The formation of a company is a lengthy process. It involves several stages. The first stage in the process of formation is the promotion. At this stage the idea of carrying on a business is conceived by a person or by a group of persons called promoters. For incorporating a company various formalities are required to be carried out. The promoters perform these functions and bring the company into existence. 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.
MEANING AND DEFINATION
There is no statutory definition of a promoter, although the term is used expressly in Sections
62, 69, 76, 478 and 519
of the companies Act 1956. In the words of:
“Bowen, L J
. “– 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”.
“Justice C. Cockburn “
— a promoter 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.”
states that “the term promoter is a short and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company”.
The promoter is usually an industrial expert who, with the help of a big team of experts, does the entire preliminary work necessary before a company can be brought into existence. He selects and settles with persons to become signatories to the memorandum and the first directors; instructs and directs the solicitors to prepare the memorandum, the articles and other documents necessary to be filed with the Registrar of Companies; finds funds for the registration expenses and prepares the climate to secure the initial capital for the company. Where to situate the registered office of the company, from where to get necessary plant and equipment etc., are other worries of a promoter.
A promoter may be an individual, a firm, and an association of persons or even a company. Whether a person is or is not a promoter depends upon the facts in each particular case. Only one who has a desire that a company be formed and is prepared to take some steps to implement it is a promoter. Section 62(6) makes it clear that person’s assisting the promoter by acting in a professional capacity e.g., counsels, solicitors, accountants and other experts are not promoters. From the above it should be clear that a promoter is one who performs the preliminary duties necessary to bring a company into existence. Thus, the true tests to
describe a person as a promoter lies in finding out whether he is keen to from a company and take steps to give it a concrete shape.
Functions of promoters
A promoter plays a very important role in the formation of a company. A promoter may be an individual, an association or a company. In their capacity as promoters, they perform the following functions in order to incorporate a company and to set it going. To originate the scheme for formation of the company: Promoters are generally the first persons who conceive the idea of business. They carry out the necessary investigation to find out whether the formation of a company is possible and profitable. Thereafter they organize the resources to convert the idea into a reality by forming a company. In this sense, the promoters are the originators of the plan for the formation of a company. To secure the cooperation of the required number of persons willing to associate themselves with the project: The promoters, in accordance with whether they want to incorporate a private or public company, try to secure the co-operation of persons needed to from the company. Minimum number of members required to from a public company is seven and that for a private company the minimum number is two. Depending upon the form chosen, the promoters may decide upon the number of primary members. To seek and obtain the consent of the persons willing to act as first directors of the company: The company has a system of representative management and is managed by individuals appointed as directors. The first directors of the company are, however, generally appointed by the promoters. The promoters seek the consent of some individual whom they seem appropriate so that they agree to be the first directors of the proposed company. To settle about the name of the company: The promoters have to seek the permission of the Registrar of companies for selecting the name of the company. The promoters usually give three names in order of preference. The promoters should ensure that the name of the company should not be identical with or should not too closely resemble the name of another existing company. To get the documents of the proposed company prepared: Certain documents like the Memorandum of Association and the Article of association are required to be filed with the Registrar of Companies before the company is registered and brought into existence. As the company itself does not exist before incorporation, this work of preparation of these documents has to be undertaken by the promoters. The promoters, on the advice of legal experts get the Memorandum and Articles of Association prepared and arrange for their
printing. In case the proposed company is a public limited company, intending to issue shares on incorporation, the promoters must also arrange to get the prospectus prepared and printed. To appoint bankers, brokers and legal advisers for the company: The incorporation of a company involves a lot of legal formalities. The promoters may need to consult the legal experts on several of these matters. They, therefore, appoint solicitors to assist them in the process of formation of the company. The company is formed for the purpose of carrying on business and as such deals with funds and their management. The promoters must, therefore, also appoint bankers for the company who will receive share application moneys. If the proposed company is a public limited company, the promoters must also ensure the success of the first capital issue made by the company by appointing underwriters and brokers. To settle preliminary agreements for acquisition of assets: The promoters may be required to acquire a suitable site for the factory, make arrangements for plant and machinery and may even make tentative arrangements for key personnel. Sometimes in order to run the business the company may be required to take over property of a running business. Promoters fulfil the function of seeing that such property and business is acquired by the proposed company on justifiable terms. To enter into preliminary contracts with the vendors: In respect of the properties and assets mentioned above, the promoters would need to settle the terms of contracts with the third parties from whom these properties are to be bought. These contracts are called preliminary contracts. To arrange for filing of the necessary documents with the Registrar: The promoters are required to pay the stamp duty, filing fee and other charges for registration of the company. The promoters are to see that the various legal formalities for incorporating the company are complied.
Legal Position of Promoters:
A promoter is neither a trustee nor an agent of the company which he promotes because there is no trust or principal in existence at the time of his efforts. But certain fiduciary duties, like an agent, have been imposed on him under the Companies Act. As such he is said to be in & fiduciary position (a position full of trust and confidence) towards the company and the original allottee of shares. Consequently, a promoter must make full disclosure of the relevant facts, including any profit made.
He must not make any secret profits out of the transactions he makes on behalf of the company. It is to be observed that it is not the profit made by the promoter which the law forbids, but the non-disclosure of it. If full disclosure is made to an independent Board of
Directors or to the shareholders as a body (and not to a selected few), the profit is permissible. A promoter vendor cannot evade his liability of disclosure of profits by disclosing to a Board of Directors who is mere nominees of his own, or in his pay. A good illustration on the point is to be found in
Gluckstein vs. Barnes.
In this case, a syndicate of persons was formed to purchase the Olympia Company and to promote and register a company to which the Olympia property was to be resold. At that time the Olympia Company was in a bad shape. The syndicate first bought the debentures of the Olympia Company at a discount. Then they brought the Company for £ 1,40,000. Out of this money, provided by them, the debentures were repaid in full and a profit of £ 20,000 was made thereon. They promoted a new company and sold Olympia to it for £ 1,80,000.
The profit of 40,000 was revealed in the, prospectus, but not the profit of £ 20,000. It was held that the profit of £ 20,000 was a secret profit made by the syndicate as promoters of the company, and they were bound to pay it to the company which was at that time in liquidation. On behalf of the syndicate it was argued that they had in fact made a proper disclosure, but it was turned down on the plea that disclosure made by them in the capacity of vendors to themselves in the capacity of directors of the purchasing company was not sufficient. The disclosure ought to be to an independent Board or to all shareholders by means of a prospectus.
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
A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are:-
1. The company may to pay some remuneration for the services rendered.
2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.
3. The promoter may sell his property for fully paid shares in the company after making full disclosures.
4. The promoter may be given an option to buy further shares in the company.
5. The promoter may be given commission on shares sold.
6. 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.
BY: Rahul Pandey
New law college,BVP