Promoters of a Company
Dr. HINA KAUSAR
Assistant Professor
A promoter is a person who does all necessary preliminary work,
incidental to the formation or promotion of the company.
The 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.
Cockburn C.J., in the case of Twycross V. Grant (1877)
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".
He selects and settles with persons to become signatories to the memorandum of association
and the first directors; instructs and directs the solicitors to prepare the memorandum of
association, the articles of association and other documents necessary to be filed with the
Registrar of Companies;
he also finds funds for the registration expenses and prepares the climate to secure the initial
capital for the company. Where to situate the registered office of the company, from where to
get necessary plant and equipment etc., are other worries of a promoter.
Whether a person is or is not a promoter depends upon the facts in each particular case. Only
one who has a desire that a company be formed and is prepared to take some steps to
implement it is a promoter.
The expression 'Promoter' had not been defined under the
Companies Act 1956.
However, as per Section 2(69) of the Companies Act, 2013,
defines the term 'Promoter’, it means-
“Person who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise”.
Rights of Promoters
The promoters being in a fiduciary relation with the company
they form, have certain rights and liabilities vis-a-vis the
company. The rights of a promoter of the company are:
1) Right to Receive Preliminary Expenses- The promoters are
entitled to receive all the expenses incurred in setting up and
registering of the company. The articles may provide for payment
of preliminary expenses to the promoters.
2) Right to Indemnity- The promoters are held jointly and severally liable for
the secret profits made by them in formation of the company. Therefore, if the
entire amount of secret profits is paid to the company by a single promoter, he
is entitled to recover the proportionate shares from his co-promoters.
Likewise, if the entire liability arising out of mis-statement in the prospectus is
borne by one of the promoters, he is entitled to recover proportionately from
the co-promoters.
3) Right to Receive Remunerations: A promoter having made proper
disclosure, has a right to be paid remunerations for his efforts. The payment of
the remunerations to a promoter in consideration of his services may be in the
form of fully or partly paid-up shares, debentures or commission or it can even
be in the form of lump sum amount.
It must, however, be noted that in absence of any express agreement with the
company after its incorporation, a promoter is not entitled to claim from the
company any remunerations for his services. A company is also not liable in
absence of an agreement to reimburse a promoter in respect of registration fee
or stamp duty paid by him for the registration of the company.
Duties of Promoter
The promoters have certain basic duties towards the company formed:
1) To Stand in Fiduciary Relationship:
As we know that promoters have been described to be in a fiduciary
relationship (i.e., relationship of trust and confidence) with the company. This
relationship of trust and confidence requires the promoter to make a full
disclosure of all material facts relating to the formation of the company.
2) To Disclose all Secret Profits: He must not make any secret profit out of
the promotion of the company. The promoter can make profits in his dealings
with the company provided he discloses these profits to the company and its
members. What is not permitted is making secret profits i.e. making profits
without disclosing them to the company and its members.
3) To Disclose All Material Facts: He must make full disclosure to the
company of all relevant facts including any profit made by him in transaction
with the company.
4) To Make Good to The Company what he has obtained as a Trustee: A
promoter stands in a fiduciary position towards company. It is his duty to
make good to the company what he has obtained as trustee.
Liabilities of Promoter
A promoter can be compelled by the company to hand over any secret profit, which
he has made without full disclosure to the company. The company can also sue for
the rescission of the contract of sale by the promoter where the promoter has not
disclosed his interest therein. A promoter is subject to the following liabilities under
the various provisions of the Companies Act:
1) Section 26 Companies Act, 2013 lays down matters to be stated and reports to be
set out in the prospectus. He may be held liable for the non-compliance of the
provisions of this Section.
2) Under Section 35 of Companies Act 2013, a promoter is liable for any
untrue statement in the prospectus to a person who has subscribed for any
shares or debentures on the faith of the prospectus. Such a person may sue the
promoter for compensation for any loss or damage sustained by him.
Any false statement in the prospectus may lead to the following consequences:
a) The allotment of shares or debentures may be set aside
b) The promoters may be sued for damages and also for compensation.
c) The promoters may incur criminal liability and criminal proceedings may be
instituted against him.
3) Besides civil liability, the promoters are criminally liable under Section 34
of Companies Act, 2013 for the issue of prospectus containing untrue
statements. Section 68 imposes severe penalty on promoters who make untrue
and deceptive statements in a prospectus with a view to obtaining capital.
4) A company may proceed out against a promoter for deceit or breach of duty
under Section 543, 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.
Pre–incorporation Contracts
Incorporation of company includes variety of activities which are done by
agreements, for example, buying land for manufacturing and registered office,
technology transfer, loan agreement, agreement with stock exchange, agreement
with intermediaries, agreement with third parties for procurement of raw materials
and mobilization of stock in trade.
Before incorporation, company has no contractual capacity so on behalf of a
prospective company all such agreements were signed by promoters and these
contracts are known as pre-incorporation agreements. No contract can bind the co.
before it becomes capable of contracting by incorporation.
A very apt question in this regard is that what will be liability of promoter or
company or third party in pre-incorporation agreement.
The true legal position in respect of pre-incorporation contracts may be discussed
under the following two heads:
1. Position before 1963 (i.e., before passing of Specific Relief act, 1963), and
2. Position after 1963
1) A pre-incorporation contract never binds a company since a person (legal or
juristic) cannot contract before his or its existence and a company before
incorporation has no legal existence. The company is also not entitled to sue on a
pre-incorporation contract. As it was held in the case of Natal land and colonization
company V. Pauline colliery syndicate [(1904) AC 120] that the syndicate was not
entitled to its claim as it was not in existence when the contract was made and a
company cannot obtain the benefit of a pre-incorporation contract in the suit of
specific performance.
2. Position after 1963 (i.e., After Passing of the Specific Relief Act, 1963)
Until the passing of the Specific Relief Act, 1963, in India the promoters found
it very difficult to carry out the work of incorporation. Since contracts prior to
incorporation were void and also could not be ratified, people hesitated to
either supply any goods or services for the cause of incorporation.
The Specific Relief Act, 1963 came as a relief to the promoters.
Section 15(h) and 19(e) of the Specific Relief Act provides as follows:
1) The contract should have been entered into by the promoter for the purpose
of the company
2) The terms of incorporation should warrant such contract.
3) The company should accept the contract after incorporation.
4) Such acceptance should be communicated to the other party to the contract.
After incorporation of the company
After company came into existence, a company can ratify or adopt the contract, and this
would bind the company and not the promoter. Under the Specific Relief Act 1963, Section
15(h) and 19(e) promoter can shift his right and responsibility to the company, if it is
warranted by the terms of incorporation.
