Role of a Promotor

Introduction

A promoter plays the most important role in the formation and registration of a company under the Companies Act, 2013. The promoter conceives the idea of the formation of the company and takes all preliminary steps to get the company registered. The emphasis of all the definitions of a promoter is on the kind of work that a promoter does. The court defined a promoter in Twycross v. Grant as “one who undertakes to form a company with reference to a given project and to set it up, and who takes the necessary steps to accomplish the purpose.” The court defined “promoter” in Phosphate Sewage Company v. Hartmount as a person who, as a principal, procures or assists in procuring the incorporation of the company. This blog will explain the roles and duties of a promoter as per the Companies Act, 2013.

Who is a Promoter

According to Section 2(69), “promoter means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) who has control over the affairs of the company, directly or in directly whether as a share holder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity”

Whether a person is a promoter or not is a question of fact in each case. Much depends upon the nature of the role played by him in the promotion of business. In the case of Twycross v. Grant, the court said ‘‘that the defendants were the promoters of the company from the very beginning can admit of no doubt. They framed the scheme, they not only provisionally formed the company, but were, in fact, to the end its creators, they found the directors, and qualified them, they prepared the prospectus, they paid for printing and advertising, and the expenses incidental to bringing the undertaking before the world.” The court further stated that once promoters turn over control of the company to a governing body, such as a Board of directors, their duties end.

Persons acting in a professional capacity- A promoter is not someone who works in a professional capacity. Therefore, it was held in the case, Great Wheal Polgooth Co Ltd, re, that a lawyer, who prepares the important paperwork of the proposed company on behalf of the promoters, is not a promoter.  Similarly, a valuer or accountant who aids in the promotion while acting in their official capacities is not a promoter. However, if someone contributes to the company’s development by doing an action that is not within the purview of his professional obligations, that individual may become a promoter. As was held in Tracy v. Mandalay Pty Ltd., getting a buyer for the company’s patent or shares or hiring employees are just a few examples of how someone may assist and become a promoter.

The definition of “promoter” in Section 2(69) of the 2013 Act includes in its category (c) a person in accordance with whose advice, directions or instructions the Board of directors of the company is accustomed to Act. This category is included in point (vii) of the definition of related party in Section 2(76), and, therefore, all the restrictions stated in Section 188 applicable to “Related Party Transactions” become applicable to promoters.

Roles and Responsibilities

A promoter completes all the steps required for the formation of a company. Some examples include:

1. Inventing the scheme for the company’s formation.

2. Choosing a name and submitting it to the Registrar for approval.

3. Finalising the details of the memorandum and articles of association.

4. Gathering the subscribers to the memorandum and articles of association.

5. Choosing a registered office.

6. Appointing directors, bankers, brokers, and solicitors.

7. Arranging for the prospectus’s drafting and publication.

8. Arranging for the capital’s placement.

These duties have to be done by the promoter in accordance with some of the important qualities, which are as follows:

1. Not to make any secret profit out of promotion: A promoter may benefit financially from the establishment of the company since he has extensive authority and substantial resources. But he should not generate secret gains. A promoter must inform the competent and independent Board of Directors of any potential profit. However, especially for private companies, the promoters typically take on the role of company directors following incorporation. If that happens, there will not be an independent Board of Directors, and thus, their consent is pointless. In that case, permission must be gained from everyone who initially provided interest to the company. Shareholders may assent on an individual basis or through a regular or special resolution. 

2. Duty not to make secret profits at the expense of the company: The promoters should not get any unreported benefits, either directly or indirectly, from the company they are promoting. The promoter has broken a common law duty of fairness if he sells the property he gained through a promotion at a higher price. However, he does not violate fiduciary obligations if he purchased property before the promoter’s fiduciary duty began and afterwards sold it to the company for a fair price.  

3. To give the benefit of negotiations to the proposed company: The promoter has a responsibility to operate with the same level of caution he would have used in his own case when entering into any contracts or talks on behalf of the proposed company.

4. Duty to make full disclosures of his interest: The independent Board of Directors or any individual who provided capital to the company must be informed of any personal interests that a promoter has in transactions that he participates into on the company’s behalf; otherwise, the promoter risks legal liability for breaching his statutory obligations. In the case of Gluckstein v. Barnes, a syndicate acquired specific property levies at a reduced price. Later, it paid 1,40,000 pounds for the property, on which it held charges, intending to form a business and sell the property later for 1,80,000 pounds. The syndicate made a profit of 20,000 pounds on the charge, which was fully paid and 40,000 pounds on the property. A prospectus was published that revealed a profit of 40,000 pounds, but the 20,000 pounds profit was not included. The court determined that the 20,000 pounds represented the hidden profit that the syndicate, as the company’s promoters, were required to provide to the company. 

5. Not to make unfair use of positions: The promoters must take care to avoid any behaviour that seems to be fraud or undue influence and refrain from using his position in an unfair or unjustified manner. Even if the liability is expressly absolved in the articles of association, the liability cannot be discharged. 

6. Promoter’s duty under the Indian Contract Act, 1872: The promoter has no agreement with the company that will be incorporated. As a result, such circumstances are not recognised by the Indian Contract Act of 1872. The promoters, however, are subject to the principle of a quasi-contractual relationship. They are likewise also subject to the tort law’s established standard of reasonable care and skill.

7. Duty as a Fiduciary Agent: The promoter’s main responsibility as a fiduciary agent is to reveal to the company his position, his profit, and his interest in the property that the company is considering buying or selling. The only challenging issue is who should receive the disclosure. It was recommended that it be made to an independent and competent Board of directors by the House of Lords in Erlanger v. New Sombrero Phosphate.

However, subsequent experience has shown that the promoters may not always be able to provide the company with an independent Board of directors. It is simply impossible to appoint a board of directors that is independent in the event of a private firm or a public company that is solely comprised of family members. In this situation, the promoter must inform the company’s shareholders of his financial interests. However, informing the first few shareholders of the truth will not be sufficient. The entire group of people who are invited to become shareholders should get the disclosure. The House of Lords emphasised this in its well-known ruling in the Gluckstein case referred to above.

Conclusion

As seen throughout this article, the role of a promoter as a fiduciary agent is very important for any company. It would be in the company’s best interests for the promoter to disclose his interests and profits to the independent Board of directors. A promoter needs to be truthful and work for the best interests of the company for a faster and healthier growth and development of the business.

References

  • Companies Act, 2013.
  • Avtar Singh, Compnay Law.
  • Rinita Das, Company Law.
  • Phosphate Sewage Company v. Hartmount, [1876] 5 Ch D 394.
  • Twycross v. Grant, (1877) 2 C.P.D. 469.
  • Great Wheal Polgooth Co Ltd, re, (1883) 53 LJ Ch 42: 49 LT 20.
  • Tracy v. Mandalay Pty Ltd, (1952-53) 88 CLR 215.
  • Gluckstein v. Barnes, [1900] AC 240.
  • Erlanger v. New Sombrero Phosphate Co, (1878) 3 App Cas 1218.

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