Section 2(69) of Companies Act 2013, deals with the term Promoter:
1. A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or
2. A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.
In a simple word, the promoter may be an individual, a firm or a company that does all the necessary preliminary duties to bring a company into existence. The promoter’s work is to formulate new ideas and to develop it and also persuade others to join the company.
According to L.J. Brown. “The term promoter is a term not of law but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.”
According to Justice C. Cockburn. “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.”
Legal Position of a Promoter is that he is not an agent or trustee of the company. Promoter has a fiduciary relationship with the company which is based on trust and confidence. Therefore, a promoter is obliged to disclose all the relevant facts and any secret profit which is made by him in relation to the formation of the Company.
In Erlanger v. New Sombrero Phosphate Co., Lord Carins stated, The promoter of the company has a fiduciary position. They can create and mold the company as well. The promoter has full authority to define how and when and in what shape and under what supervision, it will start into existence and begin to act as a trading corporation.
Functions of a Promoter:
1. To think of the idea of forming a company and also to determine the possibilities.
2. The necessary negotiation can be conducted for the purchase of business if it is intended to purchase an existing business. The help of the expert can be taken only if it is necessary.
3. To collect the requisite number of persons which is 7 in the case of the public company and 2 in case of a private company, who can sign the Articles of Association’ and ‘Memorandum of Association’ of the company and also agree to as act as the first directors of the company.
4. To decide about the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The form and amount of its share capital,
(iv) The brokers or underwriters for the capital issue
(v) The bankers,
(vi) The auditors,
(vii) The legal advisers.
5. To draft and print the Memorandum of Association (M/A) and Articles of Association (A/A)
6. Making of preliminary contracts with underwriters, vendors, and others.
7. Making arrangements for the preparation of the prospectus, it’s filing, advertisement and the issue of capital.
8. Arrangement for the registration of the company and obtaining the certificate of incorporation.
9. To defray preliminary expenses.
10. To arrange the minimum subscription.
Rights of Promoter:
1. If there is more than one promoter in a company then the promoter can claim against another promoter for the damages and compensation paid by him.
2. If any untrue statement is given in the prospectus and for the secret profits then the promoters will be held liable severally and jointly as well.
3. The promoter has the right to get paid for all the legitimate expenses he has incurred in the process of formation of the company such as fee of a solicitor or the cost of advertisement etc. However, it is not a contractual right to receive the preliminary expenses but it depends on the director’s discretion.
4. A promoter has no right against the company for his remuneration unless there is a contract to that effect. In some cases, articles of the company provide for the directors paying a specified amount to promoters for their services but this does not give the promoters any contractual right to sue the company. This is simply an authority vested in the directors of the company.
Duties of Promoter:
1. It is the duty of the promoter to disclose all the secret profits made by him and also he should not make any secret profit and even if he does, then he has to disclose it.
2. It is the duty of the promoter to disclose all the relevant material facts.
3. It is the duty of the promoter to make good to the company what he has obtained as a trustee and not what he may get at any time.
4. The promoter has to disclose all the private arrangement which gives him the profit by promoting the company.
5. It is the duty of the promoter to stand in relation to the future allottees of the shares.
“The views of the authors are personal“
Frequently Asked Questions
What is a Promoter?
Section 2(69) of Companies Act 2013, deals with the term Promoter: A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.
What is the legal position of a promoter?
Promoter has a fiduciary relationship with the company which is based on trust and confidence. Therefore, a promoter is obliged to disclose all the relevant facts and any secret profit which is made by him in relation with the formation of the Company.
What are the certain things that a promoter can decide for the company?
The name of the Company, The location of its registered office, The form and amount of its share capital, The brokers or underwriters for the capital issue, The bankers, The auditors, The legal advisers