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DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

PROJECT ON:
Law relating to promoters of a
Company duties and liabilities- An analysis
PROJECT BY:

Raghuveer Puranam (201038)

SEMSTER:

VII SEMSTER

SUBJECT:

Corporate Law -I

RESEARCH METHODOLOGY
Aims and Objectives:
The aim of the project is to present a detailed study of the topic promoters through decisions
and suggestions and different writings. The aim has been to come to a conclusion very much
indigenous.
Scope and Limitations:
Though the topic role of promoters is a project which can be written pages. Because of
certain restrictions and limitations researcher is constrained to the availability of the material.
Sources of Data:
The following secondary sources of data have been used in the project1. Books
2. Website
Method of Writing and Mode of Citation:
The method of writing followed in the course of this research paper is primarily analytical.
The researcher has followed Uniform method of citation throughout the course of this
research paper.

TABLE OF CASES

1. Bosher v Richmond Land Co, 89 Va 455 (16) SE 360


2. Emma Silver Mining Co v Lewis, (1879)4 CPD 396
3. Erlangerv New SombreroO Phosphate Co., (1878) 3 App Cas 1218
4. Gluckstein V Barnes, [1900] AC 240
5. Gomba Holdings U.K v Homan , [1986] 3 All ER 94 Ch D
6. Great Wheal Polgooth Ltd, Re, (1883) 53 LJ Ch. 42.
7. Kelner v. Baxter, (1866) LR 2 CP 174
8. Re Leeds & Hanley Theatres Of Varities Ltd.(1902), [1902] 2 Ch 809. 210.
9. Tengku Abdullah v Mohd Latiff bin Shah Mohd,[1996] 2 MLJ 265
10. Tracy v Maandalay (1952-53) 88 CLR 215
11. Tycross v Grant, [1877] CPD 469
12. Whaely Bridge Calico Printing Co v Green , (1880) 5 QBD 109
13. Fairview Schools Sdn. Bhd v Indrani [1998] 1 MLJ 110

LIST OF ABBREVIATIONS

1. AC- Advance California Reports


2. All ER All England Reporter
3. App Cas- Law Reports, Appeal Cases
4. Ch - Chancery
5. CLR- Clarke New York Chancery Reports
6. CPD- Cape Provincial Division Reports
7. LR- Law Reporter
8. MLJ -Madras Law Journal
9. QBD- Queens Bench Division
10. SE-South Eastern Reporter

Table of contents

Introduction.7
Definition.8
Functions..9
Types of promoters..10
Stages of promotion.10
Relationship with the company..11
Position of a promoter.13
Remuneration..13
General duties..13
Liability for pre incorporation contracts.14
A) Comparison of laws.14
Rewards.15
Indian law.15
A) Specific Relief Act, 1963.16
B) Novation of contract17
U.s law..17
English law17
Conclusion18
Bibliography.19

INTRODUCTION
I didnt grasp the basic principle of being a promoter, which was; put on music but also
generate an income. I was on the dole most of the time.
-Alex (musician)
Like this quote, all the concentration of a person should not just be on doing something. He
must also concentrate on letting people know that he has done something. When a person
starts a company, public or private, it is very essential that the people come to know about the
company. They must be made aware that a new company has come into existence. They must
be informed that they now have wider options. In the case of a public company it is even
more essential that the people are made aware of the new company. Its because the more
people come to know, the more are the chances of people investing in the company build its
share capital.
This is done through advertisement. The company is brought to the knowledge of people
through advertisements in the media-newspapers, magazines, internet, television etc. The
goodwill of the company must be built up and that can happen only when many people know
about the company and start trusting it. They will start trusting in it only when the company
makes some progress and when the progress is made known to the public.
Puffery statements, exaggeration and falsification do not build up the image of the company
but degrades it. So a company must take reasonable care while promoting herself. As it is a
very essential and important job of a company, it must be done with a lot of circumspection.
Since the job is very sensitive one, it is handled by those people who are specialized in image
building. In the business fraternity, they are called PROMOTERS. A promoter, although the
term creates connotations of someone in the building and construction industry, is actually a
generic term associated with the person who starts a business. In common parlance, this
person is also referred to as the founder of the business.
A promoter typically is responsible for raising capital, targeting initial leads and chasing
initial business opportunities, entering into the initial contracts for the business formation and
incorporating the company. A promoter conceptualizes the idea of a company and the purpose
of its formation. The promoter acquires and invests the initial capital for the company. Once
all the formalities are completed, the promoter hands over the authority to the directors. A
promoter can be a person or a registered company as well.

A promoter is
(a) Any person who is in control of the target company
(b) Any person named as promoter in any offer document of the target company or any
shareholding pattern filed by the target company with the stock exchanges pursuant to the
listing agreement, whichever is later1;
So the logical meaning of this is that although the promoter ordinarily means the person who
started the company, in certain exceptional cases, it can even mean the person who is in
control of the company even if he / she did not actually start the company. A common doubt
most people have with regard to a promoter is with reference to the contracts, documentation
and expenses incurred by the promoter prior to the incorporation of the company -these are
called pre-incorporation expenses and most people want to know how they can be
recovered from the company after the incorporation.
DEFNITION
There is no strict definition of a promoter defined under the company laws of any country in
the world. The definition is mostly deduced through the case laws and circumstances. The
difficulties in defining the term led judges to state that the term promoter is not a term of
art, nor a term of law, but of business2. The emphasis upon its business implication is quite
apparent from the statement of Bowen LJ that the term is used to sum up in a single word a
number of business operations, familiar to the commercial world, by which a company is
generally brought into existence3.
In Tengku Abdullah v Mohd Latiff bin Shah Mohd 4, Gopal Sri Ram JCA said: A
promoter is one who starts off a venture-any venture-not solely for himself,
but for others, but of whom, he may be one.
Companies Act, 2013 defines- promoter to mean a person
(a) who has been named as such in a prospectus or is identified by the company in the annual
return, or
1 SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997
2 Gomba Holdings U.K v Homan , [1986] 3 All ER 94 Ch D
3 Whaely Bridge Calico Printing Co v Green , (1880) 5 QBD 109
4 [1996] 2 MLJ 265
7

(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 is
accustomed to act.
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity
Most of the definitions are in terms of categories of work that the promoters usually perform.
A promoter is a person who brings about the incorporation and organization of a company.
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.5
A promoter is one who undertakes to form a company with reference to a given project and
to set it going, and who takes the necessary steps to accomplish that purpose. 6 The term
therefore has no very definite meaning7. Whether a person is a promoter or not is a question
of fact in each case. Much depends upon the nature of the role played by him in the
promotion of business.
A solicitor is not a promoter 8. A person may help in getting a purchaser of the companys
patent or of shares, or in getting personnel for the company. Any such role may make him
promoter9. A promoter is one who starts off a venture-any venture-not solely for himself,
but for others, but of whom, he may be one10.
FUNCTIONS
The general functions of a promoter are:

Conceptualizing the scheme of company formation.

Finalizing the name of the company and getting it registered.

5 Bosher v Richmond Land Co, 89 Va 455 (16) SE 360


6 Tycross v Grant, [1877] CPD 469
7 Emma Silver Mining Co v Lewis, (1879)4 CPD 396
8 Great Wheal Polgooth Ltd, Re, (1883) 53 LJ Ch. 42.
9 Tracy v Maandalay (1952-53) 88 CLR 215
10 Tengku Abdullah v Mohd Latiff bin Shah Mohd,[1996] 2 MLJ 265

Filing the important documents, such as Memorandum and Articles of association


with the Registrar.

Getting the consent of the director before finalizing the nomination.

Completing the formalities regarding the nomination of directors, secretary, etc.

Organizing the printing of Memorandum and Articles.

Handling the complete procedure for the registration of the company.

Handling the details relating to the prospectus.

Making necessary appointments of lawyers, bankers and agents.

Obtaining the co-operation of all the people who are associated with the company.

TYPES OF PROMOTERS11
1. Professional Promoters:
They are experts who specialize in company promotion. They float the company and hand it
over to the shareholders or their representatives. Promotion is their main profession or
occupation.
2. Occasional Promoters
There promoters take interest in floating some companies. They are not engaged in promotion
work on a regular basis. They take up the promotion of some company and once it is over
they go to their original profession. For instance, engineers, etc. may float some companies.
3. Entrepreneur Promoters
They are both promoters and entrepreneurs. They conceive idea of a new business unit, do the
groundwork to establish it and subsequently become a part of the management.
4. Financer Promoters
Some financial institutions, like investment banks or industrial banks, may take up the
promotion of a company with a view to finding opportunities for investment.
STAGES OF PROMOTION12

11 Company Law and Practices by D.P Mittal 2nd Edition


12 Guide to Companies Act- by A. Ramaya 15th Edition 2001
9

1. Discovery of business.
The first stage in company promotion is the conception of a new idea. It is the promoter who
conceives the idea of setting up a business. If makes an assessment of the viability of a
particular business.
2. Detailed investigation.
Promoters undertake a detailed investigation of the viability, profitability and future prospects
of the growth of the proposed activity. To assist then in this venture, they seek the help of
specialists such as chartered Accountants, Cost Accountants, Company Secretary, Engineers.
Organizations engaged in market research and other specialized agencies. Specialists are in a
position to make an objective analysis of their own areas which may help the promoters.
Decisions have to be taken regarding the size, location, layout, man power etc.
3. Assembling the factors of production
If the proposed endeavor gives promise of success and the promoter is willing to undertake
the risk of forming the business, steps must be taken to assemble various factors of
production viz, land, labour, capital and managerial personnel. Assembly of resources
involves making contracts for the purchase of material, land, machinery, etc.
4. Entering into preliminary contracts
The promoter enters into contracts with different parties before the registration of the
company. After registration, the company approves these contracts.
RELATIONSHIP WITH THE COMPANY
Relationship between a company and a promoter is fiduciary .He is bound to disclose all the
accounts and other contracts he entered into before incorporation of the company to an
independent and competent board of directors so that he may be held accountable for any ill
gained profits and may be held accountable for them before the board. The following are
some of the fiduciary duties that the Courts will insist that a Company promoter has to
observe.
1. Top of the list is not to make a secret profit at the expense of the company
2. A duty to account to the company for the benefit for any property he might Purchase
with the intent of selling the property to Company for a profit later.
3. A duty not to defraud the Company by active concealment of any affairs relating to
the company
4. A duty not to disclose confidential information to outsiders
5. A duty not to hide his personal interests through a nominee.

10

A Promoter is in a fiduciary relationship with the Company he promotes and as such he owes
fiduciary duties towards it. This means that he is in a position of trust and must at all time act
honestly and in good faith for the Company as a whole. However, the most important aspect
of his duty is not to make a secret profit at the expense of the Company. In the case of
Fairview Schools Sdn. Bhd v Indrani 13 Mahadev Shanker JCA said, Promoters have a
legal duty not to make a secret profit out of the promotion of the Company without the
Company's consent and also to disclose to the Company any interests the promoters have in
any transaction proposed to be entered into by the Company.
There are many cases where Promoters did not remain true to their fiduciary duties. The
bottom-line requirement from Promoters is that they must be transparent in their dealings
with the Company.
There are three remedies in situations where the Promoters have breached the Fiduciary
Duties.
1. RESCISSION
If the Company has entered into a Contract with the promoter and it is later discovered there
had been no transparency, the Company is entitled to rescind the contract. It is irrelevant that
the promoter has made no profit from the contract.S17 Contracts Act states that nondisclosure amounts to a fraud and by Sect 19 the Contract becomes voidable.
Under Sec 34(1) Specific relief Act 1950 the Company can apply to the Court to rescinded
the contract. Once the contract is rescinded, restitution has to take place. This is where the
Company has to return whatever it received from the Promoter and the Promoter has to return
all monies received from the company.
ERLANGER v NEW SOMBRERO PHOSPHATE CO14
In this case, Erlanger bought an island containing phospates for 55,000 pounds. Later,
Erlanger promoted a Company and sold the property to it for 110,000 pounds. All the
Directors of that Company were nominees of Erlanger and two of them were directly under
his control. Later the old board was replaced by a new board which brought an action to
rescind the contract with Erlanger.
The Court held that there had been no adequate disclosure of the circumstances of the sale
and the Company was entitled to rescind the contract.
2. RECOVERY OF THE SECRET PROFIT
13 [1998] 1 MLJ 110
14 (1878) 3 App Cas 1218
11

GLUCKSTEIN Vs BARNES15
In this case the Defendants bought debentures cheaply in a Company at a time when the
Company was faring very badly. Later they bought over the Company for 140,000 pounds.
The debentures were redeemed at full value and they made a good profit. Here they made a
profit of 20,000 pounds. Later still, they formed another company and sold the Company to a
new Company at a profit of 40,000 pounds. This profit was disclosed in the prospectus but
not the amount of profit they made on the redemption of the debentures. (20,000 pounds)
The Court held that there were in breach of their duties as promoters and the Company was
entitled to recover the profit from them. The Company can recover the secret profit even
though they chose not to rescind the contract. The liability of the promoters is joint or
several. A Promoter who is found liable may recover contributions from the other promoters.
3. DAMAGES FOR BREACH OF FIDUCIARY DUTIES.
In the case of RE LEEDS & HANLEY THEATRES OF VARIETIES LTD 16 the Court
ordered the Promoter to pay damages to the Company. The Court held that the Promoters had
fraudulently omitted to disclose the profit made by them on the sale of the property to the
Company. The amount of damages was equivalent to the amount of profit made by the
promoters.
POSITION OF A PROMOTER17
A promoter is not an agent for the company, which he is forming because a company cannot
have an agent before it comes into existence. For the same reason he cannot be the trustee of
the company. However from the moment he acts with the company in mind, a promoter
stands in a fiduciary position towards the company. Lord cairns had correctly stated the
position of a promoter in Erlanger v. new sombrero phosphate co.18 The promoters of a
company stand 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, and in what shape
and under what supervision, it shall start into existence and begin to act as a trading
corporation.
15 [1900] AC 240
16 [1902] 2 Ch 809. 210
17 COMPETETION LAW at a glance By: Amitabh Kumar
18 Supra no 12
12

REMUNERATION
The nature of the promoters work in the formation of a company calls for considerable skill
for which he should be adequately remunerated. A promoter has no right against the company
for his remuneration unless there is a contract to that effect. In the absence of such a contract,
he cannot even recover from the company payments he has made in connection with the
formation of the company.
GENERAL DUTIES19
A promoters general duties are:
1. Initiator
The promoter originates the scheme for the formation of the company, he gets memoranda
and articles prepared, executed and registered and he deals with merchant bankers, brokers
and legal advisors.
2. Fiduciary Agent
Promoter stands as a fiduciary agent of a company. As a fiduciary agent, a promoter should
fulfill the following duties:
i) He should make all disclosures regarding accounts and formation so as to maintain
transparency at the time of transfer of management to the director.
ii) He should not make any secret profit out of promotion of the company.
iii) He should make all disclosures regarding transactions entered by him on behalf of the
company as promoter.
In case of default on the part of the promoter in fulfilling the above duties, the company
may:1. Rescind or cancel the contract made and if he has made profit on any related transaction,
that profit also may be recovered.
2. Retain the property paying no more for it then what the promoter has paid for it depriving
him of the secret profit.
3. If these are not appropriate, the company can sue him to for breach of trust. Damages upto
the difference between the market value of the property and the contract price can be
recovered from him.

19 COMPETETION LAW at a glance By: Amitabh Kumar

13

LIABLITY FOR PRE INCORPORATION CONTRACTS


Generally under common law, if a promoter entered into a contract before the incorporation
of the company for the company, the promoter will be held personally responsible for the
contract. This rule was laid down on the concept that, a company cannot be held liable for an
act done before its coming into existence. However today there are many exceptions to his
rule under Indian law, American law and the English law (to a very little extent).
a) Comparison of laws
Although under the English Common Law, the American law and the Indian Law recognize
the rule that promoter is personally liable for pre-incorporation contract, American Laws and
Indian laws are much more innovative and effective to solve the problem of Pre-incorporation
Contract. Whereas the English Courts still follow the principle of Kelner v. Baxter20.
Although in UK, Contracts (Rights of Third Parties) Act 1999 brought some relief, but it is
not as broad as the American and Indian Laws are.
Under English Common Law, the ratification or adoption, after the incorporation, did not
release the promoter from liability of pre-incorporation contract. Whereas in American Court
recognize that if the after the incorporation company can ratify or adopt the contract, and this
would bound the company and not the promoter. Indian Law the rule of Kelner v Baxter21 is
applicable but under the Specific Relief Act 1963, section 15(h) and 19(e) promoter can shift
his right and responsibility to the company, if it is warranted by the terms of incorporation.
The principle of novation of pre-incorporation contract is applicable in above three counties,
the reason behind is that, the novation replace the old contract with the new contract, so there
is not problem of non-existence of company. Now after the Contracts (Rights of Third
Parties) Act 1999, English laws may also allow company to become the part of preincorporation contract, when it acquire its legal existence.
REWARDS
For the efforts put in by the promoters in promoting the company, the promoters may be
rewarded in the following ways:

The company may to pay some remuneration for the services rendered.
The promoter may make profits on transactions entered by him with the company
after making full disclosure to the company and its members.

20 (1866) LR 2 CP 174
21 Ibid
14

The promoter may sell his property for fully paid shares in the company after making

full disclosures.
The promoter may be given an option to buy further shares in the company.
The promoter may be given commission on shares sold.
The articles of the Company may provide for fixed sum to be paid by the company to
him. However, such provision has no legal effect and the promoter cannot sue to
enforce it but if the company makes such payment, it cannot recover it back.

INDIAN LAW
The Indian law i.e., the Companies Act 1956 does not define a promoter. It mentions only the
liabilities of a promoter. Sections 56, 62, 63, 203, 478, 542 and schedule II of the Act speak
about promoters.
1. Section 56 lays down matters to be stated and reports to be set out in the prospectus.
He may be held liable for the non-compliance of the provisions of this section.
2. Under section 62, a promoter is liable for any untrue statement in the prospectus to a
person who has subscribed for any shares or debentures on the faith of the prospectus.
Such a person may sue the promoter for compensation for any loss or damage
sustained by him.
3. Besides civil liability, the promoters are criminally liable under section 63 for the
issue of prospectus containing untrue statements. Section 68 imposes severe penalty
on promoters who make untrue and deceptive statements in a prospectus with a view
to obtaining capital.
4. Section 478 says that a promoter may be liable to public examination like any other
director or officer of the company if the court so directs on a liquidators report
alleging fraud in the promotion or formation of the company.
5. A company may proceed against a promoter on action for deceit or breach of duty
under section 543, where the promoter has misapplied or retained any property of the
company or is guilty of misfeasance or breach of trust in relation to the company.
6. If any promoter is found to be involved in an activity which amount to an offence
regarding promotion, management or formation of a company, the court can bar such
a promoter from taking part in the administration of the company for five yearsSection 203.
7. In the course of winding up a company, if it appears that any business of the company
has been carried on with an intention of defrauding the creditors, the court can declare
those people who were knowingly parties to the carrying of that business shall be
personally liable Section 542.
15

a) Specific Relief Act 1963


There is some scope for the promoter to shift his liability to company in a pre- incorporated
contract. He can shift to company his liability under the Specific Relief Act 1963 or he can go
for novation under contract law.
Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for
pre-incorporation contract. Section 15 is about stranger's right to sue if he entitled to a benefit
or has any interest under the contract, although it has certain limitation. Section 15(h) talks
about the company, being a stranger to pre-incorporation contract, has the right to sue to the
other contracting party.
But the necessary condition is that the contract should be warranted by the terms of its
incorporation. This provision clearly negates the common law doctrine, which says that the
company cannot ratify or adopt the pre-incorporation contract. Under this provision promoter
can give his right to sue to sue to the company.
Section 19(e) states that the company can be sued by the other party of pre-incorporation
contract, if the terms of incorporation warrant and adopt the contract. This provision reduces
the promoter of liability of pre-incorporation contract.
b) Novation Of Contract
In the situation of Novation of Contract, the Company can replace the promoter from the preincorporation contract. But one might say that such contract would not be called preincorporation contract, but it should be called post-incorporation contract; because novation
of contract result into a new contract.
ENGLISH LAW
The word promoter is not defined under the English law also. Sec 43, 51 of the Companies
Act, 2006 talks about promoters. They talk about execution and pre incorporation contracts
respectively. According to Chitty on Contract, even in equity the company cannot be held
liable for pre-incorporation contract. Generally, any person who plays a major part in forming
a company or establishing its business (usually the prospective owners or directors of the
company). Where any trading takes place on behalf of the company, before the certificate of
incorporation is issued, any person who purports to act for or as agent of a company before
the company has been formed will be personally liable for any contract they make on behalf
of the company (section 51, Companies Act 2006).
16

U.S LAW
According to Securities Exchange Commission Rule 405(a) a promoter is a person who,
acting alone or in conjunction with another person directly or indirectly takes the initiative in
founding or organizing the business enterprise. Delaware General Corporation Law
(Delaware Code 1956 amended), Ch. 339 section 101(6) Promoters contract-corporations
can adopt contracts made by promoters for its benefit, although such contract antedates
corporations existence22. Sec 101(7) Promoters liabilities-Promoters must account to secret
profits obtained at its expense and surrender for cancellation of shares representing secret
profits23.

CONCLUSION
Hence, its very clear that, for a company to prosper and develop, establishment is just not
enough. Its promotion is also equally important. The promotion of the company should be
done in such a way as to benefit the company. But that does not mean than the company
members of promoters falsify facts with a mala fide intention of securing investments in the
company. A promoter of a company holds a very prime position in the company and is
expected to be in a fiduciary relationship with the company. He must be extremely honest and
loyal the company and must work for the profits of the company pushing aside his personal
profits with company money. For any development made to the company, he can be rewarded
by the company and for any default activities, he can be made liable for those activities and
his contract can be rescinded. In the case of Pre-incorporated contracts, he is personally liable
for all those contracts entered into on behalf of the company without its knowledge and not
ratified later by the company.
Therefore a promoter is a key player in the game of corporate business whose every step is
counted as a lifeline of the company and every bad move can collapse the entire edifice of the
company or him personally.

22 Commissioner of Lewes v Breakwater Fisheries Co. 117 A 823 (Ch Ct 1922)


23 RE Bribeck v Am Toll Bridge Co Cal A2d 158 (Ch Ct 1938)
17

Bibliography:

Company Law and Practices by D.P Mittal 2nd Edition


Mannual of SEBI ,2000
Competition Law in India by Oxford T. Ramappa
The Company Law 10th Edition Vol 1- Wadhwa and Company
Guide to Companies Act- by A. Ramaya 15th Edition 2001
Taxmanns Companies act with case laws reffered [1913- 2007] 5th Edition 2008
COMPETETION LAW at a glance By: Amitabh Kumar
Securities And Exchange Board of India (INTERMEDIARIES)Regulations, 2008
Securities Contract(REGULATION) ACT, 1956

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