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Cmwny a d its Formation A company which is registered initially as a private company, may be converted into

a public company. Such a conversion may be by choice, or by default o r by operatioa~
of law. When a private company gets converted into a public cornparay by opa:.rationm of'
law under Sec. 43-A, it is called as 'deemed public company'. When a private
company becomes a public company, it loses the special privileges.
Just as a private company may become a public company, a public company by
altering its articles and obtaining the approval of the Central Government, can also
become a private company. However, conversion of a company from private to public
and from public to private does not affect the legal identity ofzthe company.
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2.11 KEY WORDS - ------ -.-.--"'----.-

Private company: a company which by its articles (a) restricts the right of the
members to transfer shares, (b) restricts the maximurn number to fifty, and
(c) prohibits invitation to the public to subscribe to its shares or debentures.
Public Company: a company which is not a private company.
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Proxy: a right by which another person can attend and vote at the meetings sf the
company.
Share: units in which the total capital of the company is divided.
Share warrant: a document the bearer of which is the owrner of the number of shares
mentioned therein.
Quorum: Minimum number of persons who should be personally present to conduct
the meeting.

2.12 ANSWERS TO CHECK YOUR PROGRESS
A 4 (a) two, fifty (b) share warrant (c) statutory (d) public (e) two thirds
5 (i) True (ii) False (iii) True (iv) False (v) Trlle (vi) True (vii) False (viii) True
B ,1 (i) False (ii) False (iii) True (iv) True (v) False
2 (a) iii (b) iii
C 1 (a) iii (b) iii (c) i
2 (i) True (ii) True (iii) False (iv) False (v) True (vi) False (vii) True (viii) True
(ix) false (x) True

2.13 TERMINAL QUESTIONS -
1. Define a private company. Distinguish between a private company and a public
. company.
2. Discuss various privileges enjoyed by a private company. Why does law grant
these privileges to a private company?
3. Enumerate the various restrictions imposed by law on a private company.
4. Describe the procedure for converting a private company into a public company.
5. Define a public company. Describe the procedure for converting a piiblic company
into a private company.
6. Section 43-A of the Companies Act creates a new class of company, a deemed
public company. Describe the circumstances under which a private company shall
become a deemed public company.
7. A private company need not issuk. a prospectus? Why?
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Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University. These are
for your practice only.

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the promoters make detailed investigations to find out the weaknesses and strong points of the idea.J. For incorporating a company various documents are to be prepared and other formalities are to be complied with. 3. For incorporatirig a company various formalities are required to be carried out. Ge'rstenberg has defined promotion as the discovery of business opportunities and the subsequent.UNIT 3 PROMOTERS Objectives Introduction Promoter : Meaning and Importance Functions of a Promoter Legal Position of Promoters Duties of Promoters Liabilities of Promoters Remuneration of Promoters Position of Preliminary Contracts Let Us Sum Up Key Words Answers to Check Your Progress Terminal QuestionslEx~rcises . involving different stages. determine the amount of capital required and estimate the operating expenses and probable income.organisationof fun&. The Companies Act does not define the term promoters anywhere. their legal position and their duties. At this stage the idea of carrying on a business is conceived by a person or by a group of persons called promoters. Another definition given by Lord Blackburn states that "the term promoter is a short .2 PROMOTER :MEANING AND IMPORTANCE You learnt that a company is an artificial person created by law. On being satisfied about the economic viability of the idea. e describe remuneration payable to promoters.process of formation of a company is the 'promotion'. You will also learn about the position of pre-incorporation contracts. usefully summing up in a single word a number of business operatiom familiar to the commercial word by which a company is generally brought into existence. Bowen. the term promoter is a term not of law but of business. After the idea is conceived. A number of judicial decisions have defined the term promoter. 3. The first stage in the. it only refers to the liabilities of the promoters.0 OBJECTIVES After studying this unit you should be able to: o explain the meaning and importance of promoters. In this unit you will learn about the meaning and functions of promoters. o enumerate duties and liabilities of a promoter. According to L. The promoters perform these 'funptions and bring the company into existence. property and managerial ability into a busiriess concern for the purpose of making profits therefrom. e describe the functions of a promoter. A company is born only when it is duly incorporated. The formation of a company is a lengthy process. and o explain the position of preliminary contracts.1 INTRODUCTION In Unit 1 you learnt about the various types of companies that can be formed. 3. the promoters take all the necessary steps for incorporating the company. All this work is done by promoters.

The promoters carry considerable risk because if the idea sometimes goes wrong then the time and money spent by them will be a waste. they perform the following functions in order to incorporate a company and to set it going. mf. in accordance with whether they want to incorporate a p5ivate pr a public company. For example. You learnt that the minimum number of members requited to form a public cowpany is seven and that for a private company tFe minimum number is tyo. iv)' ~o'&ttleabout the name of the company : The promoters have to seek the of the Registrar of companies for selectivg the iame ~fthe company. Thus.The first directors ~f the cornp.er as "one who undertakes to form a company with reference to a given project and to set it going. a very useful service to society and they play an important role in the ' industrial development of countries. yo3 have also noted that a promoter may be an individual. Similarly.be an individual." A Company may have more than one promoter. In their capacity of promoters. It-is. The promoters usually qive three names in order of preference. the promoters are the originators of the plan for the formation of a company.?€$rsse& {he'cons~gfP$ sqve indiuidbal whpm thky deem apjrq.U and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company". a solicitor who draws up the documents of the proposed company in his professional capacity is not a promoter in the eyes of law. The prQP. firm. The promoter may. But a person Cannot be held as promoter merely because he has signed at the foot of the memorandum or that he has provided money for the payment of formation expenses. an association of persons or a body corporate. They carry out the necessary jvve~tigationto find out whether the formation of a company is passible and profitable. however. Cockburn described a promr . From the above it should be clear to you that a promoter is one who performs the preliminary duties necessary to bring a company into exhtence. solicitors.Promoters are generally the first persons who conceive the idea of business. render very useful services in the formation of a company. the true test to describe a person as a promoter lies in finding out@hether he is keen to form a cqmpany and take steps to give it a concrete shape. $#tice C.geqerslly gppninted by the promoters. A promoter has been described as 'a creator of wealth' and 'an economic prophet'. In this sense.3 'FUNCTIONS OF A PROMOTER You learnt that a promoter plays a very important role in the formation of a company. and who takes the necessary steps to accomplish that purpose. an engineer who advises on the selgction of site or a valuer who helps with drawing the estimates would not be regarded a promoter. important for you to remember that everyone who is assaciated with the process of the formation of a company cannot be called a promoter. Unit 1 you learnt that the compqny bas a system af reprssontative management and is mapaged by jigividyals appointed as direftor$. The promoters should ensure that the name of the company shauld not be identical with or 36 should not too closely resemble the name of another existing company. Section 62 (6) makes it clear that persons assisting the promaters by acting in a professional capacity e. they organise the resources to convert the idea into a reality by forming a company.. he may'stili be a promoter. accountants and other erperts are not promoters. the promoters may decide upon the number of primary members. Thereqfter. .: yendps. in fact.ii)l Tq seek qnd obtain the cpnsent of the persons willing to qct as first directors of the company: In.' The plomoters. Even if a person has taken a very minor part in the promotion activities. Depending upQn the farm chosen. try tq secure the co-operation af persons needed to form the company.g. hoyeve~. 4.~fjq€$ SO Shqf thy! agree to be the first directors of the proposed company. a0 association or a company. i. i) To originate the scheme for formation of the company .q)pyare. li) To secure the cooperation of the required number of persons willing to m i a t e themselves with the project : The promoters.

ix) To arrange for filing of the necessary documents with the Registrar: The propoters are required to pay the stamp duty. the company they . For the same reason. New Sambtera Xposition. In case the proposed company is a public limited company. make arrangements for plant and machinery. These contracts are called preliminary contracts. H e is not an agent because there is no principal in existence. rd Cairns has rightly stated the position of promoter in Erlanger V. viii) To enter into preliminary contracts with the vendors: In respect of all the properties and assets mentioned above. The company is formed for the purposes of carrying on business and as such deals with funds and their management. osphate Co. The promoters. it does hot mean that the promoters do not have any legal relationship with the proposed company. he also cannot bs called the trustee of the company. It shall came into existents and begin to act as a trading~orporation. the promoters must also arrange to get the prospectus prepared and printed. "The promoters of a company stand undoubtedly in a fiduciary They have in their hands the creation and moulding of the company. registration of the company. be interesting to note that there are no specific s'tatutory provisions in this regard. this work of preparation of these documents has to be undertaken by the promoters. The promoters may need to consult the legal experts on several of these matters. the promoters occupy a fiduciary position in regard to. We shall study more about them later in this unit."In fact. If the proposed company is a public limited company. h e promoters legal position is that he is neither an agent nor a trustee of the company he promotes. the promoters would need to settle the terms of contracts with the third parties from whom these properties are to be bought. appoint solicitors to assist them in the process of formation of the company. and under whose supervliilon. and have very wide powers relating to the formation of the company. As the company itself does not exist before incorporation.4 LEGAL POSITION OF YROMOTERS You learnt that promoters are respoqsible for the formation of a company. filing fee and other charges for . The legal position of a promoter can be correctly described by saying that he stands in a fiduciary position (relationship of trust and confidence) in relation to the company he promotes. also appoint bankers for the company who will receive share application moneys. he^. V) To get the documents of the proposed company prepared: You will study in the next unit that certain documents like the Memorandum of Association and the Articles of Association are required to be filed with the Registrar of Companies before the company is registered and brought into existence. however. It will. vi) To appoint bankers. The promoters must. Promoters fulfil the function of seeing that such property and business is acquired by the proposed company on justifiable terms. As such. on the advice of legal experts get the Memorandum and Articles of Association prepared and arrange for their printing. and may even make tentative arrangements for key personnel. therefore. they occupy important position. The promoters are to see that the various legal formalities for ihcorporating the company are complied with. You will recall from youi exposure to the contract of agency that in order to be a valid contract of agency bothstheprincipal * and the agent must be in existence. brokers and legal advisers for the company: The incorporation of a company involves a lot of legal formalities. 3. Sometimes in order to run the business the company may be required to take over property of a running business. However. the promotcrs must also ensure the success of the first capital issue made by the company by appointing underwriters and brokers. intending to issue shares on incorporation. vii) To setthe preIirninary agree~nentsfor acquisition olmsets: The pro~notersmay be required to acquire a suitable site for the factory. 1 The legal position of a promotes is somewhat peculiar. therefore. They havs Ihr: power of defining bow and when and in what shape.

.................. a group of persons or a company........ Being in a fiduciary position...... The promoter in this fiduciary capacity has the foIlowing impoitant duties......... either directly or indirectly...... You must clearly understand that the law does not forbid the promoter froni making a profit..... ariy profits at the expense of the company that he promotes. Check Your Progress A 1 Who is a promoter? 2 List the four most important functions of a promoter...... the profits which the promoter has not disclosed to the company.. 4 State in three lines the legal position of promoters....... ii) The term 'Promoter' is defined in the Companies Act............ vii) A promoter stands in a fiduciary relationship towards the company he promotes..........promote. viii) The promoters in fact act as agent of the company which is being promoted............... it is his duty to be honest and uphold the'trust of his position.......... 3 What is meant by 'fiduciary relation'? .. without the knowledge and consent of the company...... v) The promoter is a person who brings the company into existence............... vi) A promoter cannot be allowed to make....any secret profits...... The law prohibits only the making of secret profits i....... .e..... iv) All the persons associated with the formation of the company are promoters of the company..... The promoters of a company are perfectly free to ...... 5 Statewhether the following statements are true or false: i) A promoter can be an individual..... 3 5 DUTIES OF PROMOTERS In the above section you have just learnt that the promoter occupies a position of total confidence and trust in relation to the company promoted by him........ ana algo the original allottees whom they induces to buy shares of the company....... Since he occupies a position cf a trust........ You would recall from what you have studied in the contract of agency and partnership that a fiduciary relationship means a relationship of utmost trust and confidence and implies disclosure of all material facts.......... 1 Not to make any secret profit: A promoter cannot make any direct or indirect profits out of the promotion of the company.................. iii) Promotion is the first step for the formation of the company.. ........... the promoter must not make.

lesci~ldthe ccntract entered into by the promoter to make the said profit. by making the secret profit. Let us explain these iidut:iary duties of the promoter with the help of an example. the purchase agreement of land was approved at the meeting of the shareholders but the fact of A's ownership and the profit nratlc by him were not disclosed at the meeting. the conlpany may either repudiate the contract ok affirm the curltract and recover the profits made by the promoter.:ret prafit. any secret profit q a d e by him. The promoter must act honestly and diligently to escape liability with respect to dealing with the future company and the outsiders. Subsequently when the company weill into liquidation. the contract could not be rescinded. 2 To make full disclosure to the company of all relevant facts: In keeping with his fiduciary capacity. 3. has defaulted in his duty towards the company. He and some of his friends. ' A ' was the owner of sonlc arid land. The company can also file a suit for .+. You should bear in mind that while making a clisclosure the pro~notermust make the full and complete dist:losure. then he must disclose the profits to the intendcd sharci-rolders.medies against him: a) Rec~.The Company may on learning of the secret profit. i the contract . It does not mean that they stand in such relation only to the company but they also stand in this position to the future allottees of shares. d w b some reason. it should be remembered that secret profits on the sale of property can be recovered from the promoter only when the property was bought and sold to the company while he was acting as a promoter.The company tnay require the promoter to refund'the amount of se. c) Suit tor breach of duty -. decided to form a company to manufacture microchips. When the company was formed. You would observe that in this case 'A' had defaulted in his duty to make full disclosure of all material facts and had made a secret profit out of pro~notion. the liquidator filed a suit against 'A' to recover the profits made by him in the sale of land.'T'he company may sue the promoter for rnisftxasancc. 4 Duty of promoters towards future allottees: The promoters stand in a fiduciary position towards the company.When a promoter makes a secret profit. Por example. rnnke a !:)'ofit provided they disclose fact to an independent Board of directors. the company may rescind the contract on discovering the truth of the matter.. The prorfioters must ensure that the prospectus iqsued at his instance contains all material facts and particulars and does not contain any mis-statements. They appointed the first directors of the company and 'A' sold his own land to the company at a price higher than the actual valuation of the land.6 LIABILITIES OF PROMOTERS You have just gone through the duties of a promoter in his fiduciary capacity and learnt that in the event of any breach the promoter can be made liable to hand over to the company. If he charges a price higher than the negotiated price. If. he must sell the property to the company at the negotiated price.. the benefit of any negotiation or agreement that he has carried on in a his capacity of a promoter. a prornotcr is bound to disclose to the company all relevant facts including any profit made from the sale of his own property to the company and his personal intercst in a transaction with the company. the companx has the following r . all the relevant facts of the transaction including his personal interest and the profits made.the company is entitled to rescind the contract. If tklere is no intfcpendent Board of Directors. as the promoter. 'A' could have retained the profits tnade by him if he had made a full disclosure to the directors of the company o r to the shareholders of the company. However. the company is entitled to cWm damages from the promoters and the amount of damages shall be equal to the amount of profits made by promoters. when he has negotiated a certain prict for some land for the company.As there was no disclosure by the promoters of the profits they were making. If he contracts to sell his own property to the company without making a full disclosure. 11) Order for rc 'iund . 3 To give the benefit of negotiations to the company: The promoter must pass on to the company.

.8 of this Unit.......... rhe liabiliijl of the gfddbter.. by a ptfson who has subscribed for the shares and debentures of the company acting on the faith of the prospectus.... iv) Section 478 states the power ofdhe court to order publit examination of all the promoters held guilry of fraud in promotion or formation of a cdwpany. formation or management of a company. . the promoter may be held 1iable... ) Section 203 providas'that the court may suspend a promoter from taking part in the management of tha kbrtipeny far a period of five years if he is convicted of any offence in connection with the gramotian... a promoter can also be held liable if he had misapplied or retained any of the property of the company or is found guilty of breach of ftust or misfetlisance in relation to the company... The promoter may have to bear this criminal liability for mis-statements unless he can pkove that ttie rrhftllt?stdiemerit Wars immaterial or that he was justified in believing... .. iii) Section 63 discusses the criminal liabilities for issuing a prospectus which contains untrue statements...may be a promoter..b~the shareholders... Thq promoter may be held liable to pay Cmpensation to every person who subscribes for shares or debentures for any loss' damage sustained by him on account of the untrue statements made id the prospeci:!S. 2 Fill in the blanks a) A promoter plays a very important role in1 the ... b) Besides an individual even an . .... is discussed below : i) Section 56 explainsthe nraif@r~ that should be stated and the reports that should be set oilt in the prospectus. under the Companies Act. You shall learn about pre~incorporation........ that the statement was true at the time of issue of prospectus.......... V) Section 543 of the Act provides for the liability for misfeasance or breach of trust by mhdpplication offunds during the formation of the company... t%d$61onof thd u&fitfectof sale made by the promoter if the promoter has not made a dirkfosure d hfs IntereLt t a fhe company.. If this provlgion is not compiled with. the p s m o t e r can also be held liable for public examination by the Court. Under this sectiofi the promoter can be held liable for any fake statements in the prospectus.contractsin 3. It is clearly provided that in additiod to the civil liability mentioned in the above two cases. These remedies are common f3 dl) persons who cA2 be held liable for mis-statement in the prospectus. Like any ather director or officer of the company. If in the event of winding up of the company the liquidators report alleges a fraud in the promotion or formation of the company.. the promoters can be held Criminally liable if the prbspectus issued by them contained mis-statements. The punishntsnt prescribed is imprisonment extending upto two years or a fine upto 50C#) rup?&sor both... Check Your Progress B 1 List three important duties of promoters.. like any other difdCtor o r officer of the mmpany... Even the death of the promater does not relieve him from this liability... You will study mat&&boutthese remedies in Unit 7 of this course..of a company... becaus4 of reasonable gtaunds. ii) Section 62 discusses the civil liabilities for any mk-statements made in the prospectus. IJndrrrSection 62 specifie provisions have also been made sf the gf&mds bn which th$ gr@tnatercan avoid his liability. vii) The promoters are personally liable for pre-incorporation contracts.

f) A promoter can be made liable to hand over to the company any ... therefore..... for acquisition of assets for the company... ....... For all these important activities and his considerable effort he should be suitably remunerated..... v) He may be given a commission at a fixed rate on the shares sold. therefore. He has to incur preliminary expenses as well.. The promoters cannot claim as a matter of right any remuneration from the company.............. the company............. . Whatever is the manner in which the company chooses to compensate for the services of the promoter. 3 ..... Before the company is brought into existence he has to complete all the formalities....... ......................... the idea of setting up a business and then organise .......... This option is generally limited to a certain period which means that the promoter must subscribe to the shares within a certain time....... In actual practice........ While this provision gives the director an authority to make such payment... He.... directors of the company are generally appointed by the promoters.. he may sell the same to the company at a higher price after making a full disclosure of the price paid'and the profit earned...... d) ... he is also in a peculiar position for doing all these activities for a company that is not yet in existence......... isuaily agrees to pay some remuneration for the valuable services rendered by the promoters. made by him........ he has no valid claim against the company for remuneration. iv) He may be paid a certain lump-sum by the company as a remuneration for services rendered...... it does not give the promoters a right to claim remuneration or to sue the company.. to the company....... g) A promoter stands in a ...... You must note that even if the promoter has entered into a contract with the prospective directors before the incorporation... e) The promoters enter into ........... This is so because the directors cannot enter into any contract on behalf of a company that is not yet in existence.... 7 REMUNERATION OF PROMOTERS You have noted through the above paragraphs that the promoter occupies a unique position in relation to the company...... to convert this idea.. The remuneration to the promoter may be paid in any of the ways mentioned above........ once it is registered.......... spend considerable skill and effort and organise necessary resources so that the company can be formed.. iii) The company may allot to the prAmoters fully paid up shares of the-company..... after he has made a full disclosure about the valuation and the profit earned to an indeperident Board of directors. bi) The company may give him an option to subscribe for a certain number of the company's unissued shares at par. There are also cases where the articles of a company may specifically provide that a specified sum may be paid to the promoters as remuneration for their services....... for the same........ However. ii) If the promoter has purchased some business or some other property to be sold ... is not entitled to recover any remuneration for his services unless the company after getting formed enters into a specific contract with the promoter for this purpose.... if the remuneration is paid within two years preceding \'he date of the prospectus. This remuneration may be paid to the promoters in any of the following ways: i) He may be allowed to sell his own property to the company for cash at a price higher than the valuation........ I ... the amount of remuneration and the manner of payment must be disclosed in the prospectus.relationship towards the company...... c) Promoter ..........

The solicitor sued for his expenses and the fees paid by him. For example.Ltd.8 POSITION OF PRELIMINARY CONTRACTS In order to fulfil the necessary formalities and organise the required resources for the formation of the company. . In the case of Kelner . You must note that such preliminary or pre-incorporation contracts are-not legally binding on the company even after its incorporation. In the above paragraph the term "contracts for the purposes of the company" means contracts which are necessary for the incorporation and working of the company. You will recall from your study of the Unit on agency that for valid ratification of a contract. it also cannot enforce such contracts made before incorporation. On registration. The solicitor also paid the necessary registration fee of the company. In relation to the above two rinciples. iii) The company cannot ratify the preliminary contracts . the company is not bound by the preliminary contracts . the company is not bound to pay. 1963. It was held that the company cannot sue 'X' and cannot claim specific performance as it was not even in existence when the lease was signed.Pvt.After incorporation the Company cannot ratify the contracts formed before its existence.entity. contracts for the preparation and printing of the memorandum and articles or contracts for the supply of necessary raw material for the production work in the company are contracts for the purposes of the company. It should be clear to you now that in order to be enforceable. These promoters later became the directors of the company. For example. B and C. 'X' the owner of a piece of land in Assam agreed to lease it to a company t o be formed by promoters A. All such contracts entered into by the promoters with the third parties for the proposed company (before incorporation) are called 'preliminary contracts'. it is necessary that the company after its incorporation accepts the contract and communicates its acceptance to the other contracting party. specific performance may be obtained by or against the company. On some prospecting of the land. The company cannot enforce preliminary contracts -You must note that just as the company cannot be held liable for the preliminary contracts. if the company has accepted the contract after the incorporation and has communicated such acceptance to the other party". The reason for this is that before incorporation the company cannot enter into contract as it has no legal entity. it was discovered that there was a definite possibility of striking oil in that land. These provisions provide an important exception to the above principles. before its incorporation. Not only this. entered into contracts for the purpose of the company and such contracts are warranted by terms of incorporation. the promoters of a company enter into contracts for a company which is yet to be incorporated. According to Section 15 and 19 of the Specific Relief Act "where the promoters of the Company have. by the promoters.on the date of contract. important provisions have been made in our f country in the Specific Relie Act.A company is not bound by the preliminary contracts even if the company has taken the benefit of the work on its behalf under the contract. ii) . the principal must have been in existence at the time when the promoters entered into such contracts. For example. it cannot ratify a preliminary contract on being incorporated.Company and its Formation 3. a solicitor was appointed by the promoters of the company and was instructed by them to prepare the articles and the memorandum of the company.Pvt. These contracts are generally entered into by the promoters in order to acquire some property or some rights for the company that they are interested in promoting. The promoters later on formed a company called M. Subsequently 'X'refused to grant the lease to the company M. the company cannot ratify such contracts after incorporation because. And as the company does not exist. A company can neither sue nor be sued on such contracts since a company before incorporation is a non. This means that on account of a preliminary contract the company does not get a right to sue the third party for fulfilment of the contract. it is essential that the principal must exist of the date when the contract is originally entered into. The position of these contracts can be explained as follows. Ltd. It was held that since the company was not in existenct when these expenses were incurred. for valid ratification.

The preliminary contracts made by the promoters generally contain a provision that if the company adopks the agreements on incorporation. You have already learnt that the company is neither bound nor entitled on account of a preliminary contract. it was held as the company was not in existence when the preliminary Promoters contracts were made. therefore. the liability OF the promoters shall come to an endsand if the company does not adopt the preliminary contract within a specified period either party may rescind the contract. ii) In the absence of a contract with the company. the company can ratify the preliminary contracts. ix) A preliminary contract cannot be enforced by the company against the third parties. in such a case liability of the promoter will cease on the expiry of the specified period. Therefore.Baxter. x) Promoters are personally liable for preliminary contracts. vii) Upon registration the company is not bound by the preliminary contracts. as known to both the contracting parties. is deemed to be personally entered into by the promoters and they will be held personally liable for the performance of these contracts. viii) If all the members of the company agree. The contract. The reason for this is that the preliminary contract is made for a company which. it need not be mentioned in the prospectus. it is the promoters alone who remain personally liable for the preliminary contracts.The promoters are personally liable for contracts made for a company which is not yet in existence. iv) If a prospectus is issued within fifteen months of the remuneration being paid to the promoters. the promoter cannot recover the payments he has made in connection with the formation of the company. v) In the remuneration to the promoter is paid in cash and the prospectus is issued within two yeaiiof the date of remuneration being paid. vi) The liability of the promoter for the preliminary contracts ceases as soon as the company is formed. What the company can'do is to enter into a new contract with the vendors after incorporatior) to give effect to the terms of the contract ma& before incorporation. he can sell his own property to the company at a higher price. iv) Liability of the promoter for preliminary contracts . it could not be bound by any purported ratification. Check Your Progress C 1 Enumerate three ways in which the promoter can be remunerated. is as yet non-existent. iii) If the promoter has made the necessary disclosures. the fact of the remuneration need not be mentioned in the prospectus. 2 What is a pre-incorporation contract? 3 State whether the followi~lgstatements are true or false. v. . i) A promoter is entitled to be suitably remunerated for the services rendered during formation of the company.

Further. If it is found that a secret profit has been made by promoters. 7 Explain the statement that "Promoter is not a trustee or an agent of the company but he stands in a fiduciary position towards it. B 2 a) formation b) association or a company c) conceives. On incorporation. Try t o write answers for them. Such contracts are no legally binding on the company because at the time of making of the contract. C 3 i) False ii) True iii) True iv) False v) False vi) False vii) True viii) False ix> True I x) True 3. Secret Profits: Profits made without making a full disclosure of all relevant facts. 6 What do you understand by preliminary contracts? Discuss (a) the position of the company in relation to the preliminary contracts. 4 Discuss the liabilities of a promoter. and (b) the liability of the promoter for a preliminary contract." 8 Why pre-incorporation contracts are not binding on the company? Note: These qnestions will help you to understand the unit better. Contracts entered into befofe the incorporation of a company are termed as pre-iqcorporation or preliminary contracts. Thus. A promoter cannot be allowed to make any secret profits.9 LETUSSUMUP Promotion is the first step in the formation of a company. 3. Ratification: To approve of an act already done. the promoters are not allowed to derive a profit from the sale of his own property to the company unless all material facts are disclosed.12 TERMINAL QUESTIONS/EXERCISE 1 Define the term 'promoter' and explain the functions performed by him. I . a promoter who wishes to sell his own property to the company must make a full disclosure of his interest. 1 ANSWERS TO CHECK YOUR PROGRESS A 5 i) True ii) False iii) True iv) False v) True vii) True viii) False. These are for your practice only. 5 Is a promoter entitled to remuneration for the services rendered by him during the formation of the company? List the ways in which a promoter might be given remuneration.10 KEY WORDS Promoter: The person who performs various functions in relation to the formation of a company. Even if the company has received the benefit' of work done. Preliminary contracts: Contracts made before the incorporation of the company. A promoter occupies a unique position in relation to the companyas he is neither an agent nor a trustee of the company and yet has fiduciary relationship with the company. 3 What are the fiduciary duties of a promoter towards a company promoted by him. I 2 Discuss the legal position of a promoter. Prospectus: A document issued by the company inviting public to subscribe for its shares or debentures. the company shall not be bound by it. the company cannot ratify preliminary contracts. But do not submit your answer to the University.Company and Its Formation 3. resources d) first e) preliminary contracts f) secret profits g) fiduciary. 3 . Fiduciary relation: The relationship based on mutual trust and confidence. then the promoters are bound to refund the money to the company. the company was not in existence.

5. You know that a private limited company can commence business immediately after obtaining the certificate of incorporation. The procedure for obtaining the certificate of commencement of business has also been discussed. UNIT 4 FORMATION OF COMPANY Structure 4. It involves the following three stagks: 1 Promotion 2 Registration or incorporation.2 STAGES IN THE FORMATION OF A COMPANY The formation of a company is a lengthy process.1 Introduction 4.8 Key Words 4. In this unit. and 0 describe the procedure for obtaining the certificate of commencement of business.2 Procedure for Obtaining the Certificate of Comqencement of Business 4. Imorporation 4. @ explain the meaning of the certificate of incorporation.1 Cbnclusivenessof Certificate of Incorporation 4.7 Let Us Sum U p 4. Figure 4.5 . .3 Promotion 4.5.4 Documents to be Filed with the Registrar 4. but a public limited company is required to wait till another certificate known a:.6. take certain steps to form the company. and 3 Commencement of business Each of the ab'ove stages comprises specific activities to be undertaken.2 Effects of Registration 4.0 Objectives 4. after satisfying themselves about the viability of the business. @ explain the effects of registration.6 Commencement of Business 4.9 Answers to Check Your Progress 4.10 Terminal Questions 4. make a detailed investigation and.1 INTRODUCTION In Unit 1 you learnt that a company is an artificial person created by law and has a distinct separate legal entity of its own. you should be able to: @ describe the stages in the formation of a company. 4. 'certificate of commencement of business is obtained. 4.1 gives you an overview of the activities involved in the various stages of formation of a company.1 Certificate of Commencement of Business' 4. You have also learnt in Unit 3 that before a company is actually formed.2 Stages in the Formation of a Company 4. e enumerate the documents to be filed with the registrar.0 OBJECTIVES After studying this unit.6. you will learn about the various stages involved in the formation of a company and the documents which are required to be filed with the Registrar of Companies. certain persons known as 'promoters'.