Promoters

Meaning
• When an individual has an idea for a new business venture, he or she may set about
interesting others in the venture and persuade them to contribute capital to a company
to be incorporate for the purpose of carrying on the venture. The individual will then be
described as ‘promoter’ of the company. A person who acts in a professional capacity
is not a promoter.
• A company is born only when it is duly incorporated. For incorporating a company
various documents are to be prepared and other formalities are to be complied with. All
this work is done by promoters. Technical and non-technical.
• Then the question arises that who really are promoters of a company, the most
important work of a promoter is in the formation of a company.
• The whole process of the formation of a company may be divided into four stages (i)
Promotion, (ii) Registration, (iii) Floatation and (iv) Commencement of business.
• Promotion is a term of wide import denoting the preliminary steps taken for the
purpose of registration and floatation of the company. A promoter may be an
individual, syndicate, association, partner or company.
Technical activities
• Project planning
• Feasibility study
• Technical co-operation/ collaboration
• Location studies
Non- technical activities
• Assembling the required number of signatories
• Obtaining legal advice
• Appointing company lawyer and other key people
• Infrastructural activities
In short promotion involves
• Discovering an idea of business
• Preliminary and detailed investigation on the feasibility of the project
• Assembling business elements and
• making funds to launch the projects

• Any person who assumes primary responsibility for these issues is a

‘promoter’
Section 2(69) in the Companies Act, 2013: “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; or
b) who has control over the affairs of the company, directly or indirectly whether as
a shareholder, director or otherwise; or
c) 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.
Explanation
• 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.
 Promoters in other statutes- national & international
• 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.
• 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
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 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.
Judicial interpretations
• In the case of Bosher v. Richmond L and 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.”
• 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”- ?
• A 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, targeting initial leads and
chasing initial business opportunities, entering into the initial contracts for the
business formation and incorporating 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 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.
Legal position or status of a promoter
• He is not a trustee- the company as a beneficiary is not in existence
• Not an agent- the company as a principal is not in existence
• He is in a fiduciary relation towards the upcoming company.
• Therefore, he should make full disclosure of all material information
including profits made.
• He cannot make any secret profits without disclosing it to an
independent Board or a body of shareholders.
• 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.
Duties of Promoter
• The 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.
• Duty to disclose secret profits
• A 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 principal’s
consent.
Gluck stein v. Barnes
• A syndicate was formed to purchase Olympia company. It was also
formed with an intention to register a company and to resell Olympia
company to the proposed new one. The syndicate purchased the
debentures of Olympia co. at a discount. They bought the Olympia co.
for 1,40,000 pound out of their own money, repaid the debentures
fully and made a profit of 20000 pounds. They formed a new
company and sold Olympia to it for 1,80,000 pounds. The profit of
40000 during sale was revealed in the prospectus but not the 20000
out of sale by debentures. The revealing of the 20000 profits made in
the capacity of vendors to themselves as capacity of promoters was
held not to be proper disclosure.
Continued…
• Duty of disclosure of interest
• In 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.
Promoter’s duties under the Indian Contract Act

• Promoter’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.
 Termination of Promoter’s Duties
• A 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.
• Remedies available to the company against the promoter for breach of his duties
• Since 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.
• Rescission of contract
• So 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.
• To recover secret profit
• If a promoter makes a secret profit or does not disclose any profit made, the company has a remedy of
recovery against him.
 Liabilities on Promoter
• A 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.
To fix the liability of a promoter
• 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.
Status of pre-incorporation of contracts
• The 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 prospective 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.
Validity of pre-incorporation contract under the Specific Relief Act
• 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, deviate 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 thereto
• Provided 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 by 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.
Contracts should be warranted by the terms
of incorporation- meaning
• The company can ratify only pre-incorporation contracts which are
essential for incorporation and working of the company.
• E.g. contracts for printing the Memorandum or Articles, supply of
essential machineries etc.
• The company should accept such contracts and communicate such
acceptance to the other party
• 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 on behalf of a prospective 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.
Position in Indian law regarding promoter’s
liability in pre-incorporation contracts
• 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,
there is 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.
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.
Procedure for incorporation of a company

Certificate
Preparatory
Of
steps
incorporation

Scrutiny Application
by Registrar to Registrar
Preparatory steps
• Checking in with the Registrar the availability of name
• To acquire Letter of intent which have to be converted into industrial
license if the business falls under the purview of Industries
(Development and Regulation )Act, 1951
• To appoint underwriters, brokers, bankers, solicitors, auditors and
signatories to memorandum
• Prepare and print Articles and Memorandum of Association
Application to Registrar of Companies in the
state
• Documents needed with application-
1. Memorandum duly stamped, signed and witnessed
2. Articles duly stamped, signed by signatories to memorandum and
witnessed
3. Agreement with any manager, whole time director or managing director
4. Consent letter of directors, specifying necessary share qualifications
5. A notice of address of the registered office of the company. May be filed
within 30 days of incorporation
6. A statutory declaration that all legal formalities as mentioned in the Act
has been complied with.
7. The application is filed along with filing fee and registration fees as
prescribed under Schedule of the Companies Act.
Certificate of incorporation
• After scrutinizing all documents and application along with the fee,
the Registrar will issue the Birth certificate of the company- the
Certificate of incorporation. Thus it becomes a body corporate
• A Corporate Identity Number will be allotted to the company- CIN
Conclusiveness of Certificate of Incorporation
• A Certificate of incorporation once issued is final for all purposes
• The courts will not go behind the illegality in registration
• Illegal objects of a company does not become legal by means of
Certificate of Incorporation. That illegality can be questioned.
• But, certificate of incorporation cannot be questioned on grounds like
persons who had signed it happened to be minors, signatures were
forged etc.
• Legal personality of a company can be cancelled only by winding up
Commencement of business
• A private company can straight away commence the business
• A public company having share capital and issuing prospectus , thus
inviting public for its shares will have to file certain documents with
the Registrar to get the Certificate of Commencement of Business. It
can start business only after getting this trading certificate.
Documents needed for the trading certificate
1. A declaration that shares payable in cash have been allotted up to
the amount of the min. subscription as stated in the prospectus
2. The declaration as to every director has satisfied his share
qualification and has paid in cash the application and allotment
money in the same proportion as others
3. The declaration that no refundable money exists by reason of
failure to apply for or obtain permission for shares or debentures in
any of the recognized stock exchanges
4. A declaration by director, secretary or when the company has a CS a
full time CS that all these requirements have been complied with.
• The Registrar will scrutinize these documents and will issue the
commencement of business certificate
• The company can start business on getting the trading certificate.
• Any contract entered into by the company before getting the trading
certificate shall be provisional contracts
• If the company does not commence business within one year of its
incorporation, it may be wound up by the court.
Model questions
1. A company, FM Ltd was formed to run a pop group. Mr. Lane, one of the
promoters made a contract with Phonogram Ltd ‘for and on behalf of FM Ltd’.
Based on this contract money was advanced to FM Ltd. However, FM Ltd was
never actually incorporated. The creditors filed recovery against FM Ltd. Explain
the liability of Mr. Lane and the company FM w.r.t the loan advanced to FM Ltd.
What remedy is available to the creditors?
2. The promoters of a company, incorporated on 9th April 1996, had entered into a
contract with M on 8th March, 1996 for supply of goods. After incorporation,
the company does not want to proceed with the contract. Explain the liability of
the company and promoters?
3. Though six out of seven signatures to the memorandum of association were
forged, the company was registered and the certificate of incorporation issued.
Can the registration be challenged on grounds of forgery?