee nor an agent of the company because there is no company yet in
existence. The correct way to describe his legal position is that he stands in a fiduciary position
towards the company about to be formed.

Lord Cairns has correctly stated the position of promoter in Erlanger V. New Semberero
Phophate Co. “The promoters of a company stand undoubtedly in a fiduciary position. They have
in their hands the creation and moulding of the company. They have the power of defining how
and when and in what shape and under what supervision, it shall start into existence and begin to
act as a trading corporation.”

From the fiduciary position of promoters, the two important results follow:

1. A promoter cannot be allowed to make any secret profits. If it is found that in any
particular transaction of the company, he has obtained a secret profit for himself, he will
be bound to refund the same to the company.
2. The promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If he contracts to sell his own property to
the company without making a full disclosure, the company may either repudiate/rescind
the sale or affirm the contract and recover the profit made out of it by the promoter.

A promoter who wishes to sell his own property to the company must make a full disclosure
of his interest. The disclosure may be made:

 To an independent Board of Directors, or

 In the articles of association of the company, or
 In the prospectus, or
 To the existing and intended shareholders directly.

If the promoter fails to discharge the obligation demanded of his fiduciary position the company
may rescind the contract or may in the alternative choose to take advantage of the contract and
sue the promoter for damages for breach of his duty to the company.

Secret profits on the sale of property can be recovered from a promoter only when the property
was bought and sold to the company while he was acting as a promoter.