Definition of Promoters: #
In the Companies Act of 1994, nowhere the term ‘promoter’ has been defined. But in the simplest term, ‘promoters’ may be defined as a person who takes initiative to start a business.
In absence of any statutory definition we have to depend frequently on judicial decisions and the writing of different authors.
The best definition of promoter has been given by Browen, L.J. in the case Whaley Bridge Calico Printing Co. Vs. Green as- “it is not the term of law, but of business, usually summing up in a single Commercial word, a number of business operations, familiar to the commercial world by which a company is brought into existence.”
It was held in the case of Erlanger Vs. New Sombreo Phosphate Co. (1878) that, “it is a short and convenient way of designating those who set in motion the Machinery by which the act enables them to create an incorporated company.”
Justice Cockburn defines 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.”
In The Emma Silver Mining Co. Ltd Vs. Lewis, (1879) it was held that, “the term promoter involves the ides of exertion for the purpose of setting up and stating a company or what is called floating it.”" There may be a number of Promoters for a company e.g.:
- Persons who give instructions for the preparation of Memorandum and Articles of Association;
- Persons who obtain the directors;
- Persons who prepare prospectus;
- Persons who negotiate underwriting contracts and contracts for purchase of property or by procuring capital.
Person who are not Promoter: It is to be kept in mind that the functions of promoters end when the board of directors is formed and it undertakes the remaining work respecting Promotion. However, the following persons are not promoters
- Person who is an employee or agent of the promoter an advocate;
- Persons who provide only professional help or advice;
- A shareholders.
So, a lawyer who provides legal help preparing Memorandum or Articles of a company shall not be considered as a promoter. But if he took initiative at the early stages of promotion and does accordingly, then he is a promoter.
Function of a Promoter: #
Generally a promoter has to perform a lot of duties. The main functions of a promoter are:
(a) Conceiving Idea: A promoter has to conceive the idea of forming the company and take other initiatives in this regard.
(b) Gathering Persons: A promoter has also to get the people together who wish to sign in the Memorandum and to act as the first directors.
(c) Selection of the Name of the Company: Name of the company is to be selected by the promoter. He has to get clearance certificate of names also.
(d) Selection of Banks etc: A promoter has also to select the banks, Brookers, Auditors, Legal Advisors etc. which is required for the flotation of the company.
(e) Preparing Documents: A promoter needs to prepare necessary documents like, Memorandum and Articles of Association for the company.
(f) Registration of Documents: After preparing the necessary documents, he is to attend the registration of the company.
(g) Selection of Documents: The promoters are required to select the first directors and publish the address etc.
(h) Issuing Prospectus: The promoters have to issue the prospectus for the purpose of making it known to the public and for raising capital.
(i) Collection of Minimum Subscription: The promoters have to pay preliminary expenses. Besides, they have to collect minimum subscription for meeting up the initial expenses for the formation of the company.
(j) Allotment of Shares and Debentures: The promoters are to secure allotment of shares and debentures.
(k) Taking Steps to Obtain Certificate of Commencement of Business: After fulfilling all the legal provisions, the promoters have to take steps to obtain certificate of commencement of business.
Apart from the above mentioned duties, the promoters are required to arrange for office, factory, machinery and staff.
Legal position of Promoters: #
(a) Not an agent or trustee: The legal position of a promoter is somewhat peculiar. He is not an agent for the company which he is forming, because a company cannot have an agent before it comes into existence. Further more, he is usually not treated as trustee for the future company as no person will be a trustee for a future institution.
(b) Fiduciary position of a promoter: The position of promoter may be right to define a fiduciary position because he takes extensive powers to form a company so not entitled to disregard the interest of the incorporation altogether. Actually, promoters stand in a fiduciary position into that incorporation.
Duties of a Promoter: #
Though some consider the term ‘functions’ similar to the term ‘duties’, but duties are wider than the mere concept of function. It involves some more responsibilities. The duties of a promoter, however, include the following-
(i) Fiduciary Duties: Two things involve with the fiduciary duties of promoter-
- He is not allowed to make any secret profits; and
- He is not allowed to derive a profit from the sale of his own property unless all disclosed.
So, from the moment he acts with the company in mind, a promoter stands in a fiduciary position towards the company.
(ii) Duty to Disclose: Whenever, a promoter keeps fiduciary relation with the company, he has full liability to disclose the company about any profit made by him out of promotion, a profit on a sale of property to the company. The disclosure must be made to either-
- An independent board of directors; or
- The existing and intended share-holders, by making disclosure in a prospectus.
If a sell is made or a contract is entered into without making a full disclosure, then the following consequences may be found:
in case of sale, the sale may be set aside at the instance of the company; the company is not bound by the contract; if it is found that the recession of the contract is not possible, the company may claim damage.
Liabilities of Promoters: #
The promoters usually have the following liabilities:
(i) Liabilities in case of Secret Profits: As said earlier that the promoters are not allowed to make any secret profit. If any secret profit is made by the promoter, he is liable to account to the company for all secret profits made by him. [Gluckstein Vs. Barnes].
(ii) Earned profits to be communicated to the Board of directors: It is not forbidden for a promoter to earn profit but it must be reasonable. However, the earned profits should be communicated to the board of directors in case of business dealings with the company.
(iii) Liabilities from pre-registered Agreement: If the promoter entered into any contract with third party before the company had got registered, the liabilities for such contract incur upon the promoters. [Re Impress Engineering Co. (1880) 16 Ch. D. 125)
(iv) Liability from Preliminary Expenses: The promoters shall be liable for the preliminary expenses for the formation of such formation of the company until the company gives recognition expenses.
(v) Liability due to False Statement in Prospectus: The promoters may be held liable for misstatement in the Prospectus. For misstatement, a promoter is liable for paying compensation under sec. 145 and for imprisonment up to five years or with fine under criminal liability mentioned in section 397 of the Companies Act, 1994. Besides, he may be held liable under tort law.
(vi) Liability for Abuse of Powers: The promoter must keep a fiduciary relation with the Company. So, he must not misuse his power in relation to the formation of the company. In case of misuse, he may be held liable.
(vii) Liability Arising from Death or Insolvency: A promoter is not exempted from his liability merely by death or insolvency. His liability vests upon the shoulder of his legal representatives in case of death or insolvency.
Rights of Promoters #
The promoter is entitled to the following rights in connection with the formation of the company:
(i) Right to have Remuneration: A promoter is entitled to have remuneration. The remuneration may be paid in cash, by shares, by commission or by any other convenient ways.
(ii) Right to Claim Legitimate Expense: The amount spent as preliminary expenses may be claimed by a promoter. So, he has right to claim legitimate expenses.
(iii) Right to Claim Contribution: For misstatement in the prospectus, if any individual promoter is held liable, he has the right to claim from the other promoters in proportion to the amount.
Remuneration of Promoters #
Generally, a promoter is not entitled to recover any remuneration for his services from the company except an express contract grants so with the Company. In the absence of such a contract, he cannot recover any payment even though he spent for the formation of a company. In Clinton’s Claim case, a syndicate promoted a company and paid in respect of registration fees and stamp duty. The company shortly went into liquidation. (AM)
It was held in the case that the syndicate was not entitled to prove for the payments they had made.
Modes of Payment: If contract authorizes then the remuneration may be paid in any of the following modes:-
- Commission on the purchase price;
- Granting a lump sum either in cash or in the from of shares;
- Commission at a fix rate on shares sold;
- Subscription within a fixed period for a certain Period of the Company’s unissued shares.
Whatever be the modes of payment, any payment within the two Preceding years or intended to be paid or given to a promoter must normally be disclosed in a prospectus.