UNIT 3

● Promoter
● The term promoter has not been defined under the Companies Act 1956. Whereas Sec
2(69) of the Companies Act 2013 defines the term “promoter”
● Promoter mean a person-
- Who has control over the affairs of the company, directly or indirectly whether as
a shareholder, director or otherwise or
- In accordance with those advice, directions, or instructions, the board of directors
of the company is accustomed to act
- Who has been named as such in prospectus (or) is identified by the company in
the annual return referred to in Sec 92 or
- Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity

● From the functional point of view a promoter can be defined as a person-

- Who conceives the idea of business
- Originates the scheme for formation of the company
- Takes necessary steps to incorporate the company
- Get-together the subscribers to the memorandum
- Finds the bankers, brokers and legal advisors
- Settle the term of prelim contracts with vendors
- Make arrangements for the preparation, advertisement and circulation of
prospectus.
- File all the documents connected with the incorporation and get the company
incorporation and
- Ensures, that the memorandum and articles are prepared executed and
registered
Thus, the promoter is one who brings the company into existence

● Legal Position of a Promoter:

● A promoter is not a director or employee or agent or trustee for the proposed company,
since the company itself has not come into existence. Thus, legally a promoter cannot
be an agent or trustee for the proposed company
● However, the law imposes certain duties, functions, responsibilities and liabilities on a
promoter which are like that of an ‘agent or trustee’ for the proposed company
● This position of the promoter like that of an agent or trustee is called the ‘fiduciary
capacity or fiduciary role or fiduciary duties’ of a promoter
● This, in the fiduciary capacity they shall act as agents or trustees of the company and
should not make any secret profit at the expense of the company
● Duties of Promoter
● A promoter cannot make any profit at the expense of the company he promotes either
directly or indirectly without any knowledge and consent of the company
● Similarly he is not allowed to derive any profit from the sale of his own property to the
company unless all material facts are disclosed.
- Erlanger V. New Sombrero Phosphate Co.
- Gluekstein V. Barness
- Lady Well Mining Co. Ltd. V. Brooks

● What law prohibits is not the profits made by the promoter but the non-disclosure of the
same. If full disclosure is made the profit is admissible.
● The disclosure should be made to the following persons -
- To board of directors or
- In the articles of association of the company or
- In the prospectus or
- To the existing members of the company directly

● Remedies against the Promoted Available to the Company -

● Where a promoter bought the property with a view to sell it to the company he promotes
and sells the same without disclosure of profit, the company has the following remedies
against such promoter:
- Rescind the contract and recover the money if any already paid on the
transaction or
- Retain the property, pay the promoter only the cost value and deprive him of the
profit or
- Where the above remedies are inappropriate, the company may sue for
misfeasance i.e. breach of duty to disclose

● The measure of damages will be the difference between the amount paid and the market
value of the contract

● Remuneration of promoter
● A promoter is paid remuneration for the services rendered by him as per the AOA or as
agreed by the BOD
● A promoter can be remunerated in any one of the following basis:
- He may sell his property to the company for cash at overvaluation after full
disclosure
- He may sell his property to the company for fully paid-up shares, at an
overvaluation after full disclosure
- He may take commission on the shares held
- He may be paid lump sum amount by the company
- He may be granted some shares in the company at par
 - He may be given an option to buy further shares in the company at par in future.

● Contracts
● A company being an artificial person can contract only through its agents. There are 3
situations in the case of every company in which contracts are made -
- Contracts made on behalf of the company before its incorporation(certificate of
incorporation - preliminary or pre-incorporation contracts - not liable on
company but on the promoters if the situation demands(indian law/ under english
law the promoters are absolutely liable) - contracts entered into for the purpose
of incorporation
- Contracts made after incorporation but filing of the prescribed declaration by a
director with the Registrar under section 11 (which is a mandatory requirement
before the company can commence business) - provisional contracts -
applicable to public companies having share capital
- Contracts made after the company becomes entitled to commence business -
regular contracts.

● Preliminary or Pre-incorporation Contracts:

● Preliminary contracts are those contracts made by the promoters on behalf of the
company before its incorporation
● Primitive contracts will not bind the company since the company was not in existence at
the time of contract and therefore the company had no capacity to contract to that time
● Even if the contract was entered on behalf of the company for the purpose of the
company and for the benefit of the company, such contracts will not bind the company
● Even after incorporation of the company the preliminary contract cannot be ratified by
the company
● Thus, the promoters alone shall be personally liable for the preliminary contracts entered
on behalf of the company
● The only alternative available to the company is that it shall enter into a new contract
after incorporation to give effect to the old contract
● In Kelner V. Baxter (1866) L.R. 2 C.P. 174 - three persons A, B and C enter into a
contract as agents on behalf of a company before its incorporation for the purchase of
certain goods from Kelner and signed it as “A, B and C Directors”. The company later
obtained the certificate of incorporation. It was held that A, B and C were personally
liable on the agreement and no subsequent ratification by the company would relieve
them from that liability.
● In Howard V. Patent Ivory Co. (1888) 38 Ch.D - a company cannot ratify a pre-
incorporation contract, but it is open to enter into a new contract after its incorporation to
give effect to a contract made before its formation. Since the pre-incorporation contract
is a nullity, even the company cannot sue the vendor of property if he fails to carry out
such a contract
● Under Indian Law, however, under section 15 and 19 of Specific Relief Act 1963, a
preliminary contract shall bind the company subject to the following conditions -
 - Such preliminary contracts were warranted by the terms of incorporation of the
company and was specified in the memorandum/articles
- Such contract should be ratified after the incorporation of the company
- Such ratification should be communicated to the other party to the contract

● In Inlec Investment (P) Ltd. V. Dynamic Hydraulics Ltd. (1989) 3 Comp LJ 221, 225
(CLB)- a company cannot acquire shares prior to its incorporation. Where a company
was named as the transferee in the share transfer forms prior to its incorporation, it was
held that such transfers could not be registered.
● Provisional Contracts:
● A private company can commence business immediately after incorporation, but a public
company can commence its business only after obtaining certificate of commencement
of business
● In case of public company, contracts made after incorporation but before grant of
certificate of commencement (submission of declaration), of business are called
provisional contracts
● Provisional contracts will not bind the company until the company is entitled to
commence business. However, on issue of such certificate to commence business such
contracts will automatically bind the company without any ratification, right from the date
of the contract
● In Re. Electrical Manufacturing Co. (1906) 2 Ch. 390, a public company is wound up
before it is entitled to commence business persons who have rendered services or
supplies or materials to the company can have no claim against it.
● Regular Contracts:
● It refers to post incorporation contract in case of private company and contracts entered
after getting the certificate of commencement of business in case of a public company
● All the contracts entered on behalf of the company by the director/officer will bind the
company. However, in order to bind the company, the contracts must be -
- Entered in the name of the company
- The proposed contract should not be beyond the scope of MOA of the company.
If so, they are ultra vires contracts and cannot be ratified by the company in
which case the directors/officers shall be personally responsible
● Commencement of Business
● According to section 11(1), every company having a share capital shall not commence
any business or exercise any borrowing powers unless -
- A declaration is filed by a director in such form (Form No. INC 21) and verified,
with the Registrar, that every subscriber to the memorandum has paid the value
of shares agreed to be taken by them on the date of making this declaration and
- The company has filed with the registrar a verification of its registered office as
provided in section 12(2)

● If any default is made in complying with the requirements of this section, the company
shall be liable to a penalty which may extend to Rs.5000 and every officer who is in