QUESTION BANK
Q.1 Define the term ‘promoters’. State importance, duty and liability of promoter.
Q.2 Define position of promoter, duty and liability of promoter.
Q. 3 The companies Act des not define a promoter, but whether a person is a promoter or not is a question of law. Explain.
SHORT NOTES
Q.1 Promoter.
a. Chief Justice Cockburn:
b. Justice Changing:
Under Section 2(69) of the Companies Act, 2013,
The Professional Capacity Exception:
a. Civil Liability (Section 35):
b. Criminal Liability (Section 34):
The term "promoter" originates from the verb "promote," which means to push forward or advance. In corporate jurisprudence, it signifies the entrepreneurial force that takes the initiative to move a business idea forward into a formal, registered corporate body.
a. Chief Justice Cockburn: "A promoter is 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." (Twycross v. Grant, (1877) 2 CPD 469)
b. Justice Changing: "A promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons and sets in motion the machinery which leads to the formation itself." (Bosher v. Richmond & Princeton Land Co., 89 Va. 455 (1892))
Under Section 2(69) of the Companies Act, 2013, a "promoter" is explicitly defined as a person:
a. Who has been named as such in a prospectus or is identified by the company in its 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.
The Professional Capacity Exception: Section 2(69)(c) includes a strict statutory protection: it excludes individuals acting merely in a professional capacity (such as practicing advocates, chartered accountants, company secretaries, or valuers who draft the incorporation paperwork, agreements, or articles for a professional fee).
A promoter identifies a commercial opportunity, negotiates initial asset acquisitions, drafts the Memorandum (MoA) and Articles (AoA), and navigates the registration process with the Registrar of Companies (RoC).
The promoter's primary function is complete once the Certificate of Incorporation is issued and a functional Board of Directors assumes operational control. While promoters frequently transition into becoming the company’s first directors, this is a distinct legal change in capacity.
A promoter is neither a formal agent nor a trustee of a company because an unborn entity lacks legal personality and cannot act as a principal or beneficiary. However, corporate law places promoters in a strict fiduciary position toward the unformed company and its future investors.
As observed by Lord Cairns:
"Promoters stand in a fiduciary position. They have the creation and moulding of the company in their hands. 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." (Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218)
Because of this fiduciary bond, promoters are legally prohibited from making any secret profits at the expense of the future company. A promoter is fully entitled to sell their own property or business to the newly formed corporation at a profit, provided they make a full, frank, and honest disclosure of that profit to:
a. An independent, non-partisan Board of Directors; or
b. The entire body of shareholders via the public prospectus.
Gluckstein v. Barnes, [1900] AC 240
Facts: A syndicate of promoters bought a distressed property for a certain amount and subsequently formed a company to purchase that same property from them for a higher amount. Through this transaction, the promoters pocketed a hidden profit of £20,000. Although they disclosed certain aspects of the transaction in the prospectus, they hid this specific internal profit from the independent board and shareholders.
Ruling: The House of Lords held the promoters liable for a gross breach of fiduciary duty. Because they failed to make a full, transparent disclosure of their personal financial interest, the court ordered them to refund the entire secret profit to the company's liquidator.
Under Section 26 of the Act, a company must disclose any managerial interest or payments made to promoters in its public prospectus. This requires explicit disclosure of the nature and total amount of any cash, shares, or benefits paid or intended to be paid to any promoter within the two years immediately preceding the date of the prospectus.
If a promoter participates in issuing, distributing, or authorizing a public prospectus that contains false, misleading, or ambiguous statements, or deliberately conceals material facts, they face strict dual liability:
a. Civil Liability (Section 35): Jointly and severally liable to pay full monetary compensation to every subscriber who bought securities relying on the faith of that misleading prospectus and suffered a financial loss.
b. Criminal Liability (Section 34): Criminally liable under the fraud provisions of Section 447 if the misstatement was made knowingly, carrying a penalty of mandatory imprisonment ranging from six months up to ten years.
Because a company does not exist prior to its official date of incorporation, it lacks the legal capacity to contract. Consequently, a promoter cannot enter into a binding contract with a future company to secure remuneration for their promotional activities or recover pre-incorporation expenses. After incorporation, the company is under no automatic legal obligation to compensate the promoters for their time, skill, or out-of-pocket expenses. Legally, the promoter operates at the mercy of the subsequent Board of Directors.
To ensure fairness, promoters typically insert a specific enabling clause into the company's Articles of Association (AoA) that empowers the incoming directors to evaluate and pay legitimate pre-incorporation expenses and promoter remuneration.
However, a clause in the Articles only serves as an internal authorization for the directors; it does not create a binding contract between the company and an outside promoter. If the directors refuse to exercise this power, the promoter cannot sue the company to enforce payment.
When the Board does choose to reward promoters, it can do so through several recognized commercial methods:
a. Paying a fixed cash lump sum;
b. Allotting fully paid-up shares to the promoters for their services without cash consideration (sweat equity/promoter equity);
c. Purchasing the promoter’s private business assets via a contract that includes a premium or allowance for goodwill; or
d. Allowing the promoters a contractual option to subscribe for a future block of the company's shares at a discounted rate.
Phase | Legal Status | Core Responsibility / Liability | Remuneration Status |
Pre-Incorporation | Fiduciary Position (Erlanger Rule) | Strict duty of full disclosure; cannot make secret profits (Gluckstein Regimes). | Cannot execute a binding contract for fees; bears personal liability for expenses. |
At Incorporation (SPICe+) | Applicant / Signatory | Must submit true declarations of statutory compliance under Section 7. | Expenses must be formally declared to the RoC. |
Post-Incorporation Public Offer | Named Promoter under Section 2(69) | Joint and several liability for any prospectus misstatements under Sections 34 & 35. | Directors can pay fees only if authorized by the Articles of Association. |
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