PROJECT SUBMISSION

Company Law I

WHO CONSTITUTES PROMOTER OF A COMPANY

IS A QUESTION OF FACT

Submitted by:
Nikhil Goyal
Class: BBA LLB Division: A
PRN: 17010224047

of Symbiosis Law School, NOIDA

Symbiosis International (Deemed University),

On
7th August, 2019
Under the Guidance of
Prof. Rajnish Jindal

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 CERTIFICATE

The project entitled “WHO CONSTITUTES PROMOTER OF A COMPANY IS A QUESTION

OF FACT” submitted to the Symbiosis Law School, Noida for Company Law I as part of
Internal assessment is based on my original work carried out under the guidance of Prof.
Rajnish Jindal from 3rd July, 2019 to 7th August, 2019. The research work has not been
submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in the thesis has been duly
acknowledged.

I understand that I myself could be held responsible and accountable for plagiarism, if any,
detected later on.

Nikhil Goyal

7th August, 2019

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 ACKNOWLEDGEMENT

With my deepest appreciation, I would like to thank Professor C. J. Rawandale and Assistant
Professor Rajnish Jindal for providing me with the opportunity to do this research project on
WHO CONSTITUTES PROMOTER OF A COMPANY IS QUESTION OF FACT and for their
consistent guidance and support.
Without their consistent motivation and assistance, it would not have been possible to make
this project.
Moreover, I would also like to express my sincere gratitude towards Symbiosis Law School,
Noida for providing me a congenial learning environment to do my project.
Furthermore, I would like to thank the library staff for helping me in completing this project
successfully by helping me finding the necessary books and resources and finally, I would
like to thank my parents whose constant prayers and guidance has always been the biggest
motivating source in my life.

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 INDEX
Content Page Number
Abstract 5

Introduction 6

Who is Promoter 7

Duties of promoter 8

Liabilities of promoter 9

Conclusion 10

Bibliography 10

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Abstract:
A promoter is a general term associated with the person who initiates a business. In common practice,
this person is known as the founding father of the commercial enterprise. A promoter usually is liable
for generating capital, initial leads and chasing preliminary business opportunities, entering into the
initial contracts for the company and incorporating the company.

The Substantial Acquisition of shares Takeovers (SEBI) regulation states that the promoter is:
1. Any person who is in control of the company.
2. Any person named as promoter in any document of the company or any shareholding sample filed
by the target company with the stock exchanges pursuant to the listing agreement, whichever is later.
As per the previous companies Act, 1956 there was no rigid definition of promoter even though it was
noted in various section, but within the new companies Act, 2013 Section 2(69) explicitly defines
promoter.
The title ‘promoter’ is a term of commercial enterprise and not of law, but some of judicial decisions
have attempted to explain it:
In Twycross v. Grant1 promoter was defined as “person who undertakes to form a company with a
specific objective which the company must fulfil, and to set its working in motion, and who takes the
essential steps to accomplish that motive.”
In USA, the Securities exchange commission Rule 405(a) defines promoter as a person who,
appearing alone or in conjunction with other men and women, directly or indirectly takes the initiative
in founding or organizing the company.
In Lagunas Nitrate Co. v. Lagunas Syndicate 2, it was stated that “one need not necessarily be
associated with the initial formation of the company to be a promoter; person who eventually
facilitates to arrange floating of its capital will equally be considered as a promoter.
According to Justice C. Cockburn3 “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.”
According to Palmer, “Company promoter is a person who originates a scheme for the formation of
the company, has the memorandum and the articles prepared, executed and registered and finds the
first directors, settles the terms of preliminary contracts and prospectus (if any) and makes
arrangement for advertising and circulating the prospectus and placing the capital.”
According to Guthmann and Dougall. “Promoter is the person who assembles the men, the money and
the materials into a going concern.”

1
Joint Stock Company - Fraudulent Prospectus - Concealment of Contracts affecting the Company - Companies Act, 1867 (30 & 31 Vict. c.
131), s. 38
2
[1889] 2 Ch. 392 (p. 428, C.A.)
3
Kelner v. Baxter [1866] 15 LT 213.

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Introduction:
When a person comes up with a new business venture idea, she or he may set about interesting others
with the same objective and convince them to make capital contribution to the business enterprise to
be incorporated for the purpose of implementing business idea. The person will then be defined as
‘promoter’ of the company. A person who acts in a professional capacity isn't always a promoter. For
incorporating an organization several documents are to be prepared and different formalities are to be
complied with, all this work is performed by promoters.
Then the query arises that who really are promoters of a business enterprise, the most essential
function of a promoter is the formation of company. The whole process of the formation of a
organisation may be divided into four stages (i) Promotion, (ii) Registration, (iii) Floatation and (iv)
Commencement of business. Promotion is a term of wide import denoting the preliminary steps taken
for the purpose of registration and floatation of the company. A promoter may be a person, syndicate,
organisation, associate or corporation.

The expression ‘promoter’ has been defined below phase 2(69) in the companies Act, 2013 as:
“promoter” means a person—
a) Who has been named as such in a prospectus or is recognized by the corporation in the annual
return referred to in section 92; or
b) Who administers affairs of the company, directly or indirectly whether as a shareholder, director or
otherwise; or
c) In accordance with whose advice, guidelines or commands 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;
The term is used expressly in sections 35, 39, 300 and 317.

In the case of Bosher v. Richmond Land Co., the term Promoter has been defined as:
“A Promoter is a person who brings about the incorporation and organisation of a company. He brings
together the people who have interest in the objectives of company, aids in acquiring subscription, and
initiates the working which results in the formation itself.”
“A promoter is one that undertakes the responsibility to shape an organisation for a specific objective
and to set it going, and who takes the essential steps to accomplish that objective.”
To be a promoter one want not always be associated with the preliminary formation of the business;
one that finally helps to set up floating of its capital will equally be regarded as a promoter. But, a
person supporting the promoters by acting in a professional capacity do no thereby become promoter
themselves. The relationship between a promoter and the company that he has floated ought to be
fiduciary relationship from the day the job of floating the organisation starts and maintains up to the
time that the directors take under their control what remains to be done in the process of forming the
company.

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The status of the promoter is generally terminated when the Board of directors has been created and
they begin governing the company. Chronologically, the first individuals who control or influence the
company’s affairs are its promoters. It is the promoters who conceive the idea of forming the
company, and take the important steps to incorporate it, to provide it with share and loan capital and
so forth. while these things had been executed, they handover the control of the business enterprise to
its directors, who are often themselves under a different name. on passing over the control of the
company the promoter’s fiduciary and common law obligations cease, and thereafter he is no more
subject to duties in handling the organization more than a third person who is disconnected to it.

Who is a promoter:
A promoter plays a crucial role in formation of a company. He may be a person, an association or a
business enterprise. Promoters in their capacity as promoter perform the subsequent functions in order
to incorporate a company and initiate its workings:
They carry out the necessary research to discover whether or not the formation of a company is
feasible and profitable.

Thereafter they organize the resources to transform the idea into reality by formation of a company; or
we can say that it is the promoter –
1. Who decides name of the organisation thereby confirm the name will be appropriate by the registrar
of the office;
2. Who decides the content or details as to the Articles of the business; (right here, articles implies
Articles of association & Memorandum of association),
3. Who nominates the directors, bankers, auditor etc. for the company;
4. Who decides the location where registered office (head office) should be situated;
5. Who prepare the Memorandum of association, Prospectus and different important documents and
file them for incorporation.

In this sense, the promoters are the creators of the plan for the formation of a company. To acquire the
cooperation of the desired number of people willing to associate themselves with the venture: The
promoters, as per whether they want to incorporate a private or public corporation, attempt to acquire
the co-operation of people required to form the company. Minimum number of members required to
from a public company is seven and that for a private company is two. Depending upon the form
chosen, the promoters may decide upon the number of initial promoters.
To find and obtain the consent of the people ready to be first directors of the company: The company
has a system of consultant management and is controlled by people appointed as directors. The first
directors of the company are, however, normally appointed by the promoters. To select the directors,
promoters seek the consent of few person whom they seem suitable so that they accept be the primary
directors of the proposed company. To settle about the name of the business enterprise: The promoters
have to obtain permission of the Registrar of companies for selecting the name of the organization.
Legal status of promoter has not been specified and determined in the statute. His role is incapable of
being defined. He cannot be considered as an agent, an employee or trustee of the company. The

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status of the promoter is usually terminated while the board of directors has been incorporated and the
board starts governing the company.

Duties of Promoter:
The early companies Acts contained no provisions regarding the liabilities or duties of
promoters, and even today legislation is largely silent on the subject, merely imposing
liability for untrue statement in listing particulars or prospectuses to which they are parties.4

The duties of promoters are as follows:

1. To disclose all the secret profits:
The promoter must not make any secret profit. If he has made any secret profit, it is his duty to reveal
all the profit secretly acquired by way of manner of profit. He is empowered to deduct the reasonable
expenses incurred by him.

2. To reveal all the material facts:

The promoter must reveal all the material facts. If a promoter without making full disclosure contracts
to sell the organisation a property, and the property turned out to be obtained by him at the time when
he stood at a fiduciary position towards the company, the company may both repudiate the sale or
confirm the agreement and recover the profit created from it by the promoters.

3. The promoter should make good to the company what he has acquired as a
trustee:
A promoters stands in fiduciary position towards the enterprise. It is the duty of the promoter to make
good to the enterprise what he has received as trustee and not what he may get at any time.

4. Duty to reveal private arrangements:

It is the duty of the promoter to disclose all the non-public association incurring him profits by using
the company.

5. Obligation of promoter towards the future allottees:

when it is said the promoters stand in a fiduciary position towards the organization then it does not
imply that they stand in such relation only to the corporation or to the signatories of memorandums of
company and they will also stand on this relation to the future allottees of the shares.

4
FSMA 2000, s.90(see para. 25-31). But note s.90(8)nwhich makes it clear that in respect of the duty of disclosure a promoter is in no
worse position than any other person responsible the propspectus. as quoted in Gower and Davies, ‘Principles of Modern Company Law’,
18th ed. London; Thomson, Sweet & Maxwell, South Asian Edition, 2008, p.107.

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Liabilities of Promoter:
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.5

The liabilities of promoters are as follows:

1. Liability to account in earnings:
As already mentioned that promoter stands in a fiduciary position to the enterprise. The promoter is
liable to the organization for all secret earnings made by him without complete disclosure to the
company. The business enterprise may undertake any of the following actions if the promoter fails to
reveal the earnings.
(i) The company can sue the promoter for any quantity of income and recover the same with interest.
(ii) The business enterprise can rescind the contract and might recover the money paid.

2. Legal responsibility for mis-statement in the prospectus:

section 62(1) holds the promoter liable to pay compensation to every person who subscribes for any
share or debentures on the belief based upon untrue facts mentioned in prospectus for any loss or
damage sustained. Sec.62 additionally offers certain grounds on which a promoter can avoid his
liability. Further Sec.63 explains the criminal liability for mis-statement in the prospectus and a
promoter might also become liable under this section.
The promoter can also be imprisoned for a term which may extend to two years or may be punished
fine upto Rs. 5,000 for untrue declaration in the prospectus. (Sec. 63).

3. Personal legal responsibility:

The promoter is individually responsible for all contracts made by him on behalf of the corporation
until the contracts were discharged or the corporation takes over the legal responsibility of the
promoter.
The death of promoter does now not relieve him from liabilities.

4. Liability on the time of winding up of the agency:

When the company is being winded up, on an application made by the official liquidator, the court
can also make a promoter liable for misfeasance or breach of trust. (Sec. 543).
further wherein fraud has been alleged by the liquidator towards a promoter, the court may order for
his public examination. (Sec. 478).

5
promotion and formation of co.,  as quoted at: http;//www.legalserviceindia.com/company%20law/com_1.htm.

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Preliminary Contracts/Pre-Incorporation Contracts Made by way of the Promoters:
Initial contracts are those contracts which are made by the promoters with different corporations on
behalf of the enterprise which is yet to be incorporated. Such contracts are commonly entered into by
promoters to gather some assets or right for and on behalf of the enterprise to be formed.

The promoters enter into initial contracts, commonly as agents or trustees of the company. Such
contracts are not legally binding on the company because consenting parties are necessary to a
contract whereas the company is non-entity before incorporation.

Conclusion:
In conclusion, it may be said that the word ‘Promoter’ is used in common parlance to denote any
individual, syndicate, association, partnership or a company which takes all the necessary steps to
create and set it going. The Promoter originated the scheme for the formation of the company; gets
together the subscribers to the memorandum; gets memorandum and prepared articles, executed and
registered; finds the bankers, brokers and legal advisors; located the first directors, settle the terms of
preliminary contracts with vender and agreement with underwriters and makes arrangements for
preparation, advertisement and circulation of the prospectus and arrangement of the capital. So,
Promoters act as a molding format for the company and gives it a shape which can exist in the world
although they cannot take anything in this regard.
In the light of above discussion it could be concluded that a person who fulfils the duties of a
promoter, has liabilities as that of a promoter and who enters into preliminary contracts for the
company can be said to be the promoter of a company.

Bibliography:

Act, B. (2018). The Compaines act, 2013. universal law publishers.

Associates, N. D. (2014, May 23). Borrow, Lend Or Invest: Beware Of Companies Act 2013.
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http://www.mondaq.com/india/x/315938/Corporate+Commercial+Law/BORROW+LEND+O
R+INVEST+BEWARE+OF+COMPANIES+ACT+2013
Datta, C. (n.d.). Datta on the company law. Lexisnexis.
Goyal, D. (2019, Feburary 15). Permissible Deposits – Private Companies -Companies Act, 2013.
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Harsh, C. R. (2017, january 18). Reduction of Share Capital under Companies Act, 2013 – A
Complete

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Journal, T. @. (2017, may 8). Borrowings Under The Companies Act, 2013. Retrieved from
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K.C.Garg, Chawla, R., & Gupta, V. (n.d.). Company law . kalyani publishers.
Publication, S. (2018, january 20). Companies (Amendment) Act, 2017 brings relief under sections
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and 186 . Retrieved from vniodkothari: http://vinodkothari.com/2018/01/companies-
amendment-act-2017-brings-relief-under-sections-185-and-186/
Sinclair vs, Brougham (High Court 1914).
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