Companies Act - Promoters (Positions, power, duties and liabilities)

 Introduction

 Promoters are knows as entrepreneur. They promote a business for maximization of profits. Here is one famous promoter of Kingfisher Airlines.

In this part we will cover below things.

1. Promoters and Promotions
2. Activities of Promoter
3. Position of Promoter
4. Duties of Promoter
5. Liabilities of Promoter
   

Promoters and Promotions

Who is promoter ?

Vijay Mallya was promoter of Kinfisher Airlines (Which is bankrupt).

A corporate promoter is a firm or person who does the preliminary work incidental to the formation of a company, including its promotion, incorporation, and flotation, and solicits people to invest money in the company, usually when it is being formed.

House of Lords gave definition of promoter and promotions in judgement Whaley Bridge Co Vs Green 1897 QBD 111, where justice Bowell LJ held that

Promotion is not a term of law, but of a business operations familiar to the commercial world, by which company is generally brought in to existence. Promotion include wide range of commercial activities which include many technical and non technical operations. Amongst the technical include project planning, feasibility study, looking for technical co-operation and collaboration. Non technical activities includes assembling required number of signatories, obtaining advice on different legal requirements, appointing key people like Company Lawyer who make documentation and enter into all types of pre-incorporation contracts.

 Securities Exchange Commission Rule of US405(a) defines promoter as

Person who acting alone or in conjunction with others persons directly or indirectly takes the initiative in founding or organizing the business enterprise.

So generally a founder or initial organizer of business is promoter. 

Section 2(69) of Companies Act defines promoter as :

A person who is named as such in a prospectus or is identified by a company in the annual return referred to in Section 92 or, any person who has control over the affairs of of the company directly or indirectly whether as shareholder, director or otherwise, or in accordance with whose advice instruction, the Board of Directors of the company is accustomed to act.

Professionals who are engaged initially such as CAs, Lawyers are not promoters.

What is Promotion?

It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company.

There are three types of Promotion

1. Individual Promotion - Here individuals come together, runs a company.
   
2. Institutional Promotion - Public companies come together to promote a company.
   
3. Professional Promotion - Other companies which promotes a company such as UBS, Merril Lynch etc

There are various stages of Promotion

1. Conception of Idea
2. Incorporation
3. Flotation - where promoters manages capital.
   
4. Commencement of business

 Activities of Promoter

Below are major activities carried out by promoters

• Conception of Idea - identifying business opportunity and choosing suitable corporate device. (Whether to go for OPC, Private, Public etc)
  
• Assembling subscribers - You will need certain number of subscriber to carry out particular business
  
• Tax compliance and getting CIN, GLN, TAN,PAN etc
• Incorporation - AoA, MoA, Prospectus etc
• Intermediaries - Deal with Bankers, registrar, depositories etc
• Compliances
  
• Flotation : IPO, Private Placement, Debt Capital etc
• Pre-incorporation agreements

Position of Promoter

We will discuss the legal position of Promoter here. Promoters are kind of in a fiduciary relationship with the company. They have access to confidential information about company.

 

So are they trustee and agent ? Answer is NO.

 

In Erlanger Vs New Sombrero Phosphate Company Ltd, 1878 AC 1218 Cairn LJ held that

The promoters undoubtedly stand in fiduciary position, they have in their hand the creation and moulding of the company. They have the power of defining how and when and in what shape and in whose supervision it shall come into existence and begin to act as trading corporation

Duties of Promoter 

Promoters are in fiduciary relationships so it casts two duties on promoters.

Duty not to make secret profit - Many times promoters uses their confidential knowledge and corporate veil for their own benefit and to make secret profit. If Promoters do this, they have to return a profit to the company.

In Gluckstein Vs Barnes (1900) AC, promoters tried to earn profit by dumping their product known as Olympica. In this case profit was restored to the company.

Duty to disclose interest in transaction - Promoters are provided to disclose any interest in transaction owing to fiduciary nature with Company.

In case these duties are breached by Promoters, companies have below remedies.

1. Recession of contract
2. Suit for recovery of profit 

To exercise these remedies Company have to prove that Promoter was in position of authority and have misused that authority.

Time period of duties

Duties of promoters start as soon as the conception of idea. These duties can continue as long company continues to operate. 

 

However, in regard to liabilities, such liabilities will continue till Board of Directors  is appointed.

Liabilities of Promoters

Liabilities of promoters arises in below cases

• Furnishing wrong information of incorporation
• Civil and Criminal liability under section 34, 35 for mistatement in prospectus.
• Inducing people for buying shares (Section 36)
• Incorrect Disclosure of interest to SEBI etc.
• Misuse of authority during winding up process  (Section 336 to 342)

 

 

Well, that's it about promoters.

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