What do you mean by a promoter?

What do you mean by a promoter? What is his legal position in the Company ? Explain his rights, duties and liabilities also.

Ans. Promoter?-According to S.2(69) “promoter” means a person-

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity; According to the Webster’s dictionary, 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”. According to Sir Francis Palmer, “A Promoter is a person who originates the scheme for promotion of a company, has the memorandum and 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 paying the capital.” According to Lindley, the term ‘promoters’ as used in connection with companies, involves the idea of exertion for the purpose of setting up and starting a company or what is called floating off, and also the idea of some duty towards the company imposed by or arising from the position which the so called promoter assumed towards it.” According to Lord Bowen, L. J, “Promoter is a term not of law but of business, usually 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”. Thus, from these ‘definitions it can be inferred that no exact definition of the term ‘promoters’ can be coined. Perhaps the true test whether a person is a promoter or not is to find out if he has a desire that he may or may not involve other persons, to implement it.

Legal Position of a Promoter—The legal position of prOinoter in relation to the company was explained by Lord Cairns in Erlanges VCs. New Sombrero Phosphate Co. 1878 as follows—”They (i.e. promoters) stand in my opinion, undpubtedly in fiduciary position. They have in their hands the creation and moulding of the company_ They have the power of defining how and when in what shape and U/what supervision the company shall start into existence and begin to act as a Trading Corporation. Explaining the legal position of promoters, Lindley, LJ: in Lyndey and Wigpool Iron Ore Co. V.s. Bird,(1886) observed that” a promoters although not an agent of the company nor a trustee for it. Before its formation, the old principles of the law of agency and of trusteeship have been extended and very properly extended to meet such cases.” Similar view has been expressed about the position’of a promoter in Laguna’s. Nitrate Co. V.s. Lagiraa s Syndicate wherein the court held that a promoter occupies a fiduciary position in relation to the company he promotes. He is neither an agent nor a trustee for the company because the company before incorporation has no legal existence. Duties of Promoters—The fiduciary relation of a promoter with the company he forms gives rise to certain legal consequences. Therefore, he is under a legal duty in respect of the following matters-

(i) A promoter is not to make any secret profits out of the promotion of the company. Secret profit may be. made by promoter by purchasing property or a business himself and selling it to the company at a higher price.

(ii) He should make full disclosure of all relevant facts to the company including any profit made and his personal interest in transactions with the company. It must, however, be noted that it is not the profit made by the partner which the law forbids, but what is forbidden by law is the non-disclosure of it. The disclosure should be made to the Board of Directors, and where there is no independent Board of Directors, it should be made to prospective shareholders as a whole.

Rights of Promoters—The promoters being in. a fiduciary relation with the company they from, they have certain rights and liabilities vis-a-vis the company. Thg rights of a promoter of the company are as under-‘.

Right to Receive Preliminary Expenses—The promoters are entitled to receive all the expenses incurred in setting up and registration of the company from the Board of Directors. The articles may provide for payment of preliminary expenses to the promoters. The company may pay the expenses to the promoters even after its formation but such payments shout d not be ultra vires the articles of the company. The articles may contain a provision regarding payment of a fixed sum to the promoters. But such a provision has no Contractual effect and the promoter cannot sue the company for enforcement of payment on the strength of the provision in the ajrticles. In Malhado Vs. Porto Allergre Railway Co. (1874) LRICP 503, the articles of the company contained a provision that the company may make payment of the expenses incurred for setting up the company to the promoters. The . quantum of expenses to be paid depended on the decision of the Board of Directors but it was not to exceed £2000 in any case. The plaintiffs were the promoters of the company who sued it for enforcement of payment on the basis of the articles. The Court ruled that the promoters could not sue the company for preliminary expenses as the company is not bound by any provision in the articles except to members in their capacity as members. 2. Right to recover proportionate Amount from the Co-promoters-The promoters are held jointly and severally liable for the secret profits made by them in the formation of a company. Therefore, if the entire amount of secret profits is paid to the company by a single promoter, he is entitled to recover the proportionate amount from his co- promoters. Likewise, if the entire liability arising out of mis-statement in the prospectus is borne by ‘one of the promoters, he is entitled to recover proportionately from the co-promoters. 3.

Right to Remuneration—A promoter having made proper disclosure has a right to be paid remuneration for his efforts. The payment of remuneration to a promoter in consideration of his services may be in the form of fully or partly paid-up shares, debenture or commission or it can even be in the form of a lump-sum amount. , It must, however, be pointed out that in the absence of any express agreement with the company after its incorporation, a promoter is not entitled to claim from the company any remuneration for his services. A company is also not liable, in the absence of an agreement, to reimburse a promoter in respect of registration fee or stamp duty paid by him for the registration of the company. Liabilities of Promoters- A promoter is subject to certain liabilities under the Companies Act, 2013. Some of these liabilities are as under-

1. Liability for Non-compliance of S.26- S.26. of the Act lays down matters to be stated and reports to be set out in the prospectus. Hie promoter may be held liable for the non-compliance of the provision of this section.

2. Liability for Untrue Statement in Prospectus- According to S.35, a promoter is liable for any untrue.statement in the prospectus to a person , who has subscribed any shares or debentures on the faith of the prospectus. The aggrieved person may sue the promoter for compensation or any loss or damage sustained by him. Any false statement in the prospectus may lead to the following consequences-

(a) The allotment of shares or debentures may be set aside;

(b) The Promoter may be sued for damages and also for compensation;

(c) The promoter may incur criminal liability and criminal proceedings may be instituted against him. –

3. Liability for Misfeasance or Frauds- The court may restrain a promoter from talking part in the management of the company for a period of five years if it appears that he has been guilty of any offence punishable U/S.339 (Whether he has been convicted or not) or while being an officer of the company has otherwise been guilty of any fraud or misfeasance in relation to the company or committed any breach of duty ; in respect of the company of which he is a promoter.

4. Criminal Liability for Deceptive Statement in Prospectus—S.34 of the act makes a promoter criminally liable for the issue of prospectus containing false or deceptive statements. The punishment under this section may be for a term which may extend to two years or with One which may extend to Rs. 5,000/- or with both. The promoter may, however, escape liability if he proves that he had reasonable ground to believe that the statement was true or the statement was immaterial from the point of view of attracting the investors.

5. Liability for Fraud in Promotion of a Company-According to S.300, if the company is being wound up by the order of the court and the liquidator’s report alleges any fraud in the promotion and formation of the company, the promoter or promoters shall be liable to public examination like any other officer or director of the company.

6. Liability for the Loss due to Deceit or Breach of Duty- According to 0.340, where a promoter has misapplied or retained any property of the company or is guilty of misfeasance or breech of trust in relation to the company ; he can be sued by the company for breach of duty or deceit, is the case may be.

7. In the event of death of the promoter, the company may recover the damages or compensation from the property of the deceased