Who is a Promoter
A promoter is a person or entity who settles on an idea to establish a specific business and completes the required formalities for its establishment. An individual, company, firm or association can conceive the idea of company formation and be the company's promoter. The phrase “promoter” has been defined in Section 2 (69) of Companies Act, 2013. The term has been used specifically in Section 35, 39, 40, 300 and 317 of the Act. Section 2 (69) of the Act states that promoter is a person whose name has been mentioned in the prospectus of the company or is identified in the annual returns of the company, or any person who has direct or indirect control over the affairs of the company, whether as a stakeholder or as a director, or on whose direction the Board of Directors act. In simple words, a promoter is a person who performs the various preliminary steps like making the prospectus of the company, floating the securities in the market, etc. but if a person is doing this in a professional capacity, he wouldn’t be considered a promoter. In Bosher v. Richmond Land Co. (1892), the term Promoter has been defined as a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery which leads to the formation itself.
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.
Statutory definition – Section 2(69) of the Companies Act, 2013
The Companies Act, 2013 contains a statutory definition of the promoter which is also more or less in terms of functional categories: Promoter means a person
- who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92;
- who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise;
- in accordance with whose advice, directions or instructions the Board of directors of the company is accustomed to act. The proviso excludes persons acting in a professional capacity.
Types of promoters
As stated above, a promoter is the one who conceives the idea of formation of a company. An individual, an association of person, a firm or a company, can act as a promoter. A promoter may be an occasional, professional, managing or financial promoter. A professional promoter is the one who hands over the rein of the company to the stakeholders when the company is up and running. Financial promoters are those promoters, who promote financial institutions or banks. Their main aim is to assess the financial situation of the market and form a company at the opportune moment. In the case of managing promoters, they not only help in the formation of the company but when the company is formed, they get managing agency rights in the company. Occasional promoters are those whose main work is to float the company and do all the preliminary work. Although they do not do the promotion work routinely, they may float a company and then go back to their original profession.
Functions of a promoter
A promoter plays various function in the formation of a company, from conceiving the idea to taking all the necessary steps to convert the idea into reality. Some of the functions of a promoter are-
- One of the main functions of a promoter is to comprehend the idea of formation of the company.
- The promoter looks into the viability and feasibility of the idea that whether the formation of the company will be profitable and practicable or not.
- After the idea has been conceived, the promoter collects and organizes the resources available to convert the idea into a reality.
- The promoter decides the name of the Company and also settle the content regarding the Articles of Association and the Memorandum of Association of the Company.
- The promoter is the one who decides where the head office of the company will be situated. The promoter also nominates people or associations for vital posts. For instance, the promoter may appoint the bankers, auditors and Directors of the company for the first time.
- The promoter also prepares all the other necessary documents which are required to incorporate a company.
Defining the legal status of a promoter can be a very tough job. He cannot be considered an employee, trustee or an agent of the company. The role of the promoter ceases to exist when the company is on the track and is handled by the Board and the Management.
Duties of a promoter
The promoters who form the company have certain basic duties towards the company. A promoter has a relationship of confidence and trust with the company, i.e., a fiduciary relationship. Keeping this fiduciary relationship in mind, the promoter is under the obligation to disclose all the material facts which relate to the formation of the company. The promoter is also under the obligation to not take any secret profit while carrying out the promoting activities like buying a property and then selling it to the company for profit, without making any disclosure. The promoter is not barred from making profits while dealing with various parties. The only condition is that he is under the duty to disclose such profits and not make any secret profits.
Liabilities of a promoter
Liability regarding irregularities in the prospectus
Section 26 describes what should be stated in the prospectus and what reports should be included. The promoter may be held accountable by the shareholders if this provision is not followed.
Civil liability
Section 35 outlines the civil liabilities for any prospectus misstatements. Under this Section, a person who has subscribed for the company’s shares and debentures on the basis of the prospectus can hold the promoter accountable for any false statements in the prospectus. The promoter may be held liable for any loss or damage suffered by any person who subscribes for shares or debentures as a result of the false statements made in the prospectus. Specific provisions have also been provided under Section 62 regarding the reasons on which the promoter can avoid his liability. These remedies are available to anyone who can be held accountable for a prospectus misstatement.
Criminal liability
Section 34 deals with the criminal liabilities of drafting a prospectus that contains false claims. The promoters can be held criminally accountable, in addition to the civil liabilities described in the previous two examples, if the prospectus they released contains misstatements. The penalty is either a two-year prison sentence or a fine of up to 5000 rupees, or both. Unless he can show that the inaccurate statement was inconsequential or that he was justified in believing, on reasonable grounds, that the statement was truthful at the time of prospectus issuing, the promoter may be held criminally liable for misstatements.
Public examination of promoters
Section 300 gives the court the authority to order a public investigation of all promoters found guilty of fraud in the promotion or establishment of a corporation. If the liquidator’s report indicates fraud in the promotion or establishment of the company during its winding up, the promoter, like every other director or officer of the company, can be held liable for public examination by the court.
Personal liability
Promoters can be held personally liable for pre-incorporation contracts.
- A promoter has to mention the true facts in the prospectus of the company. If he does not do so, he may be held liable for it. The promoter will be liable for any untrue statement which has been made in the prospectus, and on the basis of that untrue statement any person has subscribed to the securities of the company. The person may sue the promoter if he has suffered any damage.
- Apart from civil liability, the promoter may be held criminally liable also for mentioning any untrue statements in the prospectus. A severe penalty will also be imposed on him if he provides any untrue statement with the view of obtaining capital.
- A promoter can be made liable to a public examination if there are any reports which allege fraud in the formation of the company or the promotion activities.
- The company can also proceed against the promoter in case there is a breach of duty on the promoter’s part or he has misappropriated any property of the company or is guilty of breach of trust.
Position of a promoter in relation to the company- before and after incorporation
Prior to incorporation of the company
Promoters found it extremely difficult to carry out promotion activities before the Specific Relief Act was introduced in 1963. Before this Act was passed, pre-incorporation contracts of the company were held to be void. Such contracts also couldn’t be ratified. Therefore, people were very hesitant to supply resources for incorporation of the company without any definite contract. Promoters were also very apprehensive about taking personal liability. The introduction of the Specific Relief Act, 1963 made it easier for the promoters to carry out incorporation activities, as the promoters could now enter into pre-incorporation contracts with third-parties.
Section 15 (h) and 19 (e) states that;
- The promoter should have entered into the contract for the purpose and benefit of the company
- The terms provided in the incorporation agreement should warrant such contracts.
- The contract should be ratified after the company, and it should be informed to the opposite party.
A contract made between the promoter on the behalf of the company and the third parties will still be considered as a contract between two individuals. The right to ratify a contract does not lie with the company inherently. The authority of ratifying a contract should be given to the company through its memorandum. So a company cannot be sued by the third party if the company does not ratify the contract, even if the contract was beneficial for the company.
In case the company does not have the authority to ratify the contract (because such authority has not been provided in the Articles), or the company does not ratify the contract, then the promoter will be personally liable.
After Incorporation of the Company
After the company comes into existence, and in case it ratifies the contract entered into by the promoter, in such a case the contract will become binding on the company and not the promoter. Section 15(h) and 19 (e) also state that the promoter can transfer his rights and liabilities to the company, provided that such provision is present in the incorporation agreement. Although the promoter is not entitled to any kind of salary and remuneration. But the general trend is to compensate the promoter in lump-sum after the company has been set up. A promoter cannot be asked to be compensated as a legal right. If the promoter is compensated at all, the compensation given to him is on the basis of equity ad fairness. If any shares are being allotted to the promoter of the company, the promoter also becomes a member of the company automatically.
Privileges of promoter
Right to indemnity
When more than one member acts as the company’s promoter, one promoter can sue the other for the compensation and damages he paid. Promoters are jointly and severally accountable for any false statements made in the prospectus, as well as for any hidden profits.
Right to recover genuine preliminary expenditures
A promoter is entitled to reimbursement for valid preliminary expenditures incurred in the establishment of the firm, such as advertising costs, solicitors’ fees, and surveyors’ fees. It is not a contractual entitlement to receive the preliminary expenses. It is up to the company’s board of directors to decide. Vouchers should be attached to the cost claim.
Right to remuneration
Unless there is a contract to the contrary, a promoter has no right to remuneration from the company. Although the company’s articles may provide for the directors to pay promoters a certain sum for their services, this does not provide the promoters with any contractual right to sue the company. This is just a power granted to the company’s directors. However, because the promoters are usually the directors, the promoters will earn their remuneration in practice.
Weaver Mills v. Balkies Ammal(1969)
The Madras High Court’s ruling in Weavers Mills Ltd. v. Balkies Ammal [1969] broadened the applicability of Pre-incorporation contracts. In this instance, the promoters agreed to buy several properties for and on behalf of the firm that was being pushed. When the firm was formed, it took possession of the land and began to build facilities on it. It was held that the company’s title to the property could not be set aside even if the promoter had not conveyed the land to the firm after its incorporation.
Kelner v. Baxter (1866)
In Kelner v. Baxter (1866), the promoter accepted Mr. Kelner’s promise to sell wine on behalf of an unformed company; however, the corporation neglected to pay Mr. Kelner, and he sued the promoters. The principal-agent relationship cannot exist prior to incorporation, according to Erle CJ, and the principal of an agent cannot exist if the firm does not exist. He goes on to say that the company cannot assume obligation for a pre-incorporation contract by adoption or ratification because a stranger cannot ratify or accept a contract, and the company was a stranger because it did not exist at the time the contract was formed. As a result, he concluded that the promoters are personally accountable for the pre-incorporation contract because they consented to it.
Conclusion
It can be said that a promoter can be an individual, a company, or an association of person which conceives the idea of formation of a company, undertake all the activities which are necessary for the company’s incorporation and brings about the actual existence of the company as a separate legal entity. The promoter nominates the directors, bankers and auditors of the company and also decide the contents of the Articles of the company. The promoter can be called as a molding block who gives basic shape to the company, and his role is of utmost important.
