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Understanding The Position Of Promoters Under Companies Act, 2013: Finding The Truth

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 Promoter.

According to Companies Act, 2013 under section 2(69) "Promoter" can be defined as the following:
  • 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.

Types of promoters:
  1. 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.
  2. 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 promoters".
  3. Government:
    In many 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: 
  1. 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
  2. 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.
  3. 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.
Functions of the Promoter:
  1. To conceive an idea of forming a company and explore its possibilities.
  2. 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
  3. They get Memorandum of Association and Article of Association drafted and printed.
  4. To make preliminary contracts with vendors, under writers etc.
  5. To make arrangement for the preparation of prospectus, its filing , advertisement and issue of capital.
  6. To arrange for the registration of company and obtain the certificate of incorporation.

Liabilities of Promoters:
  1. 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.
  2. 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 this act.
  3. 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.
  4. 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:
  1. 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.
  2. 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

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