November 30, 2020

Promoters of a Company: Definition, Functions, Duties, and Liabilities

Companies Act

Promoter of a company can be defined as the one whose function is to form a company with reference to a given object and to set it going. He has some duties and liabilities.

According to Justice C. Cockburn. “Promoter is one who undertakes to form a company with reference to a given object and to set it going, and who takes the necessary steps to accomplish that purpose.”

The carrying of persons on the ground of profit to run a business is called as promoters. The role of the promoter is to make the detailed investigation about the weakness and the strongess of the idea and to determine the amount of capital to be invested and estimate the operating expense and probable income

The concept of promoter is a term of business and not that of law. It has not been defined anywhere in the act.

According to L.J. Brown. “The term promoter is a term not of law but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.”

According to Justice C. Cockburn. “Promoter is one who undertakes to form a company with reference to a given object and to set it going, and who takes the necessary steps to accomplish that purpose.”

According to Guthmann and Dougall. “Promoter is the person who assembles the men, the money and the materials into a going concern.”

According to Palmer, “Company promoter is 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”

FUNCTIONS OF A PROMOTER

(1) The formation of idea and forming the company and explore the posssibilties

(2) To conduct the negotiation for the purchase of business

(3) To collect the number for signinig of the MOA and the AOA

(4) To decide the name of the company, location of the registered office, amount and form of share capital

(5) To get the MOA and the AOA drafted and printed

(6) To arrange for the minimum subscription

(7) To arrange for the registration of company and certificate of incorporation .

RIGHTS OF PROMOTERS

(1) Right to Indemnity :

The promotors are severally and jointly liable for any false statement given in the prospects therefore when 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.

(2) Right to Receive the legitimate Preliminary expenses

He has to the right to recover the legitimate expenses which had spend during the process of the company in cost of advertisement, fees for the solicitor etc. The right to receive the preliminary expenses is not a contractual right. It depends upon the discretion of the directors of the company

(3) Right to receive the remuneration

The right to receive remuneration is not a contractual right. It completely depends on the company to make sure to provide the same or not. n some cases, articles of the company provide for the directors paying a specified amount to promoters for their services but this does not give the promoters any contractual right to sue the company.

DUTIES OF PROMOTERS

(1) To disclose the secret profit

The promotor should not make any secret profits. If on case he has it is his duty to disclose the same he is although empowered to deduct the reasonable expense incurred by him

(2) To disclose all the material facts

The promotor of the company must disclose all the material facts and information,

(3) The promoter must make good to the company what he has obtained as a trustee

The promotor has a fiduciary relationship with the company. It is the duty of the promotor to make the best for his company to whatever he has obtained ad a trustee.

(4) Duty to disclose private arrangement

It is the duty of the promoter to disclose all the private arrangement resulting him profit by the promotion of the company.

(5) Duty of promoter against the future allottess

The promotor has a fiduciary relationship with the company. In the same wqay the prmotor also has a fiduciary relationship with the future allottees of the share.

LIABILITIES OF PROMOTERS

(1) Liability to account in profits

The promoter is liable to account to the company for all secret profits made by him without full disclosure to the company. They will sue the promotor for the amount of profit and recover the same with interest

(2) 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.

(3) Liability of the misstatement in the prospectus

In Case of Mismanagement of the prospectus the promotor is liable and needs to pay compensation of every share and debenture for any loss or damage sustained due to the wrong information on the prospectus.

(4) Liability at the time of winding up the company

In Case of winding up of the company, on an application made by the official liquidator, the court may make a promoter liable for misfeasance or breach of trust. Further where fraud has been alleged by the liquidator against a promoter, the court may order for his public examination

Position of promoters in Companies Act, 2013

The expression ‘promoter’ has not been defined under the Companies Act, 1956, although the term is used expressly in sections 62, 69, 76, 478 and 519. Section 62 of Companies Act, 1956 defines ‘promoter’ for the limited purpose of that section only.

In Twycross v. Grant promoter was described 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.”

Author Details: Shubhang Gomasta (LLM student, MATS University, Raipur, Chattisgarh).

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