Company Promoter Corporate Law Notes Download

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Define the term ‘Promoter’. What are his functions with reference to a Company? How is he remunerated by the Company for his services?

Ans. Meaning And Definition of Promoter

The person or persons who undertake responsibility to bring the company into existence are called ‘promoters’.

Thus, the promoter is a person who originates the idea of starting a business, plans the formation of a company, and actually brings it into existence. .He is the person who does the necessary preliminary work incidental to the formation of the company.

They provide the registration fees and carry out other duties involved in the formation of a company. They also make arrangements for advertising and circulating the prospectus and placing the capital.

The term ‘promoter’ has been in use in company law for centuries but the companies Act, 2013 is the first Act in India that defines this term. Section 2 (69) of the companies Act, 2013 defines the term promoter as a person :

(a) Who has been named as such in a prospectus or is identified by the company in the annual return; 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. This shall, however not apply to a person who is acting merely in a professional capacity.

This definition is purely a legal one. It does not reveal the nature and role of a promoter in formation of a company. It therefore, becomes imperative to go ‘through certain other definitions of the term ‘promoter’. A few other definitions are as under.

Justice C. Cock burn 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. ‘

According to Palmer, “A person who originates a scheme for the formation of the company, has the Memorandum and the Articles prepared, executed and registered and finds the first directors, settles the terms of preliminary contracts and prospectus (if any) and makes arrangement for advertising and circulating the Prospectus and placing the capital is a promoter.”

Thus, a promoter discovers, formulates and assembles a business proposition and brings about a company into existence for its development.

A promoter may be an individual, a firm, an association of persons or even a company. 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. Persons who merely acts in a professional capacity on behalf of a promoter such as a counselors, solicitors, accountants and other experts are not promoters.

Functions of Promoters

The promoter performs the following functions:

(l) To Conceive an Idea of Starting a Business: Promoter conceives the idea of forming a company and carry out detailed investigation so as to know whether the idea of forming a company is possible and profitable or not.

(2) To Collect the Requisite Number of Persons: Promoter secure the cooperation of the required number of persons willing to associate themselves with the project. In case of public company, the minimum number of members is seven and in case of private company is two.

(3) To Decide about the Name, Object and Capital: The promoter has to decide about the name of the company, the location of its registered office, the amount and form of its share capital and the underwriters for capital issue etc.

(4) To Get the Documents of the Proposed Company: Promoters prepare the necessary documents for the proposed company. They get the Memorandum and Articles of Association and other documents drafted and printed. Since the first directors are to be

(5) Consent of Directors: appointed by the promoters so they must get the consent of such persons who are to be so appointed.

(6) To Enter into Preliminary Contracts with the Vendors: The promoters must select the site for the factory, make arrangement for plant and machinery or to purchase the existing business. He enters into preliminary contracts with vendors underwriters etc.

(7) To Arrange for Filing the Necessary Documents with the Registrar: Promoters pay the stamp duty, filing fee and other charges for registration of the company and obtain the certificate of incorporation.

(8) Preparation and filing of prospectus: Promoters make arrangements for the preparation and filing of prospectus. He is also to make the arrangement for its circulation among prospective subscribers to its capital.

(9) To arrange the minimum subscription: In case of a public company, promoters arrange the minimum subscription to obtain the certificate to commence business.

Remuneration of Promoters The promoters have to incur various expenses in connection with the formation of a company, therefore, it is quite reasonable that they should get suitable remuneration for their services. But it is interesting to note that the promoters cannot claim any remuneration from the company as a matter of right. They are entitled to remuneration for their services only if there is a contract to that effect. But, a company before incorporation, cannot enter into a contract. As such, the promoter is at the mercy of the directors after incorporation of the company, even for his preliminary expenses, registration fee, etc. However, the Articles of a company, generally contain a provision to this effect and authorise the directors to remunerate the promoters. The usual ways of paying remuneration to a promoter for his services, are as under.

(i) A commission on the purchase’ price of the business or property taken over by the company through him.

(ii) The promoter may be paid a certain lump sum.

(iii) He may be given fully or partly paid shares in consideration of his services rendered.

(iv) He may be given a commission at a fixed rate on the shares sold.

(v) He may sell his own property to the company at a higher price and make profits. However; he must make full disclosure of this fact.

(vi) He may be given an option to buy the shares of the company at par when their market price, is higher.

(vii) He may be appointed as chairman of the Board of Directors of the company.

Q. 7. What is the legal position of the promoters of a company ? When pre-incorporation contracts can become applicable on the company

What is the legal position of a promoter in a company? What are rights and liabilities of promoter of a company ?

Or “A promoter is neither a trustee nor an agent of the company but he stands in a fiduciary position towards the company.” Comment on the statement.

Legal Position of A Promoter

Ans.

The legal position of the promoter is that, he is neither an agent nor a trustee of the company he promotes, since his functions as a promoter are performed at a time when the company has not yet come into existence.

As per the spirit of the provisions of the Companies Act with regard to promoters and some judicial opinions, it may be clearly inferred that a promoter stands in a fiduciary position or relationship to the company. Fiduciary position means that he holds a position of good faith (complete confidence) and trust.

Lord Cairns has correctly stated the position of a promoter in Erlanger v. New Sombrero Phosphate Co. that 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 whose supervision, it shall start into existence and begin to act as a trading corporation.

In this connection Lord L.J. Lindley described the position of a promoter as follows:

“Although not an agent for the company, nor a trustee for it before its formation, the old familiar principles of law of agency and of trusteeship have been extended and very properly extended to meet such cases. It is perfectly well-settled that a promoter of a company is accountable to it for all moneys secretly obtained by him from it just as the relationship of the principal and agent or the trustee and incest que trust had really existed between him and the company when the money was obtained.” Thus it becomes that a promoter is neither an agent nor a trustee of the company under incorporation but a number of pertain fiduciary duties have been imposed on him under the Companies Act.

Fiduciary Position of A Promoter

Duties. of Promoters

The promoters in their fiduciary capacity bas the following duties:

1. Duty not to make any Secret Profit’ : It is I be duty of a promoter that he cannot make either directly or indirectly any profit at the expense of the company he promotes, without the knowledge, and consent of the company. If he does so, in disregard of this rule, the company can compel him to account for it. Secret profits or undisclosed benefits of any type received by the promoters can be recovered from them by the company.

2. Duty to make full Disclosure to the Company of all Relevant Facts : It is the duty of the promoters to disclose fully all material facts relating to the formation of the company. The disclosure of all material facts regarding contracts made and the-profits earned by them from the formation of the company, should be made to an independent and competent board of directors. If he fails to do so, he may be held liable whenever the company comes to know about the same. It should be noted that the principle of fiduciary relationship requires full disclosure of all facts. Half disclosure is worse than none.

3. Not to sell own property without informing : A promoter must not sell his property to the company without informing it that the property belongs to him. Moreover, if he sells it at a profit or at a price higher than the market price, this fact should also be brought to the knowledge of the company. If such facts are concealed, the company may rescind the contract or claim compensation of loss caused to it.

4. Must not make an Unfair use of his Position : The promoters must make a fair and reasonable use of his powers and posit(on. He must act honestly.

Liabilities of Promoters

A promoter has the following liabilities .

1. Liability to account for the profits : The promoter; stands in a fiduciary position to the company. He is liable to the company for all secret profits made by him with full disclosure to the company. The company may either :

(a) rescind the contract and recover the purchase price where he sold his own property to the company, or

(b) sue the promoter for the amount of profit and recover the same with interest, or

Company Promoter Corporate Law Notes Download

2. Liability for preliminary contracts—A promoter is liable for the preliminary contracts made by him unless they are warranted by the terms of incorporation or adopted by the company after incorporation.

3. Fraud in the Promotion of the Company—

(i) If a promoter furnishes: any false or incorrect particulars of any information suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action under Section 447.

(ii) Where it is found that any fraud has been committed in promoting or forming a company, the Tribunal may order investigation against the promoters, any other director or officer of the company involved in such fraudulent activities. [Section 282]

(iii) A company may proceed against a promoter where the promoter has wrongfully obtains possession of any property, including cash of the company or wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorized by the Act. [Section 452]

4. Omission in the Prospectus—Prospectus issued by a company must have the contents as laid down by Section 26 of the Companies Act. In case of omission of facts, the promoter shall become liable to be punished with imprisonment for a term which may extend to 3 years or a fine from Rs. 50,000 to RS. 30,00,000 or both. [Section26(9)]

5. Misrepresentation in the Prospectus—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. [Section 35]6. Liability for non-co-operation to Company Liquidator—It is the duty of the promoters etc. of the company to extend full co-operation to the Company Liquidator in discharge of his functions and duties. But if any person, without reasonable cause, fails to discharge these obligations shall be punishable with imprisonment which may extend to 6 months or with I Section 2841 fine which may extend to 50,000 or with both.

Preliminary Contracts

The contracts which are entered into by the promoters on behalf of the company before its incorporation are termed as ‘Preliminary contracts.’ Such contracts are made by the promoters to acquire some property or right for the company before its incorporation. The company can neither sue nor be sued by the other pray on the basis of such contracts as the company has no capacity to contract before its incorporation. A contract entered into by promoters on behalf of a proposed company is void so far as the company is concerned. The promoters cannot be the agents for a principal which has not yet come into existence. In other words, the company is not liable for the acts of promoters done before its incorporation. The legal position with regard to pre-incorporation contracts is as follows :

l. A pre-incorporation contract never binds a company, since a person (legal or altifical ) cannot contract before his or its existence, and the company before incorporation has no legal existence.

2. The company cannot sue on pre-incorporation contracts i.e., it cannot take the benefit of a contract’ made on its behalf before its incorporation. In Natal Land and Colonisation Co. Ltd. Vs. Pauline Colliery Syndicate (1904) A.C. 120), the company promised C’, an agent of a syndicate yet to be formed, to grant a lease; of certain mining property for three years. After registration, the syndicate sued the Natal Company for specific performance of the agreement to grant a lease. It was held that the syndicate was not entitled to claim the lease as it was not in existence when the contract was signed and a company cannot obtain the benefit of pre-incorporation contract unless a new contract is made with the company after its incorporation. 3. The company cannot ratify or adopt a pre-incorporation contract purported to have been made on its behalf even if it is for its benefit (Natal Land & Colonization Co. Ltd. Case). Ratification is possible only where an agent has contracted on behalf of, a principal who is in existence and competent to contract at the time of making of contract. In short, we can say that a company prior to its incorporation cannot be liable for the preliminary contracts made by the promoters nor can it ratify them simply for the reason that it was not in existence. The promoters will continue to be personally liable for a pre-incorporation contract unless a new contract embodying the terms of the old one is made afresh by the company after its incorporation.