“Explore the legal status of promoters under the Companies Act, 2013, as they play a pivotal role in the conception, incorporation, and establishment of a business. Learn about the definition of promoters, their rights, and their fiduciary position in the company. Understand the legal implications, including the right to recover initial expenses, proportionate amounts from co-promoters, and remuneration. Delve into key legal aspects to ensure transparency and ethical conduct in the promotion of businesses.”
We can define the term ‘promoter‘ as a promoter who was involved in the development of the company prospectus but is not inclusive of any person because he was functioning in a professional capacity in facilitating the establishment of the firm.
The promoter is the one who comes first in the process of forming a firm. Company promotion is a time-consuming and stressful process that involves a number of duties. Promoters are analogous to the company’s parents, who give birth to the company-like child. The promotion includes the conception of an idea, incorporation, launch, and the establishment of a business. Promoters are highly involved in the establishment process and do almost everything to establish a company.
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Definition of Promoter in Companies Act, 2013
“Recently in the Companies Act 2013 the term was defined in section 2(69) in the following way: “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 indirectly whether as a shareholder, director, or otherwise; or
(c) following 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”[1]
- “A promoter undertakes to form a company concerning a given project and to set it going,” said Justice Cockburn[2].
- The term promoter was defined in the case of Bosher v. Richmond Land Co[3] as “A person who brings about the establishment and organization of a corporation.” He brings together those who become interested in the venture, assists in the acquisition of subscriptions, and sets in motion the machinery that leads to the formation itself.“
Rights of Promoters:
1. Rights to recover Initial Expenses: Promoters have the right to recoup the funds they aim to raise and use to run the business. The payment of these expenses is contingent on the number of directors.[4]
2. Right to receive a Proportionate amount from Co-promoters: When more than one individual acts as the company’s promoter, one promoter might sue another for the remuneration and damages paid by him. Promoters are jointly and severally liable for any false statement made in the prospectus as well as any hidden gains.
3. Remuneration: The promoters work hard to establish and run enterprises, and as a reward, the companies pay them. This payment is paid in a variety of ways, including cash or debentures.
Legal Status of Promoters in a Company
Due to the promoters’ significant involvement in the business’s founding process, the issue of their legal status inside the company comes up. Since there can be no principal since the business is non-existent in the eyes of the law prior to incorporation, promoters are not considered agents. The company is not a beneficiary; hence they are not trustees. As in Erlanger v. New Somrero Phosphate Co. Ltd[5]., The promoters “clearly stand in a fiduciary position,” according to Cairns LJ. They are in charge of starting and expanding the business. They are in charge of founding and forming the company. They have the power to determine how, when, and with what oversight the company will be set up and start functioning as a trading organisation. Promoters are crucial to the promotion industry. They were therefore chosen by the Court to serve as fiduciary agents. Therefore, a promoter has no legal standing. They are not an organisation or corporate trustee. In addition, the Company had no legal standing when it was founded. It was declared in Re Great Wheal Polgooth Co Ltd[6] that a solicitor who is a professional advisor for mere consultation of legal work will not be considered a promoter in a company.
As there is no corporation yet, the promoter is neither a trustee nor an agent of the company. His legal stance is that he is in a fiduciary relationship with the corporation that is about to be founded.
Two major outcomes derive from promoters’ fiduciary position:
A promoter cannot earn money in secret. If it is revealed that he obtained a concealed profit for himself in any of the firm’s transactions, he will be required to restore the same to the company.
Unless all material information is disclosed, the promoter is not allowed to profit from the sale of his own property to the firm. The corporation has the choice of either accepting the sale or confirming the contracts and recouping the promoter’s earnings if he contracts to sell the company his own property without fully revealing it.
Promotion is the most important stage of a business’s formation since all of the major functions for incorporation are completed to ensure the smooth operation of the company. As a result, a promoter is an important person who works hard to form and register a corporation. He is the one who comes up with the idea of beginning and running a business. He plays an important and necessary function in the formation of a corporate body or company. A promoter is the person who founded the firm and business. He creates a better situation for the organisation by acquiring all of the necessities that a company should have.
[1] The Company Act, 2013, Section 2(69)
[2] Taxmann’s Company Law (University Edition), 24th Edition, p. 83.
[3] Bosher v. Richmond Land Co, 89 Va 455: 16 SE 360
[4] Melheldo V/s Porto Aljeyer Rail Co. 1874
[5] Erlanger v. New Somrero Phosphate Co. ltd., 39 LT 269
[6] Re Great Wheal Polgooth Co Ltd, (1883) 53 LJ Ch 42.
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