DEFINITION OF PROMOTER

Definition of Promoter

The term promoter is a term not of law but 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. According to Justice C. Cockburn:
Promoter is one who undertakes to form a company with reference to a given object
and to set it going and who takes the necessary steps to accomplish that purpose.

According to Palmer: Company promoter is a person who originates a scheme for the
formation of the company, has the memorandum and the articles prepared, executed
and registered, and the first directors, settles the terms of preliminary contracts and
prospectus (if any) and makes arrangement for advertising and circulating the
prospectus and placing the capital.

According J. Lindley: The word promoter has no definite meaning as used in

connection with companies, the promoter involves the idea of exertion for the
purpose of getting up and starting a company, or what is called floating it and also the
idea of some duty towards the company imposed by, or arising from the position
which the so called promoter assumes towards it. Thus, the promoter is usually an
industrial expert who performs all the preliminary actions necessary to bring a
company into existence. He does everything required to convert the idea into business
concern. He may be an individual, a firm, and an association of persons or even a
company, depending upon the circumstances of the case.

II: Types of Promoters

(1) Accidental Promoters: Sometimes some idea strikes to the mind of some persons
accidentally and they try to convert it into reality. These are known as accidental
promoters. Such promoters do not take the promotion as their profession, they try to
bring a business concern into existence for their own settlement or for their family.

(2) Professional Promoters: These promoters take the promotion as their profession
and a means of their livelihood. They perform the work of promotion for various

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business undertakings. They may be an individual, a partnership from, an association

of persons, and even a company.

(3) Financial Promoters: Some promoters who undertake the promotion of a

company, complete the promotional activates and then purchase the entire share
capital of the company promoted. Thus, they provide financial certainty and
assurance to the company. Later on, they sell shares at some profit. As they provide
and offer the financial services, they are known as financial promoters.

III: Function and Role of Company Promoters

1. To get the idea of the formation of the company

2. To analyses the idea

3. To consult experts of the field regarding the feasibility of the idea.

4. To search out the persons who may agree to be the first directors of the company
and to sign the memorandum of Association.

5. To decide the name, place of registered office, the place of office, the objects of the
company, the amount of capital and its composition.

6. To prepare and enter into contracts with underwriters.

7. To select and decide the bankers, auditors, brokers and legal experts.

8. To prepare the memorandum of associations and articles of associations and

prospectus.

9. To file the necessary documents with the Registrar of companies.

10. To get the certificate of incorporation.

11. To get the permission and to arrange for the issue of capital.

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12. If the company has to purchase a going concern business, to finalize the purchase
of such business.

13. To enter into contracts with the vendors, underwriters, brokers and managing
agents.

14. To collect the amount on the issue of share capital.

15. To pay the preliminary expenses.

To sum up, a promoter performs all activities right from the idea in his mind to the
commencement of business by the company.

He gets the company established and after the establishment of company, he comes
out of the picture and lets the company go on with its business.

IV: Remuneration of Promoters

1. Cash Payment: To pay in cash is the very first and the traditional method of
making the payment for the services of promoters.

2. Shares and Debentures: Another method for making the payment to promoters is
to allot them the shares and debentures of the company, promoted by them.

3. Commission: Promoters may be paid for their services by way of commission in

the net profits of the company for a certain period.

4. Appointment at Suitable Post: A very common method for payment for the
services of promoters is to their qualifications and experience.

This can be possible only in private companies and not in public companies

In the absence of an agreement with the company after its incorporation, a promoter
cannot file a suit in any court of law for the recovery of his remuneration because he
has acted for a person who has not taken the birth so far, and no person can enter into
a contract before his birth.

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Thus a promoter can be paid only if he has entered into contract with the company.

A private company, comes into real existence after getting the certificate of
incorporation.

The promoters must have a contract in their pocket after the incorporation of
company. But in case of a public company, the real existence of company is possible
only after the certificate of commencement of business.

V: Relation of Promoters with Company

(1) Fiduciary Relations: A promoter has the fiduciary relations with the company.
He must perform all his duties with utmost good faith. These relations of a promoter
with the company continue till the company comes into existence.

(2) Liable for all the Functions regarding Formation of a Company: As the
promoter is the founder of a company, he is personally liable for all the functions
regarding the formation of company. He enters into the preliminary contracts with
brokers, underwriter’s bankers etc.

(3) No Place in the Company: Promoter performs all the functions of the company.
He brings the company into existence.

But, legally, he has no place in the company because the company is managed by the
broad of directors and is owned by the shareholders. As the promoter is the founder of
a company, he is personally liable for all the functions regarding the formation of
company. He enters into the preliminary contracts with brokers.

Legal Position of Promoter

Lord Lindly has mentioned following five facts regarding the legal position of
promoters:

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(1) Fiduciary Relations: The promoter has fiduciary relations with the company and
with all those persons to whom he inspires to become the shareholders of the
company.

Thus, the promoter should not get any undisclosed profit from the company.

If he gets any such profits, he must refund it to the company.

He cannot and should not sell any of his personal property to the company at a profit.
If does so, he should disclose all the relevant facts to the company

(2) Liable for Contracts: The directors of the company can compel the promoters to
follow up all the contracts entered into by them as promoters. Therefore, a promoter
cannot keep himself away from the contracts he made.

(3) Promoters are not Personally Liable: The promoters cannot be held personally
liable for any loss caused to the company by their acts, provided they have performed
their duties in utmost good faith and with due care and honesty.

(4) To breach the contract entered into on Misrepresentation: If it is proved that

one party of the contract has induced the order party of the contract on the basis of
misrepresentation, the other party may breach such a contract.

(5) No Termination of contracts on the charge of Parties: If the parties of the

contract are changed, the contract cannot be terminated even if it was a voidable
contract.

Because there is no company yet in existence the promoter is neither a trustee nor an
agent of the company. The correct way to describe his legal position is that he stands
in a fiduciary position towards the company about to be formed.