Saibal C. Pal

`Company’ vis a vis the Companies Act,1956 (`Companies Act’) is defined in S 2(10) to mean  a `company’  defined in S 3 which defines private and public companies and bring out its characteristics. S 2(23A) again defines a listed public company to mean public companies whose shares are listed on stock exchanges. Companies are formed by persons which may include a company. Persons activate themselves to form company as per the provisions of the Act. The Registrar of Companies (`ROC’) issues a Certificate of Incorporation which certifies the birth of a company. The Act, however, is silent on the definition of promoter. However, reference to S 62(6) gives the meaning of the expression to ascertain the liability of the person raising money from the public by issuing a prospectus and making untrue statement therein.  An expert named in the prospectus, namely Advocate, Auditor is not a promoter. Now,   Form no. 1A required to be filed pursuant to Ss 20 and 21 of the Act with the ROC for availability of name for a proposed company require the inclusion of the name of the promoters. Earlier the promoter was not required to be named.  Form no.1 (Ss 33(1) and 33(2)) filed at the time of incorporation of a company requires the names of the subscribers to the Memorandum of Association (`MOA’) to be stated. Existing companies can be named promoters. In the part where details of the subscribers to the MOA are to be included it is to be stated whether the subscribers are already promoters of other companies. Reference to promoters in the forms came with the introduction of e-Forms since 10th February, 2006. So the  Act has started  taking declaration of the  promoters on incorporation of companies though nothing is required to be mentioned further either in the annual accounts or Annual Return filed with the ROC.

Relationship between the promoter and the company which he floats is one that of fiduciary character. The promoter, therefore, is answerable to the company for anything concerning the company. (Erlanger v. New Sombrero Phosphate Co. (1878) ) 3 AC 1218. A promoter cannot enrich himself in any manner out of the company.

There are three basic duties which a promoter owes to a company which he forms.  The basic duties total three. While there no scope to substituting the name of promoter in an unlisted company, names of promoters of listed companies can be given effect with change by disclosure to the stock exchange as per the listing agreement and complying to the SEBI regulations.

Duties of Promoters:

1.  Promoters shall not to earn secret profit at the cost of the company. Profit earned by a promoter but disclosed is, however, not considered secret and is allowed.

2.  When promotion of a company commences a promoter is under obligation to declare whether he has acquired any property to sell to the company.  Where the promoter acquires property on his own before commencement of the promotion he can sell it at a profit provided there are disclosures.

3.   Promoters must not exercise undue influence or fraud, and in particular   must not conceal   his interest in anything material to the company by having a nominee to represent him.

Principles governing position of Directors and Promoters Vis a Vis Company.

S 2(6) of the Companies Act defines Board of Directors or Board in relation to a company to mean Board of directors of the company. S 253 states that only individuals shall be appointed Directors of companies and there shall be no appointment or re-appointment as director unless a Director Identification Number (`DIN’) under S 266B has been allotted. DIN is required to be obtained since 2006 with the notification of Companies (Amendment) Act, 2006 w.e.f 1.11.2006.

Principles governing the position of Directors and promoters and their acts in relation to the Companies  have been laid by Lord Lindley in Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch 392 and the same are given as under:

1.  First principle is that in equity promoters of a company stand in a fiduciary relation to it and to those persons whom they induce to become shareholders in it and cannot in equity bind the company by any contract with themselves without fully and fairly disclosing to the company all material facts which the company ought to know, Erlanger v New Sombrero Phosphate Co. (1897) LR 5 HL 480. is the leading authority in support of this.

2. The second principle states that on obtaining the Certificate of Incorporation a company is a corporation capable by its Directors of binding itself by a contract if all material facts are disclosed. Salomon v. Salomon & Co.,( 1897) AC 22.

3. The third principle is that the Directors acting within their powers and with reasonable care and honesty in the interest of the company may suffer by reason of their mistakes or errors in judgment.  Overend, Gurney & Co., v. Gibb (1872) LR 5 HL 480., is a leading theory on this head.

4. The fourth principle is that a contract can be set aside in equity on proof that one party induced the other to enter into the contract by misrepresentations in material facts, even though such misrepresentations may not be fraudulent.

5.  The fifth principle is that a voidable contract cannot be rescinded or set aside after the parties have changed their position and cannot be restored to their former position. However, the principle does not hold good in case of fraud.

As regards  legal status of promoters, provisions under the Companies Act, are silent. However, the Specific Relief Act provides specific relief to some extent. Apparently a promoter is neither an agent nor a trustee of the company under incorporation. Certain fiduciary duties are imposed on him under the Companies Act. A promoter is not an agent as there is no principal. He promoter is also not a trustee as there is no cestui que trust. It is on this ground that the doctrine of ratification by the company was regarded as inapplicable to the actual promoter vis-à-vis the company being incorporated.

R 2(za) of the Issue of Capital & Disclosure Requirements Regulations,2009 ( `ICDR’) framed by SEBI is applicable to a public issue, right issue where the specified securities is more than Rs 50 lacs, preferential issue of listed company, bonus issue by a listed company, QIB placements and issue of IDRs. It defines a promoter in relation to a listed company. R 2(zb) of ICDR defines promoter group. Listed companies are required to declare promoters and Regulations have been framed by SEBI to monitor the activities of promoters through disclosures in standardized forms so that small investors are protected and investment culture thrives.

Promoters may not be a Director of a company. For unlisted companies subscribers to the MOA are the promoters. Unlisted companies do not have role of promoters in their operations. Board of Directors representing the shareholders controls a company. In the case of listed companies there are the Promoters, Board of Directors, investors and regulations of SEBI. Role of promoters is considered significant in listed companies and for any change in promoters of a company the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 will have to be adhered.

Conclusion

Question is whether the provisions of the Companies Act are adequate in dealing with promoters in unlisted companies? Possibly no. There is no clarity on the subject.  It is time to look into this aspect in the future Companies Act in the making which is in the bill stage.

Click here to Read Other Articles of Saibal C. Pal

More Under Company Law

0 Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2021
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
282930