Promoters in Indian Companies Act, 2013 with Case Analysis

Promoters defined in Section 2 (69) of ‘The Companies Act’. Promoters is the person –
a.) Who has been named as such in a prospectus or is identified by the company in the annual return 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; or
For example – If ram give a loan to the company and take a power of appointment of board of directors. If the company have 12 board of directors and ram have power to appoint 7 directors among 12 so he is a promoter of the company.
c.) In accordance with whose advice, directions or instructions shall followed by the board of directors of the company accustomed to act ;
Exception – if any chartered accountant, legal advisor give advice to the company or give instructions or directions to the company and company followed it so he can’t say that he is a promoter of that company. (Provided that nothing in sub clause (c) shall apply to a person who is acting merely in professional capacity.)
For example – on the advice of Rattan Tata, Tata Sons ltd. removed CYRUS MISTRY from the director position. So Rattan Tata is a promoter of that company.

Promoter is neither an agent nor a trustee of the company. The promoter conceive the idea till the company registered that time or stage is called, pre incorporation stage. The legal position is concerned, he is neither an agent nor a trustee of a proposed company. He is not an agent or trustee because the company is not in existence. It doesn’t mean that promoter don’t have any legal relationship with the proposed company. There is a fiduciary relationship (based on trust and confidence) between the company and the promoters.

The promoters occupy an important position and have wide powers relating to the formation of a company. In the companies act, 2013 contain no provision regarding the duties of promoter for untrue statement in prospectus. However, promoter stand in a fiduciary relation or a position towards company so there are fiduciary duties imposed upon the promoter.

1.} Duty to not to make any secret profit or disclose secret profit – A promoter is not forbidden to make profit but to make secret profits. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principle’s consent.

2.] Duty of disclosure of interest – in addition to his duty for declaration of secret profits, a promoter must disclose to the company any interest he has in a transaction entered into by it. This is so even where a promoter sells property of his own to the company, but does not have to account for the profit he makes from the sale because he bought the property before the promotion begin. Disclosure must be made in the same way as though the promoter was seeking the company’s consent to his retaining a profit for which he is accountable.

3.} Promoter’s duties under the Indian Contract Act, 1872 – Promoter’s duties to the company under the Indian Contract Act have not been dealt with by the courts in any detail. They can’t depend on contract, because at the time the promotion begins, the company is not incorporated, and so can’t contract with its promoters. It seems, therefore that the promoters duties must be the same as those or a person, who acts on behalf of another without a contract of employment, namely, to shun from deception and to exercise reasonable skill and care, thus, where a promoter negligently allows the company to purchase property, including his own, for more than its worth, he is liable to the company for the loss it suffers. Similarly, a promoter who is responsible for making misrepresentations in a prospectus may be held guilty of fraud under section 17, of the Indian Contract Act and consequently liable for the under section 19 of the Act.

Case – Harry W. Dickerman, Trustee, et al. v. Northern Trust Co. et al., (1900)
The plaintiff, who was a bondholder, brought suit against the company, upon six coupons which were due and unpaid by the defendant company.
The principle and the interest of the mortgage due and unpaid gave the authority to the plaintiff for a foreclosure. However, the defendant argued that it did not constitute collusion in the sense of the law.

Whether a minority of the stockholders of a corporation have a right to intervene in the foreclosure of a mortgage upon the corporate property?

In this case, the court passed a decree for foreclosure and sale appealed affirmed. It was evident by the court that the bonds were duly issued, negotiated and sold as per the company norms. It was also held that “promoter is one who brings together the persons interested in the enterprise”. It acts in the best interest of the shareholders and sets in motions for the formation of the corporation.

Relevancy of the case:
This case is important for the understanding of corporate liability and its consequences if the promoters are found to be guilty of any misrepresentation of relevant facts, fraud or in their interest for the sale of the property, and will be liable for the compensation or loss suffered. A promoter is expected to work in the good faith of the company and its shareholders.

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  1. The content is really Amazing. It really helped me to understand the concept of PROMOTER. I wish MR. YATIN will post more contents like this in future to clear some more concept of companies act.

    Liked by 1 person

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