Promoters in a Company 2


A promoter has the foremost major role within the incorporation of a corporation from a mere business idea. They perform the subsequent functions to line it on a course of development. Promoters are generally the primary persons who conceive the thought of business. They perform the required investigation to seek out out whether the formation of a corporation is feasible and profitable. Thereafter, they organise 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 corporation .

The promoters, in accordance with whether they want to incorporate a private pr a public company, try to secure the co-operation af persons needed to form the company. You learnt that the minimum number of members requited to form a public company is seven and that for a private company the minimum number is two. Depending upon the farm chosen, the promoters may decide upon the amount of primary members. The first directors of the corporate are, however generally appointed by the promoters.

The promoters they deem appropriate so that they agree to be the first directors of the proposed company. The promoters have to seek the ‘ of the Registrar of companies for selecting the name of the company. The promoters usually give three names so as of preference. The promoters should make sure that the name of the corporate shouldn’t be identical with or shouldn’t too closely resemble the name of another existing company. The promoters, on the recommendation of legal experts get the Memorandum and Articles of Association prepared and arrange for his or her 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. The incorporation of a company involves a lot of legal formalities.

The promoters may have to consult the legal experts on several of those matters. They therefore, appoint solicitors to assist them in the process of formation of the company. The company is made for the needs of carrying on business and intrinsically deals with funds and their management. The promoters must, therefore, also appoint bankers for the corporate who will receive share application moneys. The promoters could also be required to accumulate an appropriate site for the factory, make arrangements for plant and machinery, and should 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 fulfill the function of seeing that such property and business is acquired by the proposed company on justifiable terms. In respect of all 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. The promoters are required to pay the stamp tax , filing fee and other charges for, registration of the corporate . The promoters are to ascertain that the varied legal formalities for incorporating the corporate are complied with.

Promoters have some duties, the violation of which makes them responsible for punishment. The promoter has a relationship of confidence and trust with the company i.e. Fiduciary relationship. A promoter isn’t forbidden to form profit but to form secret profits. He may make a profit out of promotion with the consent of the corporate , within the same way as an agent may retain a profit obtained through his agency with his principle’s consent. As said by the courts in due course of your time , there’s a account between a corporation and a promoter.

His liabilities come within the purview of the ICA, 1872. Where a promoter negligently allows the corporate to get property, including his own, for quite its worth, he’s susceptible to the corporate for the loss it suffers. Similarly, a promoter who is liable for making misrepresentations during a prospectus could also be held guilty of fraud under section 17, of the Indian Contract Act and consequently liable for damages under section 19 of that Act. He must also declare his interest in every transaction that the corporate and he himself enters into.

He must also request the company’s consent when he shows his interest. Disclosure must be made within the same way as if the promoter was seeking the company‘s consent to his retaining a profit that he’s accountable


A promoter is subjected to liabilities under the varied provisions of the businesses Act. Section 26 and ICDR Regulations 2009 lay down matters to be stated and reports to be set out in a prospectus. A promoter may be held liable for non-compliance of the provisions of the section and the Regulations.Liability to account in profit: The promoter is liable to account to the company for all secret profits made by him without full disclosure to the corporate . The company may adopt anybody of the subsequent two courses if the promoter fails to disclose the profit.

The company can sue the promoter for an amount of profit and recover an equivalent with interest. The company can rescind the contract and can recover the money paid. Section 32 & 35: A Promoter can also be found guilty of false statements in the prospectus for somebody who has bought shares or debentures. Such people can sue the promoter. Under Section 62 and 63, a promoter could also be held responsible for any untrue statement within the prospectus to an individual who subscribes for shares or debentures on the faith of such prospectus.

The rescission of the contract to purchase shares; Suit for damages; Prosecution that may lead to imprisonment for a term upto two years or punishment with fine upto Rs. 50,000 or both. The promoter is personally responsible for all contracts made by him on behalf of the corporate until the contracts are discharged or the corporate takes over the liability of the promoter.

Furthermore, The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy4, has held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles of Association or a shareholder or a director of the company. His guilt and liability also depend upon his conduct and therefore the contracts that he has entered into during the pre-incorporation stage as an agent or a trustee.


In case of Re English & Colonial Produce Company it was held that a promoter is not entitled to recover any remuneration for his services from the company unless there is a valid contract, enabling him to try to to so, between him and therefore the company.

Articles may provide a fixed sum to be paid to promoter in form of his remuneration. But the promoters cannot enforce such clauses in Articles in their favour. The best provision which promoters may have is to include a power in the Articles for the directors to pay them the value of their promotional services. The company after incorporation may by a contract written, signed and sealed with promoters for payment for their promotional services, pay to the promoters.

In Touche v Metropolitan Rly Warehousing Co. Lord Hatherly highlighted the importance of remuneration saying that the assistance of the promoter is exclusive which needs great efficiency, power and which is used in developing a business plan and making it so to the simplest benefit and thus should tend his fees. However such remuneration must be disclosed in prospectus and accounted in the first Annual General Meeting of the Company.


Therefore it can be said that, a promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons curious about the enterprise, aids in procuring subscriptions and sets in motion the machinery which results in the formation itself .In India, promoters are

usually persons who, in forming the corporate , secure for themselves the management of the corporate being formed or are persons who convert their own private business into a Ltd. and secure for themselves more or less a interest into the company’s management.

Aishwarya Says:

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