“A promoter is a person who brings about the
incorporation and organization of a corporation.” Critically evaluate the role
of Promoter in the Company.
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| INCORPORATION & ORGANIZATION OF A CORPORATION |
“A promoter is a person who brings about the incorporation and organization of a corporation.” Critically evaluate the role of Promoter in the Company.
SYNOPSIS
STATEMENT OF PROBLEM
A company is born only when it is duly
incorporated. For incorporating a company various documents are to be prepared
and other formalities are to be complied with. All this work is done by
promoters but sometimes it is found that due to lack of abundance documents
required for a formation of company is not found or not made on procedure while
incorporation a company & On other hand handling the control of the company
to the directors, the promoters fiduciary and common law duties cease, and he
is thereafter subject to no more extensive duties in dealing with the company
than a third person who is unconnected with it. Another problem that I came to
know is in the 19th century, when industrial revolution came and companies
flourished, the concept of promoter gained substantial importance like no other
occupation, as there were no restrictions on advertising immediately to the
public, inviting them to take shares in new companies, some promoters took
advantage of their position and of public sympathy and hence defrauded the public
on large extent.
RESEARCH OBJECTIVES
1.To
analyze and understand what is the procedure of formation of company.
2.To
know about the discretion of the courts regarding if any loopholes found later
on while incorporation a company by a promoter.
3.To
understand the nature of work of a Promoter who brings about the incorporation
and organization of a corporation.
4. To know the Promoter’s obligations when
instituting a company.
RESEARCH QUESTIONS
1. Promoter
who are they?
2. What
are the obligations of a promoter while instituting a company?
3. What is the role of a promoter in
incorporation of a company?
4. What is the concept of the promoter?
5. What is the type of the promoter? &
what are their functions?
6. Whether promoter is personally Liable for pre-incorporation contract?
RESEARCH METHOD
Methodology” implies more than simply the methods the
researcher used to collect data. It is often necessary to include a
consideration of the concepts and theories which underlie the methods. The
methodology opted for the study on the topic may be Doctrinal.
Doctrinal research in law field indicates arranging, ordering
and analysis of the legal structure, legal frame work and case laws by
extensive surveying of legal literature but without any field work.
SOURCES OF DATA
The Secondary sources:
· Books
(1).Singh Avtar, Advocate, B.Com, LLM, LLD, Company Law, Eastern Book Company, 16th
Edition 2015.
(2).Dr.
Surya Rao Rega, Ph.D (LAW), Lectures on Company Law (Companies Act, 2013), Asia
Law House, 2nd Edition 2016,
(3).Dr. Myneni
S.R., M.A., M.Ed., Advocate, ( A.P. Bar Council) Hyderabad, Company Law, Asia
Law House, 3rd Edition 2017,
· Website
· Dictionary-
CONCISE
LAW DICTIONARY (LEXIS NEXIS) FIFTH EDITION.
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| CHAPTER ONE |
CHAPTER 1:
“A successful promoter is a creator of wealth. He is an
economic prophet. He is able to visualize what does not yet exist and to
organize business enterprise to make the products available to the using public" - Henry E. Heagland.
INTRODUCTION
When an individual has an idea for a new business
venture, he or she may set about interesting others in the venture and persuade
them to contribute capital to a company to be incorporate for the purpose of
carrying on the venture. The individual will then be described as ‘promoter’ of
the company. In the 19th century, when industrial revolution came and companies
flourished, the concept of promoter gained substantial importance like no other
occupation, as there were no restrictions on advertising immediately to the
public, inviting them to take shares in new companies, some promoters took
advantage of their position and of public sympathy and hence defrauded the
public on large extent. The role of promoter in establishing a company changed
substantially in the 20th century. It’s clear that, Company promoters play an
indispensable role in the formation of a company. A company is born only when
it is duly incorporated. For incorporating a company various documents are to
be prepared and other formalities are to be complied with. All this work is
done by promoters. On being satisfied about the economic viability of the idea,
the promoters take all the necessary steps for incorporating the company and
start changing people’s lives.
For the purpose of formation of
a company there must be a process and that involves several stages. The first
stage in the process is the promotion. At this stage the idea of carrying on a
business is conceived by a person called promoters. For the incorporation of
company various formalities are required to be carried out. The promoters
perform this function and bring the company into existence. A promoter
conceptualizes the idea of a company and the purpose of its formation.
Position of the promoter is fiduciary concerning the
company which being the promotes his position is quasi legal. A promoter is
neither a trustee nor an agent of the company which he promotes because there
is no trust or principal in existence at the time of his efforts. But certain
fiduciary duties, like an agent, have been imposed on him under the Companies
Act. As such he is said to be in & fiduciary position (a position full of
trust and confidence) towards the company and the original allotted of shares.
Consequently, a promoter must make full disclosure of the relevant facts,
including any profit made.
He must not make
any secret profits out of the transactions he makes on behalf of the company.
It is to be observed that it is not the profit made by the promoter which the
law forbids, but the non-disclosure of it.. A promoter vendor cannot evade his
liability of disclosure of profits by disclosing to a Board of Directors who is
mere nominees of his own, or in his pay
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| CHAPTER TWO |
CHAPTER 2:
Role of
Promoters in Company Establishment
2.1 Promoters – Who are they?
The
term ‘promoter’ has been defined under section 2(69) of the Companies Act,
2013. As per this section it refers to a person –
[A]. who
has been named as such in the prospectus or is identified by the company in the
annual return.
[B]. who
has control over the affairs of the company, directly or indirectly whether as
shareholder, director or nay other position in the company.
[C]. who
advice, directs or instructs the board of directors of a company (but does not
include a person who is acting merely in a professional capacity).
When we speak of promoters and their role in company’s
establishment, it becomes important to discuss about the company’s entire
process of formation. The company’s formation can be divided into four
segments. First, is called Promotion. Second is registration. Third is
Flotation and fourth is Commencement of business. Promotion symbolizes
preliminary steps taken for the purpose of registration and flotation of the
company. The person who undertakes these phases are called promoters. A Company
may have more than one promoter.
The
term ‘promoter’ includes “a person who alone or with others sets on foot and
takes the preliminary steps in the formation of a company”.
A
promoter is a person who undertakes to form a company with reference to a given
object and to set it in going and who takes the necessary steps to accomplish
that purpose”.
In the
famous case of Whaley Bridge Calico Printing Co. v. Green & Smith - Bowen
L.J. stated the term promoter.
2.2 Obligations of a promoter while
instituting a company
The Companies Act, 1956
contains no provision regarding the duties of the promoter. It merely imposes a
liability on promoters for fallacious declarations in prospectus they are
parties section 62 and 63 to be precise, and for fraudulent trading. The
Courts, however have been conscious of the possibility of abuse inherent in the
promotion and hence laid down some fiduciary duties towards the promoters. Not
to make any secret profit out of the promotion of the company. To disclose to
the company any interests which he has in a transaction entered into by it.
2.3 Role of a promoter in incorporation
of a company
The Job of promoter is
not only limited towards, performing certain duties, but surely it extends
toward the incorporation of a company. It depends on the nature of the company
which is to be established, to arrange their respective persons. More evidence
can be found in the Companies act section 12 which states that “Any seven or
more persons or where the company to be formed will be a party company, any two
or more persons, associated for any lawful purpose may, by subscribing their
names to a memorandum of association and otherwise complying with the
requirements of this act in respect of registration form an incorporated
company with or without limited liability ". Thus the promoters
have to get together at least seven persons in the case of public company and
two persons in case of private to subscribe to memorandum of association.
Following are the functions of promoter in an elaborate manner.
2.4 Concept of the promoter
Before look upon the term ‘Promoter‘ we have to know first of all the
meaning of the term ‘Promotion’. So, the ‘Promotion’ is a term of wide import denoting the
preliminary steps taken for the purpose of registration and flotation of the
company. And the persons who assume the task of promotion are called ‘Promoters’. A promoter may be individual,
syndicate, association, partner or company. It is the Promoter who
undertakes does and goes through all the necessary & incidental
requirements keeping in view the object of proposed company in order to
bringing to existence as such incorporated company.
2.5 Types of the promoter & their functions
The promoters may be professional, occasional, financial or
managing promoters.
A. Professional
Promoter –handover the company to the
shareholders when the company starts. Unfortunately, such promoters are very
scarce in the developing countries.
B. Occasional
Promoter –are those whose main interest is the
floating of companies. They are not in promotion work on regular basis but take
up promotion of some companies and then go to their earlier profession. For
example, engineers, lawyers etc. may float some companies.
C. Financial
Promoter-do the task of promoting the financial
institutions. They generally take up this work when financial environment is
favorable at the time.
D. Managing
Promoter-played a significant role in promoting
new companies and then got their managing agency rights.
A promoter is neither an agent nor a trustee of the company
as it is a non-entity before incorporation. Some legal cases have tried to
spell out the standing of promoter
Functions
- Promoters are generally the first persons who
conceive the idea of business;
- They carry out the necessary investigation to
find out whether the formation of a company is possible and profitable.;
- Thereafter they organize the resources to
convert the idea into a reality by forming a company;
- who settles the name of the company thereby
ascertain the name will be acceptable by the registered of the office;
- who settles the content or details as to the
Articles of the companies; (here, articles implies Articles of association
& Memorandum of association);
- who nominates the directors, bankers, auditors
and etc.;
- who decides the place where registered office
(head office) have to be situated;
- who prepare the Memorandum of Association,
Prospectus and other necessary documents and file them for incorporation;
- Arranging for funds and managerial expertise;
- Conducting feasibility studies and analysis;
- Other preliminary activities;
2.6 Whether promoter is personally liable for pre –
incorporation Contract?
In Kelner v Baxter, where the promoter in behalf of unformed
company accepted an offer of Mr. Kelner to sell wine, subsequently the company
failed to pay Mr. Kelner, and he brought the action against promoters. Erle CJ
found that the principal-agent relationship cannot be in existence before
incorporation, and if the company was not in existence, the principal of an
agent cannot be in existence. He further explain that the company cannot take
the liability of pre-incorporation contract through adoption or ratification;
because a stranger cannot ratify or adopt the contract and company was a
stranger because it was not in existence at the time of formation of contract.
So he held that the promoters are personally liable for the pre-incorporation
contract because they are the consenting party to the contract.
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| CHAPTER THREE |
CHAPTER 3:
Position of
Promoter
3.1 Position of promoter
Promoter
occupies significant position in formation of accompany. However, it is very difficult
to determine his accurate legal position, because the company is not in
existence. He is neither trustee nor agent of the company. His position may be
described with reference to Rights, the following heads namely –
A. Legal
Status.
B. Rights.
C. Duties.
D. Liabilities.
Now the
positions are described below:-
Legal
Status – The legal position of promoters in relation
to the company has been explained by Lord Cairns in Erlanges v. New Somberero
Phosphate Co.(1878) LR 3 App.Cas.1218 (1236). They (i.e. Promoters) stand in my opinion, undoubtedly in a fiduciary position.
They have in their hands the creation and molding of the company. They have
the power of defining how and when in what shape and under what supervision the
prospectus is borne by one of the promoters, he is entitled to recover
proportionately form the co – promoters. As to the exact legal status of a
promoter, the statutory provisions are silent in most part, except for a couple
of Sections in the Specific Relief Act, 1963. His legal status is incapable of
precise statement.
Rights –
1 . Right
to receive/ reimburse the preliminary expenses – Preliminary expenses means all
the expenses, which are incurred in connection with the registration/
incorporation of a company. If the promoter spends from his personal funds
during the period of incorporation, he is entitled to recover/ reimburse the
same. However, the payments made by him should not be ultra vires the articles
of association.
2 . Right
to recover proportionate share from the co-promoters – The liability of
promoters is joint and several. In the event of two or more promoters have to
meet the liability jointly and only one promoter meets/clears the liability, he
is entitled to recover the proportionate share from the co-promoter/ promoters.
3 . Duties
– (1) Duty to make no secret profit i/e/ he is not allowed to make either
directly or indirectly any profits at the expense of the company. Gluckstein v.
Barnes
(2) Duty to make no profit by
sale of his property to the company: He is not allowed to make any profit by
sale of his own property to the company, unless all material facts are
disclosed. Erlanger v. N.S. Phophate Company – A person purchased an island,
contained mines for € 55000 and sold the same tot the company for € 110000 to
which he was a promoter. It was held that the company could rescind (repudiate)
the contract.
(3) Duty to make all sincere efforts and prepare require documents for Registration of the Company. He has to take necessary steps for formation of the Company viz. preparation of Memorandum, Articles of Association, prospectus etc.
(4) Duty to make a full disclosure of interest or profit: Section 26 (1) (a) (xiv) of the Companies Act, 2013 now requires the promoters to be disclosed in the prospectus itself.
(5) The promoter must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud.
(3) Duty to make all sincere efforts and prepare require documents for Registration of the Company. He has to take necessary steps for formation of the Company viz. preparation of Memorandum, Articles of Association, prospectus etc.
(4) Duty to make a full disclosure of interest or profit: Section 26 (1) (a) (xiv) of the Companies Act, 2013 now requires the promoters to be disclosed in the prospectus itself.
(5) The promoter must not make an unfair or unreasonable use of his position and must take care to avoid anything which has the appearance of undue influence or fraud.
Liabilities-
Promoter
is subject to the following liabilities, preliminary contracts in particular.
(1) He is liable for
non-compliance of Companies Act (Section 20).
(2)
He is liable for mis-statements in prospectus (Section 35).
(3) He is personally liable
for breach of preliminary contracts as enumerated below in detail.
3.2 Remedies available to the company against a
promoter
If
a promoter makes any secret profit and does not disclose it, in that case a
company has the following remedies available against him.
1 . Rescind
the contract and recover the secret profit made by him.
2 . Retain
the property, paying no more for it than what the promoter has paid depriving
him of his profit.
3 . Where
the above remedies would be inappropriate, the company may sue him.
3.3 Remuneration of promoters
When a
promoter makes proper disclosure and does not makes any secret profit, he is
often rewarded for his efforts. Therefore, when the company is registered, it
pays some remuneration to him for his services.
In
practice, following are the ways by which a promoter can be remunerated-
(a) He
may sell his own property to the company after making full disclosure to ht board
of directors or to the intended shareholders.
(b) He
may sell his property to the company and buy fully-paid shares after making
full disclosure.
(c) He may be given opportunity to buy further
shares at par in the company.
(d) He
may be given a commission.
(e) He
may be paid a lump sum amount by a company according to the contract made by
them.
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| CHAPTER FOUR |
CHAPTER 4:
Case Study
4.1 Twycross v. Grant [(1877) 2 CPD 469].
Case
Fact – Lord Cockburn, CJ, in Twycross v. Grant
observed that “a promoter is a person who undertakes to form a company with
reference to a given object and to set it in going and who takes the necessary
steps to accomplish that purpose”.
4.2 Erlanges v. New Somberero Phosphate Co. (1878)
LR 3 App. Cas. 1218.
Case
Fact – “They i.e. promoters stand in my
opinion, undoubtedly in a fiduciary position. They have in their hands the
creation and molding of the company. They have the power of defining how and
when in what shape and under what supervision the prospectus is borne by one of
the promoters, he is entitled to recover proportionately from the co-promoters.
4.3 Erlanges v. New Somberero Phosphate Co. (1878)
LR 3 App. Cas. 1218.
Case
Fact – The promoters were held liable to pay
to the company, the unauthorized profit € 20000, which they made.
4.4 Erlanges v. New Somberero Phosphate Co. (1878)
LR 3 App. Cas. 1218.
Case
Fact – A person purchased an island, contained
mines for €55000 and sold the same to the company for € 110000 to which he was
a promoter. It was held that the company could rescind (repudiate) the
contract.
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| CHAPTER FIVE |
CHAPTER – V
CONCLUSION &
This research paper finds that, promoter is personally liable
for the pre-incorporation contract, because at the time of formation of
pre-incorporation contract, the company does not come in existence, so neither
the principle agent relationship exist not the company become the party.
The promoters, in fact, render a very useful service in the
formation of the company. A promoter has been described as”a creator of wealth
and an economic prophet.” The promoters carry a considerable risk because if
the idea sometimes goes wrong then the time and money spent by them will be a waste
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| COMPANIES GROWTH |
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