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“Law Master’s” Publication
“Promoters”
Prof. S.D. Bhosale
(..4..)
PROMOTERS
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.
Table of content
DEFINITION OF PROMOTER:- ..........................................................................39
Fiduciary Relation:- .............................................................................................40
Disclose Profit (S. 26):-........................................................................................40
I]
DEFINITION OF PROMOTER:-
The term ‘promoter’ has come from the verb ‘promote’, which means “to move forward”.
In the parlance of company law, it means “to move forward for incorporation of a company”. We
will discuss some other definitions, viz-
(1)
A promoter undertakes to form a company with reference to a given project, set it up, and
take the necessary steps to accomplish that purpose.”
(2)
“A promoter is a person who brings about the incorporation and organisation of a
corporation. He brings together the persons and sets in motion the machinery which leads to the
1 Twycross v. Grant 1877 2 PPD 469
2 37 Am St. Rep 879
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“Law Master’s” Publication
“Promoters”
Prof. S.D. Bhosale
formation itself”.
(3)
S. 2 (69) of 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 S. 92 (of the 2013 Act).
(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.
In other words, a promoter is a person who voluntarily undertakes to form the company,
associates with the persons interested in the given enterprise and sets the company in motion.
The function of promoters is complete when the company is incorporated. After
incorporation, the company's charge is given to the Directors. Generally, promoters are the first
directors, but this is not always the case.
The question may arise as to whether a person is or is not a company promoter. It depends
upon the role performed by the person in promoting the company. There may be professional
promoters or promoters of their own company. Thus, professional men like solicitors who draw
up an agreement or articles of association, valuators, and persons who work for payment in the
promotion are not promoters.
II]
DUTIES AND LIABILITIES OF PROMOTER:-
A promoter is not an agent nor trustee of the company because the company, before
incorporation, does not get a legal entity. The duties and liabilities of promoters are as follows-
1)
Fiduciary Relation:-
and moulding of the company in their hands. They have the power of defaming 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 other words, his relationship with the company is fiduciary. He should disclose to the
company his position, profit and interest in the property, which is subject to purchase or sale to the
company.
2)
Disclose Profit (S. 26):-
Being in fiduciary duty, it is incumbent upon the promoter to disclose the profit earned by
reselling his property to the company. In other words, if a promoter acquires a property or a
business, he may sell that property or business to the company at a profit; however, he must
disclose his profit to the company”.
3 Erlanger V. New Sombero Phosphate Company. 1878 L R 3 App cas 1218
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“Law Master’s” Publication
“Promoters”
Prof. S.D. Bhosale
Facts—Promoters earned a profit of pound 20,000/—by selling property to the company. They
did not disclose this to the independent board or shareholders.
Held- they were held liable for breach of fiduciary duty and ordered to refund secret profit.
Thus, the Promoter must disclose to the company any interest he has earned in the
transaction with the company.
According to S. 26 of the Companies Act, the promoter’s earnings, profits, and interest will
be disclosed in the prospectus itself. Such disclosure must be made for the amount paid to him by
the company within the last two years.
3)
Liability in Respect of Prospectus:-
Promoters who participate in the prospectus issue, offering shares or debentures, are liable.
If the prospectus omits to give the information required by the Act or makes any untrue statement,
those responsible are liable to compensate subscribers for any damage sustained by them.
III]
REMUNERATION OF PROMOTERS:-
Since the company gets legal existence by incorporation, it cannot contract payment of
remuneration, fees, or expenses entered into by promoters before its incorporation. In this respect,
the promoter is at the mercy of the directors. Usually, promoters mention the clause in the article
about the association of a company, empowering directors to pay these expenses. The directors
then get the power to pay these pre-incorporation expenses to the promoters. However, such power
in the article is an authority to the directors and is not a contract with the company. Therefore,
directors don't need to pay these expenses.
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4 1900 A.C. 240