DR.

RAM MANOHAR LOHIA NATIONAL

LAW UNIVERSITY, LUCKNOW

CORPORATE LAW-I
Project
On
Promoters and their duties

Submitted to:

Submitted by:

Ms. Priya Anuragini

Sakshi

Asst. Professor (Law)

B.A.LL.B (V SEM.)
Roll no. -111

ACKNOWLEDGEMENT
A major research project like this is never the work of anyone alone. Firstly, I would like to
thank my teacher Ms. Priya Anuragini, for giving me such a golden opportunity to show my
skills and capability through this project.
This project is the result of the extensive ultra-pure study, hard work and labour, put into to
make it worth reading. This project has been completed through the generous co-operation of
various persons, my teacher, and my seniors, who, in their different potentials helped me a lot
in giving the finishing touch to the project.
This project couldnt be completed without the help of my universitys library Dr. Madhu
Limaye Library and its internet facility.

TABLE OF CONTENTS

1.
2.
3.
4.
5.
6.

Introduction
Promoters
Duties of promoters
Liability of promoters
Conclusion
Bibliography

Statement of Purpose

I want to learn about the relation between promoters and newly incorporated company as they
are responsible for the pre-incorporation work of the company.

Research question: There are two research questions that will need to be answered by
this research.
1. Who are promoters in the company and what are their duties with respect to the
companies?
2. What is their position in the company? Will they lose their existence as promoters or
converted into some other designation after the incorporation of the company?
3. What are the right and liabilities of the promoters of the company? Whether they
themselves liable to the acts done before the incorporation of the company or their
liabilities shifted to the Board of directors of the company?

Hypothesis:
Promoters do not have absolute liability after incorporation of the company, their liabilities
would also be shared by the board of directors of the company if they are aware of acts done
before incorporation after company comes into existence and they do not reject what has been
proposed by the promoters.
SCOPE: Scope of my project is limited to Indian laws though it has taken the help of
decided case laws of common law countries.
LIMITATION: It is upon the discretion of the company to take the responsibility of preincorporation contract. If company choose not to ratify or accept the contract then prompters
will be personally liable to the pre-incorporation contracts.

INTRODUCTION
A promoter has been described judicially, as 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.1 Promoters stand in a fiduciary position toward the company and
as, a result, they owe the company certain fundamental duties. It is a popular belief that the
role of promoters continues until the company has acquired the property, raised initial capital
and board of directors takes over management of affairs of the company. However, an
evaluation of the various provisions contained in the Companies Act, 2013 reveals that the
role of promoters cannot be ignored even after the board of directors takes over management
of affairs of the company. This can be carried on even when the company is carrying out its
activities as a going concern and even at the time of winding up of affairs of the company.
There are various duties which promoters have to perform before the corporation of the
company, for the formation of company they indulge in pre-incorporation contracts and after
the incorporation of the company. Contracts are usually between the two existing person but
at pre-incorporation stage company is not in existence so promoters entered into contract on
behalf of the company. But the most debatable issue here is whether company would be liable
to pre-incorporation contracts or promoters and what are the liabilities of the promoters to the
pre-incorporation contracts after company comes into existence?

PROMOTERS
Before a company is formed and registered, there must be some persons who have an
intention to form a company, and who take the necessary steps to carry that intention into
operation. Such persons are called promoters.2 People obtain the directors, issue a
prospectus, negotiate underwriting contracts or a contract for the purchase of property by the
company or procure capital are promoters.
There was no such statutory definition of word promoters till it was added in Companies Act
2013.
Section 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; This category has a wide purport. It includes any category of
stakeholders who are having control over the company. Thus, any shareholder or director or
1 Twycross v Grant (1877) 2 C.P.D, 469, CA, at 541
2 Charlesworth and Morse, Company Law ( 14th edition), 1991) 98

employee or any other person fulfilling the criteria of control is entitled to be termed as a
promoter. or (c) in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act. This category includes those persons who
may not be in a position to appoint majority of directors, however, they are in a position to
issue directions or instructions or advice to the board of directors and such board acts in
consonance with the advice rendered. The Proviso clarified that the persons who are working
in professional capacity and the board of directors acts on the basis of their advice rendered
by such persons they are specifically excluded from the purview of promoters, e.g., Chartered
Accountants, Company Secretaries, etc. This definition also only deals with the situations after
incorporation but not pre-incorporation.

A person may also become a promoter after the company is incorporated e.g. by issuing a
prospectus or preparing listing particulars, or by procuring capital to enable the company to
carry out a preliminary agreement. However, anyone who acts merely as the employee or
agent of a promoter is not himself a promoter. 3
Pre-incorporation contracts: Pre- incorporation contracts are contracts made between
promoters and any third party for the incorporation of the company. These contracts are
formed before incorporation, so company is not party to these contracts. The promoter is
obligated to bring the company in the legal existence and to ensure its successful running,;
and in order to accomplish his obligation he may enter into some contract on behalf of
prospective company. These types of contract are called Pre-incorporation Contract.

DUTIES OF PROMOTERS
Promoters have duties before the incorporation of the company and these duties are to
incorporate a successful entity. As it was understood earlier that their contribution toward the
company comes to end with the corporation of entity but now it has become clear that their
duties continue even after company comes into existence.
Duties before incorporation
1. Section 7: This section deals with incorporation of a company in which promoters
play a direct role. They have to prepare the memorandum, articles and other

3 Re Great Wheal Polgooth Ltd

prescribed documents which are to be filed up with the registrar of companies and a
certificate of incorporation is issued.
2. Fiduciary Duties: in particular, the two fiduciary duties imposed on promoters are:
Not to make any secret profit out of the promotion of the company;
To disclose to the company any interest which he has in a transaction entered into by
it.
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.4 Another settled law with regard to position of
promoters is that they occupy a fiduciary relationship with the company. This fiduciary
relationship is carried on during the lifetime of a company and even at the time of its winding
up. In the case of Weavers Mills v. Balkis Ammal5, it was held that even without express
conveyance of property by the promoter to the unincorporated company, since the promoter
stands in fiduciary duty to the company, all the benefits of the pre-incorporation contract
would pass on to the company.
The first and foremost duty of a promoter is that if he starts a company for the purpose of
buying his property and wants to draw his payment from the money obtained from
shareholders, he must faithfully disclose all facts relating to the property. He is guilty of
breach of trust if he sells property to the company without informing the company that the
property belongs to him or he may commit a breach of trust by accepting a bonus or
commission from a person who sells property to the company.
A promoter stands in a fiduciary position toward the company and therefore he must not
make any secret profits out of the promotion e.g. a profit on a sale of property to the
company.
The main difficulty with the promoters fiduciary duties has been deciding how to affect
proper disclosure to, and obtain approval from the company- the company being an artificial
entity. The first leading case on the subject, Erlanger v New Sombrero Phosphate Co6,
suggested that it was the promoters duty to ensure that the company had an independent
board of directors and to make full disclosure to it. In the formation of private company, the
promoter usually sells his business to a company, of which he is MD, and in which he is
4 Kelner v Baxter, (1867) LR-2 CP 174
5 AIR 1969 Mad 462.
6 (1878) 3 App. Cas. 1218, HL

largest shareholder, but, nevertheless, the transaction cannot be impeached on the ground that
there is no independent BOD.7 In such a case the promoter should disclose his interest and
profit to the shareholder of the company. But it will not be enough to disclose the truth to the
first few shareholders. The disclosure should be made to the whole body of persons who are
invited to become shareholders.
The position therefore seems to be that disclosure must be made to the company either by
making it to an entirely independent board or to the existing and potential member as a
whole. A partial or incomplete disclosure will not do; the disclosure must be explicit.8 This
duty as fiduciary position of promoters is given in Section 102, CA 2013.
3. Duty to arrange at least 7 directors for the incorporation of public company and at
least 2 in case of private company9 to subscribe to memorandum of association.
4. Promoters have to decide the kind of company which is to be formed. Whether to
form a sole proprietorship or partnership or limited liability partnership or a company
will be also decided by the promoter. It is also the discretion of the promoters to
decide the capital of the company required for the business.
5. Promoters have to find out the applicable name for the registration of the company.
Section 20 states that a company cant be registered by a name, which in the view of
the central government is undesirable. It is therefore argued that it would be advisable
that promoter found the availability of the name proposed from the registrar of
companies.
6. Preparation of MOA & AOA: MOA is one the important document as it contains the
objective for the incorporation of the company. Likewise, another important document
namely the articles of association which contains rules and regulations related to
internal management of the company. Promoters have duties to prepare these
documents and to get them stamped or signed and to get them registered.
7. Promoters have to make advertisement of prospectus.

Duties after incorporation

7 Salomon v Salomon Co Ltd, (1897) AC 22 (HL)

8 Gluckstein v Barnes, 1900 AC 240
9 Section 12 of CA, 2013

These duties of promoters show that the role of promoters does not end with the handing over
of the assets of company to the body of directors. In fact, they are duty bound to perform
certain activities even during the running of the company and even at the time of its winding
up.
1. Section 102, CA, 2013: promoters have to make full disclosure of the profits.
2. Section 167: This section imposes a duty upon the promoters to search and appoint
new directors in case all the directors vacate their offices.
3. Section 284: This section deals with the duty of promoters to cooperate with the
company's liquidators. This is a new section which provides for cooperation by the
promoters, directors, officers and employees, past and present, of the company to the
company's liquidators in discharge of his functions and duties. Thus, this duty of
promoters arises at the time of winding up of the company.
4. Sections 13 and 27: These two sections deal with the practice of a company to change
its objects after its incorporation. It is pertinent to mention that the company can
change its objects after following the prescribed procedure under the Act. However,
the sections 13 and 27 bind the promoters to provide an opportunity to the dissenting
shareholders who vote against the resolution for amending objects clause of the
company.

Liability of the promoters

1. Section 7 : Section 7(6) prescribes that if any promoter gets incorporation on basis of false
or incorrect information in the documents then he shall be liable under section 447.
2. Sections 34, 35 and 36: The sections 34 and 35 deal with criminal and civil liability for
misstatement in prospectus respectively. Section 36 deals with liability for fraudulently
inducing persons to invest in a company.
Section 34 makes promoters criminally liable under section 447 if there is any misstatement
in prospectus. An exception is carved out in favour of a promoter if he proves that the
statement or omission was immaterial or that he had reasonable grounds to believe that the
statement was true or inclusion or omission was necessary.
Section 35 makes promoters liable to pay compensation if a person sustains loss or damage
due to any misstatement in prospectus made by the promoters. Section 35(2) carves out an
exception in favour of a promoter who is able to prove that the prospectus was issued without
his consent and becoming aware of the issue, he forthwith gave a public notice that it was
issued without his knowledge or consent.

3. Section 284: Section 284 prescribes criminal prosecution with punishment upto six months
or fine up to fifty thousand rupees or with both in case promoter(s) do not extend cooperation
to the liquidator of a company. Thus, a promoter is liable for failure to perform his duty even
at the time of its winding up.
4. Section 266: Promoters are liable to face certain disqualifications if an interim
administrator at the time of restructuring of sick companies submits a report against the
promoters under section 266.

LIABILITY OF PROMOTERS

AFTER

INCORPORATION

OF THE

COMPANY
Now the most controversial question is who will be liable for these pre- incorporation
contracts? How to protect right of third party and against whom because he entered with the
non-existing company?
POSITION IN COMMON LAW: In common laws pre-corporation contract are complete
nullity as there is no principle and contract without principle is null. Promoters cannot work
as agent for the non-existing principle. These contracts cannot even be ratified by subsequent
ratification. Only way to make pre-incorporation contracts binding is novation by changing
parties and by changing terms. It is presumed that promoters or persons entering on behalf of
company before incorporation would be liable. If the contract is entered into in the name of
the company, the contract is void because the company does not exist.10
POSITION IN INDIAN LAW: In India liability of promoters can also be deduced from
contract act, 1872 as promoters acts as agent on behalf of the company i.e. principal. Section
196 of the contract act, 1882 says that Where acts are done by one person on behalf of
another, but without his knowledge or authority, he may elect to ratify or to disown such acts
if he ratifies them, the same effects will follow as if they had been performed by authority.
So there is no such problem in case of ratification of pre-incorporation contracts as it is in
common law countries. If company choose to ratify the pre-incorporation contract then
company would be liable otherwise personal liability of promoter exist.
It has been noted that Indian Law gives companies the power to ratify pre-incorporation
contracts entered on its behalf. Prior to the specific relief act Indian position was similar to
10 New Borne v. Sensolid,( 1953) 1 All ER 708

common law. Under Indian Law, the same power can be located under Section 15(h) and
Section 19(e) of Specific Relief Act. SRA points out that for a pre-incorporation contract to
gain validity in the eyes of the law, it must have been entered into for the purposes of the
future company and must have been warranted by the terms of the incorporation. The term
"warranted by the terms of incorporation" means within the scope of the company's object as
stated in the memorandum. The Apex court in India has held that the term warranted by the
terms of incorporation must be construed to mean that it must not be ultra vires of the object
of the company and it not to be articulated in the articles for the acceptance of a preincorporation contract.
Further provides that the acceptance of the contract must be communicated to the third party.
If a company has accepted benefits of a pre-incorporation contract, the contract wont be a
complete nullity and claims can be adjudicated based on such a contract. This makes the line
very blurred and obfuscated and renders the interpretation highly subjective. Hence, it is
submitted that the position formulated by the Supreme Court should be upheld, which states
that as long as it is not ultra vires the objects clause of the company, it must be left to the
company to ratify it. It should be clearly understood that the question whether a particular
contract is or not warranted by the terms of incorporation of a company can be answered only
by the facts and circumstances of each case.11 Hence, while interpreting the given term, care
must be taken to evaluate that the contract should not only be ultra vires the objects but also
must in some way contribute beneficially to the principal business for which the company is
purported to be formed.12
Section 230 of the Indian Contracts Act, 187113 also creates problem. It reads:

11 P.M. Bakshi, S. C. Bannerjee 's Law of Specific Relief The Law Book Company, Allahabad, Edn.9, 229
(1992).

12 KM Ghosh and KR Chandratre, Company Law with Secretarial Practice (13th ed., 2007)
13 In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him
on behalf of his principal, nor do they personally bind him.Such a contract shall be presumed to exist in the
following cases: (1) where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad. (2) where the agent does not disclose the name of his principal. (3) where the principal though
disclosed cannot be used.

In the absence of any contract to that effect an agent cannot personally enforce contracts
entered into by him on behalf of his principal, nor do they personally bind him. So according
to this provision, promoters cannot be held personally liable nor he be sued unless there is a
contract that provides that the promoter is the agent of the company and he will be liable for
the contract. Only if there is contract to show relationship then third party will be protected if
company does not ratify the pre-incorporation contracts. It might create difficulty because
company before incorporation cannot enter into the contract because of incompetency.
CONCLUSION
As we have seen that promoters are the person who are responsible for the incorporation of
the company. They have some duties, liabilities in the course of incorporation. For the
incorporation promoters also have to entered in the contracts with third party and these
contracts are knows as pre-incorporation contracts. Now, if there is contract there must also
be liability to enforce the contracts. Specific relief act is helpful in deciding the liability in
case of pre-incorporation contracts. If contract is for the beneficial purpose of the company
and is within the objects of the company then company would be liable for pre-incorporation
contract. Promoter for passing its liability after incorporation to the company must act only
what is warranted by the terms of the incorporation because promoters acting for the
company cannot do what company could itself not do. There is no need for the third party to
acknowledge of its acceptance because question of liability is between the company and
promoters. Third party need not to interfere to make promoter personally liable even if
company has took responsibility. Promoter is acting as agent on behalf of company so it is
company or principal to decide liability of 3rd party not 3rd party itself.
If the promoter purchases property from the third party, he will be acquiring the title though
apparently in his name for the benefit of the company yet to be formed. The property vests in
him for the benefit of the company though his assurance is sufficient to clothe the company
after its birth to claim full title. In Weavers Mills v. Balkis Ammal14 the judge held that the
benefit of the purchase made by the promoter passed to the company, on its incorporation,
without any registered deed.
Because of fiduciary relationship between promoter and company, the company should be
entitled to take the property or benefits from the promoter. However this does not mean that
14 AIR 1969 Mad 462

the promoters' interests should be harmed. The company should be liable to pay the promoter
consideration for taking the trouble of entering into the contract for the company before its
incorporation.
Promoters can be held personally liable only in such cases where they entered into contract
with third party not for the benefit of the company but for their own benefit. It should also not
be left absolutely to the discretion of the company but here must be some requisite conditions
to make company liable as these promoters are working for the company only and even if
they did something which is ultra vires to the company but in good faith then it should be the
company to take the liability and not the promoters. Company might not intentionally do
away with the liabilities which promoters create by contracting with third parties for its own
benefit.

BIBLIOGRAPHY
Primary sources
1. Cases
2. Companies act, 2013
3. Specific relief act, 1963
Secondary sources
Books
1. Avtar Singh; Company Law, 16th edition, EBC.
2. Charlesworths company law, 18th edition, Sweet & Maxwell, South Asian Edition
3. Dr. G.K.Kapoor, Company Law & Practice, Taxmanns, 21st edition.
Articles
4. Vipin kumar, Role and position of promoters after incorporation of the company, [2016]
68 taxmann.com 121 (Article)/[2015] 34 CPT 229 (Article)
5. Pre-incorporation Contracts: A Legal Puzzle in India, Lakshmi Dwivedi & Varun Byreddy
6. H.R. Saviprasad, Pre-incorporation contracts: A Comparative Analysis of Indian and
English laws