Introduction:
The promoter, a term which was always been overlooked and ignored by the experts as well as the law was suddenly on everyone’s tip of the tongue when the Companies Act, 2013[1]got the president’s consent to become the ‘new company law’ of the country. It wasn’t just because the new law clearly defined the term ‘promoter’ which its predecessors didn’t care enough about, but because it also carried a complete package of Roles, Duties, and liabilities of a promoter. Let’s take a deep look at it to understand clearly.
Definition of the Promoter
In layman terms, a Promoter is a person or a group of persons who comes first in the chronological order of the company incorporation process. He not only conceives the idea of setting up a company but also raises funds and capital for doing business as well as makes sure about the future prospects of the company.
The term promoter was not defined in the Companies Act, 1956[2] but was frequently used in various sections such as sec. 56, 62, 69, 76, 478 & 519. Section 2(69)[3]of The Companies act. 2013 provides the definition of the promoter as follows:
“Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual
the 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.[4]
Legal Status of the Promoter
During the pre-incorporation phase, since the company is not yet registered, it does not have a separate legal identity and therefore is incompetent to form legal relations or form contracts. According to company law, promoters doesn’t have a legal position. A promoter is a non-entity until the company has been incorporated. He has a fiduciary relationship with the company. He is neither an agent nor a trustee of the company but still works for the benefit of the company. It is under the guidance and the supervision of the promoter a company comes into existence.
Duties of the Promoter
From the fiduciary position of promoters, he is bound by the following duties for his company:
(1) To disclose the secret profit: There should be no hidden profits for the promoter. It is not permissible for a promoter to make any hidden profits. If it is discovered that he made a secret benefit for himself in one of the company’s transactions, he will be required to refund the profit to the company.
(2) To disclose all material facts and information: The company’s promoter is required to disclose all material facts and information. If a promoter wants to sell his or her personal property to the company, he or she must make a complete disclosure of his or her stake.
3) The promoter must repay the corporation for the benefits he received as a trustee: Because the promotor and the company have a fiduciary relationship. It is the promotor’s responsibility to make the best use of whatever he has earned as a trustee for his company.
(4) Duty to reveal private arrangements: It is the promoter’s responsibility to declare all private arrangements that result in him profiting from the company’s promotion.
(5) Duty of promoter against the future allottees: The promoter has a fiduciary relationship with the corporation and has a duty to future allottees. Similarly, the promoter has a fiduciary obligation with the future allocatees of the share.
Howard v. Patent Ivory Manufacturing[5]
The court observed that even while the promoter is personally liable for the pre-incorporation contract, he can transfer his duty to the firm. The Specific Relief Act of 1963 codified this novation of contract basis.
Gluckstein v. Barnes[6]
In this case, a group of people purchased ‘Olympia’ (an amphitheatre) and sold it to a firm they promoted, making a covert profit of£20,000 pounds that was not declared in the prospectus. It was claimed that a profit of £20,000 was a covert profit and that the promoters were obligated to pay it to the firm because the disclosure was inadequate.
Rights and Liabilities of the Promoter
The Companies Act, 2013 places certain liabilities and gives certain rights to the promoters. They are as follows:
Section 167(3)[7]: Power to appoint directors in case of vacation of office of all directors
Section 168 (3)[8]: Power to appoint directors in case of resignation by all directors
Section 7(6)[9]: Liability for furnishing false or incorrect information for incorporation of the company
Section 13(8)[10]&Section 27(2)[11]: Obligation to give exit opportunity to the dissenting shareholders
Section 35(1)[12]: Liability to pay compensation for misstatement or omission in the prospectus
Section 42(10)[13]: Penalty for accepting money in contravention of provisions of section42
Section 102(4)[14]: Liability to compensate for gain resulting from non-disclosure or insufficient disclosure of information in the explanatory statement
Section 257 (3)[15]: Appearance before the meeting of the committee of creditors upon instruction of interim administrator
Section 284 (1)[16]: Duty to extend full co-operation to company Liquidator
Section 300 (1)[17]: Liability to be examined beforeTribunal upon the report of Company Liquidator
It could be observed that barring Sections 167 and 168, the Act provides only for liabilities of the promoters.
Prabir Kumar Misra v Ramani Ramaswami[18], HC 2009– The Madras HC stated that there is a fix on a promoter’s liability. It is not required that his signature appears on the MoA/AoA, as a Shareholder, or in the Board of Directors. His guilt and accountability are also determined by his actions and contracts as an agent or trustee during the pre-incorporation period.
Privileges of Promoter
Right to Indemnity
The promoters are jointly and severally liable for any false statement made in the opportunities, thus when more than one person acts as the organization’s promoter, one promoter can guarantee against the other for the remuneration and damages paid by him.
Right to Recover Genuine Preliminary Expenditures
He has the right to recoup the genuine costs that were spent during the organization’s cycle in ad expenses, specialist fees, and so on. The choice to obtain the fundamental costs is unquestionably not a legally enforceable entitlement. It relies on the caution of the heads of the organization.
Weaver Mills v Balkies Ammal[19]
In this case, the Madras High Court expanded the scope of Section 19(e) of the Indian Penal Code. The promoter had engaged in a contract to purchase assets on behalf of and for the company in this case. It was decided that the company’s title to the property could not be ignored at the time of incorporation, even if the property was not present.
Kelner v. Bexter[20]
The promoter, speaking on behalf of and for the unformed company, agreed to Kelner’s proposal to enter the wine business. Kelner received no payment from the company. According to ERLE, CJ, a fiduciary relationship cannot exist prior to the company’s formation, and thus the company cannot be held liable or accept any liability by ratifying or accepting the contract because the business was not formed at the time the agreement was made (a non-existent state). As a result, the promoters are to be hailed. As a result, because they were the agreeing party, the promoters are accountable for any pre-incorporation agreements.
Conclusion
In India, promoters normally follow the standard stages when promoting a company. However, if necessary, they also handle incorporation and formation, share underwriting, substantial share contribution, and, most importantly, direct management of the business. As a result, Promoters in India play a variety of roles during a company’s founding stage. They take on the roles of new business manager and controller. The Indian promoters usually maintain a dominant interest in the company’s operations. The earliest directors of a firm are usually the promoters. And That is the reason why the promoter must have certain legally recognised obligations and liabilities in order to reduce the potential risk of a company being another scam.
References:
[1] The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India)
[2]Companies Act, 1956, No. 1, Acts of Parliament, 1956 (India)
[3] The Companies Act, 2013, § 2, No. 18, Acts of Parliament 2013 (India)
[4]Epgp.inflibnet.ac.in. 2021. Promoters, their positions, powers, duties and liabilities. [online] Available at: <https://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/13._promoters,_their_position,_powers,_duties_and_liabilities/et/5675_et_13_et.pdf> [Accessed 17 July 2021].
[5]Howard v Patent Ivory Manufacturing [1888] 38 Ch. D 156
[6] (1878) 3 AC 1218
[7] The Companies Act, 2013, § 167(3), No. 18, Acts of Parliament 2013 (India)
[8] The Companies Act, 2013, § 168(3), No. 18, Acts of Parliament 2013 (India)
[9] The Companies Act, 2013, § 7(6), No. 18, Acts of Parliament 2013 (India)
[10] The Companies Act, 2013, § 13(8), No. 18, Acts of Parliament 2013 (India)
[11] The Companies Act, 2013, § 27(2), No. 18, Acts of Parliament 2013 (India)
[12] The Companies Act, 2013, § 35(1), No. 18, Acts of Parliament 2013 (India)
[13] The Companies Act, 2013, § 42(10), No. 18, Acts of Parliament 2013 (India)
[14] The Companies Act, 2013, § 102(4), No. 18, Acts of Parliament 2013 (India)
[15] The Companies Act, 2013, § 257(3), No. 18, Acts of Parliament 2013 (India)
[16] The Companies Act, 2013, § 284(1), No. 18, Acts of Parliament 2013 (India)
[17] The Companies Act, 2013, § 2, No. 18, Acts of Parliament 2013 (India)
[18]Prabir Kumar Misra v Ramani Ramaswami, HC 2009 (11)
[19]Weaver Mills v Balkies Ammal. AIR 1969 Mad 462
[20]Kelner v Bexter 1866 15 LT 213
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