CORPORATE LAW I

Assignment on the Topic:

POSITION AND LIABILITY OF

PROMOTERS

Submitted by-
MOHD WASIF
ROLL No. 35
SEMESTER VI
B.A.LL.B.(HONS.)
REGULAR
2019

Submitted to –
Dr. Qazi Mohd Usman
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my subject teacher Dr.

Qazi Mohd Usman who gave me the golden opportunity to do this wonderful
assignment on the topic position and liability of promotors, which helped me in
doing a lot of Research from which I came to know about so many new things in
my subject. I am really thankful to him. Secondly I would also like to thank my
parents and friends who helped me a lot by giving me creative ideas and helping
me in finalizing this project within the limited time frame.

THANKING YOU
 INDEX

 INTRODUCTION

 FUNCTIONS OF PROMOTER

 LEGAL POSITION OF PROMOTERS

 DUTIES OF PROMOTERS

 LIABILITY OF PROMOTERS

 STATUS OF PRE-INCORPORATION OF CONTRACTS

 CONCLUSION

 BIBLIOGRAPHY
 INTRODUCTION
A promoter conceives an idea for setting-up a particular business at a given place and
performs various formalities required for starting a company. A promoter may be a
individual, firm, association of persons or a company. The persons who assist the
promoter in completing various legal formalities are professional people like Counsels,
Solicitors, Accountants etc. and not promoters.

According to Justice C.J. Cokburn “A promoter is the one, who undertakes to form a
company with reference to a given object and sets it going and takes the necessary steps
to accomplish that purpose.”

Arthur Dewing defined promoters as “A promoter is the person conscious of the

possibility of transforming an idea into a business capable of yielding a profit; who brings
together various persons concerned and who finally, superintendents the various steps
necessary to bring the new business into existence.”

A person who devises a plan for a business venture; one who takes the preliminary steps
necessary for the formation of a corporation. Promoters are the people, who, for
themselves or on behalf of others, organize a corporation. They issue a prospectus, obtain
stock subscriptions, and secure a charter. Promoters stand in a fiduciary relationship to
the proposed company and must act in Good Faith in all their dealings for the proposed
corporation.

The term promoter is a term not of law, but of business, usually 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.

The expression ‘promoter’ has not been defined under the Companies Act, although the
term is used expressly in Sections 2(69), 35, 39, 40, 300, and 317 of the New Company
Act, 2013. Even in English law, no general statutory definition of ‘Promoter’ is available.
As per Section 2(69) of the Act, 2013 defines the term ‘Promoter’, it means a person-
(a) who has been named as such in a prospectus or is identified by the company in the
annual return 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 capacity1. So, in other words we can defines the expression
‘promoter’ to mean a promoter who has a party to the preparation of 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.

Cockburn C.J., in Twycross vs. Grant2 described a promoter 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.

FUNCTIONS OF A PROMOTER

1. To conceive an idea of forming a company and explore its possibilities.

2. 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.

3. 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

1
Section 2(69) Companies Act, 2013
2
(1877) 2 CPD 469.
‘Articles of Association’ of the company and also agree to act as the first directors of the
company.

4. To decide about the following:

(i) The name of the Company,

(ii) The location of its registered office,

(iii) The amount and form of its share capital,

(iv) The brokers or underwriters for capital issue, if necessary,

(v) The bankers,

(vi) The auditors,

(vii) The legal advisers.

5. To get the Memorandum of Association and Articles of Association drafted and

printed.

6. To make preliminary contracts with vendors, underwriters, etc.

7. To make arrangement for the preparation of prospectus, its filing, advertisement and
issue of capital.

8. To arrange for the registration of company and obtain the certificate of incorporation.

9. To defray preliminary expenses.

10. To arrange the minimum subscription.

 LEGAL POSITION OF PROMOTOR

The company law has not given any legal status to promoters. A promoter is neither an
agent nor a trustee of the company because it is a non-entity before incorporation. Some
legal cases have tried to specify the status of a promoter. He stands in a fiduciary
position.

The promoter moulds and creates the company and under his supervision it comes into
existence. It is the duty of the promoter to get maximum benefits for the company. He
should not get secret profits from the company. 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. 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:

(i) To an independent Board of Directors, or

(ii) In the articles of association of the company, or

(iii) In the prospectus, or

(iv) 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.

Lord Cairns has stated the position of promoter in Erlanger V. New Semberero Phophate
Co.3 “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.”

In Twycross v. Grant4 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 5, 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.”

DUTIES OF PROMOTORS

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.

3
(1878) 3 App Cas 1218.
4
(1877) 2 CPD 469.
5
[1889] 2 Ch. 392 (p. 428, C.A.)
Following are the Duties of the promoter:

1. 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 principle’s consent. A promoter is allowed to make a profit out of
a promotion but with the consent of the company.
2. 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.
3. 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.
4. 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.
5. 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.

LIABILITY OF PROMOTORS

A promoter is subjected to liabilities under the various provisions of the Companies Act.

1. 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.

2. Under section 34 and 35 of the Companies Act, 2013, 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.

3. According to section 300 of the Companies Act, 2013, 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.
4. A company may proceed against a promoter on action for deceit or breach of duty
under section 340 of the Companies Act, 2013, 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 Ramaswamy6, 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 liabilities 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. Section 62(1) of the Companies Act, 2013 holds the promoter liable to pay
compensation to every person who subscribes for any share or debentures on the faith of
the prospectus for any loss or damage sustained by reason of any untrue statement
included in it. Section 62 of the Companies Act, 2013 also provides certain grounds on
which a promoter can avoid his liability. Similarly section 63 of the Companies Act, 2013
provides for criminal liability for mis-statement in the prospectus and a promoter may
also become liable under this section. The promoter may also be imprisoned for a term
which may extend to two years or may be punished with the fine upto Rs. 5,000 for
untrue statement in the prospectus. (Section 63).

6
[2010] 104 SCL 174.
 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 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.

CONCLUSION

“Promoter is the person who originates the idea for formation of a company and gives the
practical shape to that idea with the help of his own resources and with that of others.” A
person cannot be held as promoter merely because he has signed at the foot of the
Memorandum or that he has provided money for the payment of formation expenses. The
promoters, in fact, render a very useful service in the formation of the company. A
promoter has been described as “a creator of wealth and an economic prophet.” The
promoters carry a considerable risk because if the idea sometimes goes wrong then the
time and money spent by them will be a waste. In the words of Henry E. Heagland, “A
successful promoter is a creator of wealth. He is an economic prophet. He is able to
visualize what does not yet exist and to organise business enterprise to make the products
available to the using public.” A promoter may be an individual, a firm, an association of
persons or even a company.

BIBLIOGRAPHY

 THE NEW COMPANY LAW, BY Dr. N.V. PARANJAPE, SIXTH

EDITION, CENTRAL LAW AGENCY

 legalservicesindia.com

 yourarticlelibrary.com

 indiankanoon.org

 businessmanagementideas.com/company-management

 lawctopus.com