For the purpose of formation of a company there must be a process
and that involves several stages. In the first stage in the process is the
promotion. At this stage the ideas of carrying on a business is convinced by a
person called promoters. For the incorporation of a company various formalities
are required to be carried out. The promoters perform these functions and bring
the company into existence. A promoter conceptualizes the idea of a company and
the purpose of its formation.
Meaning of Promoters:
The person who creates and makes a logical plan to modify
and statutory existence of the company. This person is called to be the
According to Companies Act, 2013 under section 2(69) "Promoter" can
be defined as the following:
Types of promoters:
- A person who has been named as such in a prospectus or is identified by
the company in the annual return to in section 92
- A person who has control over the affair of the company, directly or
indirectly whether as a shareholder, director or otherwise.
- A person who is in agreement with whose advice, directions or
instructions the Board of Directors of the company is accustomed to act.
- Professional Promoters:
The principal activity of such
persons is promoting new companies. The inception of a company and its promotion
is very specialised and technical affair; and its always the case that a person
who wants to promote a company is able to carry out all the formalities that
are part of the promotion process. Knowledge and experience are the
essential ingredients of successful promotion and professional promoters
have both . That is why they are paid for their service.
- Occasional Promoters:
Such promoters are not professionals, they digress from their normal
activities to promote a company. They normally do the promotion themselves
without the help of professionals, and are also called accidental
countries, the government has started taking up promotional activity. In India,
the Central and state Government have promote many industrial and commercial
undertakings. There have been instances when the government has had to undertake
the promotional activity because of economic, social or national reasons.
Rights of Promoters:
Functions of the Promoter:
- Rights to recover Initial Expenses:
Promoters have the
rights to recover the capital they seek to and build to operate the company.
They payment of these expenses depends on a lot of directors.
Case: Melheldo V/s Porto Aljeyer Rail Co. 1874
- Right to receive Proportionate amount from Co-promoters:
where more than one
person act as the promoters of the company, one promoter can claim against
another promoter for the compensation and damages paid by him. Promoters are
severally and jointly liable for any untrue statement given in the prospectus
and for the secret profits.
- Remuneration (right to receive):
The promoters work hard to build and run
companies and for this the companies pay them as reward this remuneration is
paid by different companies in different way which may be cash or debentures.
Liabilities of Promoters:
- To conceive an idea of forming a company and explore its possibilities.
- To decide about the following:
- The name of the company
- The location of its registered office
- The amount and form of its share capital
- The bankers
- The auditors
- The legal advisers
- They get Memorandum of Association and Article of Association drafted
- To make preliminary contracts with vendors, under writers etc.
- To make arrangement for the preparation of prospectus, its filing ,
advertisement and issue of capital.
- To arrange for the registration of company and obtain the certificate of
- Liability to account in profit:
The promoter is liable to account to the company for all secret profits made
by him without full disclosure to the company. The company may adopt any one
of the following two courses if promoters fails to disclose the profit.
- The company can sue the promoter for an amount of profit and recover the
same with interest.
- The company can rescind the contract and can recover the money paid.
- Liability For Mis-Statement In The Prospectus:
Section 62(1), hold the promoter liable to pay compensation to every person
who subscribes for any share or debentures on the faith of the prospectus
for any loss or damage sustained by the reason of any untrue statement
included it. Section 62, also provides certain ground on which a promoter
can avoid his liability. Section 63, provide for criminal liability for
misstatement in the prospectus and a promoter may also become liable under
- Personal Liability:
The Promoter is personally liable for all contracts made by him on behalf of
the company until the contracts have been discharged or the company takes
over the liability of the promoter. The dead of promoter does not relieve
him from liabilities.
- Liability at the time of winding up of the company:
In the course of winding up
of the company, on an application made by official liquidator the court may make
a promoter liable for misfeasance or breach of trust.
Legal position of Promoters:
The promoter is neither a trustee nor an agent of
the company because there is no company yet in existence. The correct way to
describe his legal position is that he stands in a fiduciary position towards
the company about to be formed.
From the fiduciary position of promoters the two important result follows:
- A promoter cannot be allowed to make any secret profits. If it is found
that in any particular transaction of the company he has obtained a secret
profit for himself, he will be bound to refund the same of the company.
- The promoter is not allowed to derive a profit from the sale of his own
property to the company unless all material facts are disclosed. If he
contracts to sell his own property to the company without making a full
disclose, the company either repudiate the sale or affirm the contracts and
recover the profit made out of it by the promoter.
The promoters surely plan an important role in the company's establishment and
its success. Whether it be dealing with the professional or employing the
workers, the promoters help in the best possible way to set up the company.
Written by Agnikanya Bhattacharya
- Techno India University