Before a company can be formed, 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’. The word ‘promoter’ has not been defined anywhere in the companies act. Section 62 of the companies act only refers to the liabilities of a promoter.”The term promoter is a term not of law but of business, usefully 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.”
The promoter is a person who brings a company into existence. A promoter is a convenient way of designating those who set in motion the machinery by which the act enable them to create an incorporated company. A promoter is one “who undertakes to form a company. A 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.” The promoters of a company decide the scope of its business activities. They negotiate, if necessary, for the purchase of an existing business. They instruct the solicitors to prepare the necessary documents and secure the services of directors. They provide the registration fees and carry out other duties involved in the formation of a company. They also make arrangements for advertising and circulating the prospectus, and placing the capital.
A company may have several promoters. A person may be a promoter though he has taken a comparatively minor part in the promotion proceedings. But everyone who is connected with the formation of a company may not be a promoter. A person who merely acts in a professional capacity of behalf of a promoter such as a solicitor, engineer, accountant or a valuer is not a promoter in the eye of law. Whether a person is a promoter or not is a question of fact in each case. Much depends upon the role played by him in the promotion business.
Position of Promoters :
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 has correctly stated the position of a promoter in Erlanger v. new sombrero phosphate co. “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.”
The importance of the rule which creates a fiduciary relationship between the promoter and the company he brings into existence, can be seen when we consider its consequences which are namely-
1. A promoter cannot make either directly or indirectly any profit at the expense of the company he promotes, without the knowledge and consent of the company and that if he does so, in disregard of this rule, the company can compel him to account for it.
2. A promoter is not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed. If a promoter contracts to sell his own property to the company without making a full disclosure, the company may either repudiate the sale or affirm the contract and recover the profit made out of it by the promoter. Either way the dishonest promoter is deprived of his advantage. It is important to understand that it is not the profit made by the promoter which the law forbids, but the non-disclosure of it.
Liabilities of promoters :
A promoter can be compelled by the company to hand over any secret profit which he has made without full disclosure to the company. The company can also sue for the rescission of the contract of sale by the promoter where the promoter has not disclosed his interest therein.
A promoter is subject to the following liabilities under the various provisions of the companies act.
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. 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.
Remuneration of promoters :
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.