When you assume the role of a promoter in a company, whether public or private, you need to follow all the

necessary steps for the formation of a company. A pe rson who carries out all the initial steps for the incorporation of a company is known as the promoter of the company. Typically, a promoter takes care of all t he essential activities that help to establish a company. A promoter conceptualizes the idea of a company and the purpose of its formation . The promoter acquires and invests the initial capital for the company. Once al l the formalities are completed, the promoter hands over the authority to the di rectors. A promoter can be a person or a registered company as well. Company Law: What are the Functions of a Promoter? The role of a promoter is to perform many functions before he can actually start a company, and this includes: Conceptualizing the scheme of company formation. Finalizing the name of the company and getting it registered. Filing the important documents, such as Memorandum and Articles of associati on with the Registrar. Getting the consent of the director before finalizing the nomination. Completing the formalities regarding the nomination of directors, secretary, etc. Organizing the printing of Memorandum and Articles. Handling the complete procedure for the registration of the company. Handling the details relating to the prospectus. Making necessary appointments of lawyers, bankers and agents. Obtaining the co-operation of all the people who are associated with the com pany. Final Legal Take Away Tip: The promoter of the company is not entitled to get an y remuneration for his services unless there is a legal agreement stating so. In the absence of such a contract, a promoter has no legal right to claim any comp ensation. However, the promoter can take his remuneration in many ways, such as he may be allotted a certain number of shares. Answer: Promotion of a company is concerned with taking the steps necessary for incorpor ation. (a) Definition "Promoter" is not defined in the Companies Act. Some attempts at definition have been made by the courts: Twycross v Grant (Case 1) Whaley Bridge Printing Co v Green (Case 2) Whether someone is acting as promoter of a company is a question of fact rather than a question of law. (b) Duties of Promoters In the 19th century, it was common for promoters to sell their own property to a newly formed company at an inflated price, or to acquire assets for the company and receive a commission from the seller. The courts then began to impose a fiduciary duty on promoters similar to that im

posed on agents. A promoter must disclose any profit or potential conflict of in terest to either: (i) an independent board of directors, or (ii) existing or intended shareholders. (c) Remedies for Breach of Promoters Duty (i) Where promoter has sold his own property to the company, without disclos ing this - the company can rescind the contract and recover the purchase price: Erlanger v New Sombrero Phosphate Co (Case 3) Right of recission is lost if restitutio in integrum is not possible. (ii)The promoter may have to account to the company for any profit he has made. Gluckstein v Barnes (Case 4) (iii)The company may be able to sue the promoter for damages for breach of fiduc iary duty. Re Leeds & Hanley Theatre of Varieties (Case 5) (d) Payment of Promoters A company cannot enter into a contract before incorporation - so a promoter has no legal claim against the company for fees and expenses. In Scotland, memorandum or articles of the company can be drawn up with a provis ion that the company will pay fees and expenses incurred in promoting the compan y. (e) Suspension of Promoters Company Directors Disqualification Act 1986, s.2(1) The court can make a disqualification order against a person who has been convic ted of an indictable offence in connection with the promotion, formation or mana gement of a company. The order can be for a maximum of 15 years - a person who is disqualified is pro hibited from directly or indirectly taking part in the promotion or formation of a company a promoter is someone who helps in the documentation and establishment of a comp any. The person who does the process of conceiving a business is known as a PROMOTER I. Promotion : Refers to the entire process by which a company is brought into existence. It st arts with the conceptualisation of the birth a a company and determination of th e purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company. The promote rs enter into preliminary contracts with vendors and make arrangements for the p reparation, advertisement and the circulation of prospectus and placement of cap ital. However, a person who merely acts in his professional capacity on behalf o

f the promoter (eg lawyer, CA, etc) for drawing up the agreement or other docume nts or prepares the figures on behalf of the promoter and who is paid by the pro moter is not a promoter. The promoters have certain basic duties towards the company formed :He must not make any secret profit out of the promotion of the company. Secr et profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of t he profit to the company or its members. The promoter can make profits in his de alings with the company provided he discloses these profits to the company and i ts members. What is not permitted is making secret profits i.e. making profits w ithout disclosing them to the company and its members. He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. In case of default on the part of the promoter in fulfilling the above duties, t he company may :Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered Retain the property paying no more for it then what the promoter has paid fo r it depriving him of the secret profit. If these are not appropriate (eg cases where the property has altered in suc h a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach o f trust. Damages upto the difference between the market value of the property an d the contract price can be recovered from him. A promoter may be rewarded by the company for efforts undertaken by him in formi ng the company in several ways. The more common ones are :The company may to pay some remuneration for the services rendered. The promoter may make profits on transactions entered by him with the compan y after making full disclosure to the company and its members. The promoter may sell his property for fully paid shares in the company afte r making full disclosures. The promoter may be given an option to buy further shares in the company. The promoter may be given commission on shares sold. The articles of the Company may provide for fixed sum to be paid by the comp any to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it ba ck. If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relyin g on that statement makes a loss, he will be liable to make good the loss suffer ed by that other person. The promoter is liable for untrue statements made in th e prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the pr omoter for the loss or damages sustained by him as the result of such untrue sta tement. II.Incorporation by Registration : The promoters must make a decision regarding the type of company i.e a pulic com pany or a private company or an unlimited company, etc and accordingly prepare t he documents for incorporation of the company. In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared. Memorandum of Association of a company :

Is the constitution or charter of the company and contains the powers of the com pany. No company can be registered under the Companies Act, 1956 without the mem orandum of association. Under Section 2(28) of the Companies Act, 1956 the memor andum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies la w or the Companies Act, 1956. The memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is appli cable to the companies limited by guarantee and not having share capital, form i n Table D is applicable to company limited by guarantee and having a share capit al whereas form in table E is applicable to unlimited companies. Contents of Memorandum : The memorandum of association of every company must contain the following clause s :Name clause The name of the company is mentioned in the name clause. A public limited compan y must end with the word 'Limited' and a private limited company must end with t he words 'Private Limited'. The company cannot have a name which in the opinion of the Central Government is undesirable. A name which is identical with or the nearly resembles the name of another company in existence will not be allowed. A company cannot use a name which is prohibited under the Names and Emblems (Prev ntion of Misuse Act, 1950 or use a name suggestive of connection to government o r State patronage. Domicile clause The state in which the registered office of company is to be situated is mention ed in this clause. If it is not possible to state the exact location of the regi stered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 mus t be given to the Registrar of Comapnies within 30 days of the date of incorpora tion of the company. Similarly, any change in the registered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The regis tered office of the company is the official address of the company where the sta tutory books and records must be normally be kept. Every company must affix or p aint its name and address of its registered office on the outside of the every o ffice or place at which its activities are carried on in. The name must be writt en in one of the local languages and in English. Objects clause This clause is the most important clause of the company. It specifies the activi ties which a company can carry on and which activities it cannot carry on. The c ompany cannot carry on any activity which is not authorised by its MA. This clau se must specify :Main objects of the company to be pursued by the company on its incorporatio n Objects incidental or ancillary to the attainment of the main objects Other objects of the company not included in (i) and (ii) above. In case of the companies other than trading corporations whose objects are not c onfined to one state, the states to whose territories the objects of the company extend must be specified. Doctrine of the ultra-vires Any transaction which is outside the scope of the po wers specified in the objects clause of the MA and are not reasonable incidental

ly or necessary to the attainment of objects is ultra-vires the company and ther efore void. No rights and liabilities on the part of the company arise out of su ch transactions and it is a nullity even if every member agrees to it. Consequences of an ultravires transaction :The company cannot sue any person for enforcement of any of its rights. No person can sue the company for enforcement of its rights. The directors of the company may be held personally liable to outsiders for an ultra vires However, the doctrine of ultra-vires does not apply in the following cases :If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable. If an act is ultra-vires the articles of the company but it is intra-vires o f the memorandum, the articles can be altered to rectify the error. If an act is within the powers of the company but is irregualarly done, cons ent of the shareholders will validate it. Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim a gainst the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restra ining the company from parting with it provided that he intervenes before is mon ey spent on or the identity of the property is lost. The lender of the money to a company under the ultra-vires contract has a ri ght to make director personally liable. Liability clause A declaration that the liability of the members is limited in c ase of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to con tribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaratio n that the liability of the members is unlimited in case of the unlimted compani es must be given. The effect of this clause is that in a company limited by shar es, no member can be called upon to pay more than the uncalled amount on his sha res. If his shares are already fully paid up, he has no liabilty towards the com pany. The following are exceptions to the rule of limited liability of members :If a member agrees in writing to be bound by the alteration of MA / AA requi ring him to take more shares or increasing his liability, he shall be liable upt o the amount agreed to by him. If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimi ted liability. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in ca se of a private limited company ) and the company has carried on business for mo re than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the compan y contracted during that time. Capital clause The amount of share capital with which the company is to be regis tered divided into shares must be specified giving details of the number of shar es and types of shares. A company cannot issue share capital greater than the ma ximum amount of share capital mentioned in this clause without altering the memo randum.

Association clause A declaration by the persons for subscribing to the Memorandu m that they desire to form into a company and agree to take the shares place aga inst their respective name must be given by the promoters. Articles of Association The Articles of Association (AA) contain the rules and regulations of the intern al management of the company. The AA is nothing but a contract between the compa ny and its members and also between the members themselves that they shall abide by the rules and regulations of internal management of the company specified in the AA. It specifies the rights and duties of the members and directors. The provisions of the AA must not be in conflict with the provisions of the MA. In case such a conflict arises, the MA will prevail. Normally, every company has its own AA. However, if a company does not have its own AA, the model AA specified in Schedule I - Table A will apply. A company may adopt any of the model forms of AA, with or without modifications. The articles of association should be in any of the one form specified in the tables B,C,D a nd E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the c ompanies limited by guarantee and not having share capital, form in Table D is a pplicable to company limited by guarantee and having a share capital whereas for m in table E is applicable to unlimited companies. However, a private company mu st have its own AA. The important items covered by the AA include :Powers, duties, rights and liabilities of Directors Powers, duties, rights and liabilities of members Rules for Meetings of the Company Dividends Borrowing powers of the company Calls on shares Transfer & transmission of shares Forfeiture of shares Voting powers of members, etc Alteration of articles of association : A company can alter any of the provision s of its AA, subject to provisions of the Companies Act and subject to the condi tions contained in the Memorandum of association of the company. A company, by s pecial resolution at a general meeting of members, alter its articles provided t hat such alteration does not have the effect of converting a public limited comp any into a private company unless it has been approved by the Central Government . The articles must be printed, divided into paragraphs and numbered consequently and must be signed by each subscriber to the Memorandum of Association who shall add his address, description and occupation in presence of at least one witness who must attest the signature and likewise add his address, description and occ upation. The articles of association of the company when registered bind the com pany and the members thereof to the same extent as if it was signed by the compa ny and by each member. III. Registration of the Company Once the documents have been prepared, vetted, stamped and signed, they must be filed with the Registrar of Companies for incorporating the Company. The followi ng documents must be filed in this connection :The MA & AA An agreement, if any, which the company proposes to enter into with any indi

vidual for appointment as its managing director or whole-time director or manage r. A statutory declaration in Form 1 by an advocate, attorney or pleader entitl ed to appear before the High Courty or a company secretary or Chartered Accounta nt in whole - time practice in India who is engaged in the formation of the comp any or by a person who is named as a director or manager or secretary of the com pany that the requirements of the Companies Act have been complied with in respe ct of the registration of the company and matters precedent and incidental there to. In addition to the above, in case of a public company, the following documen ts must also be filed :Written consent of directors in Form 29 to agree to act as directors The complete address of the registered office of the company in Form 18 Details of the directors, managing director and manager of the company i n Form 32. Certificate of Incorporation Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Compan y. This document is the birth certificate of the company and is proof of the exi stence of the company. Once, this certificate is issued, the company cannot ceas e its existence unless it is dissolved by order of the Court. IV. Commencement of Business A private company or a company having no share capital can commence its business immediately after it has been incorporated. However, other companies can commen ce their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be com plied with :1. If a company has share capital and has issued a prospectus, then :Shares upto the amount of minimum subcription must be alloted Every director has paid to the company on each of the shares which he ha s taken the same amount as the public have paid on such shares No money is or may become payable to the applicants of shares or debentu res for failure to apply for or to obtain permission to deal in those shares or debentures in any recognised stock exchange. A statutory declaration in Form 19 signed by one director or the employe e - company secretary or a Company secretary in whole time practice that the abo ve provisions have been complied with must be filed 2. If a company has share capital but has not issued a prospectus, then :It must file a statement in lieu of prospectus with the Registrar of Com panies Every director has paid to the company on each of the shares which he ha s taken the same amount as the other members have paid on such shares A statutory declaration in Form 20 signed by one director or the employe e - company secretary or a Company secretary in whole time practice that the abo ve provisions have been complied with must be filed Once the above provisions have been complied with, the Registrar of Companies gr ants "Certificate of Commencement of Business" after which the company can comme nce its activities. the formation of a company is a lengthy process. It involves several stages. T he first stage in the process of formation is the promotion. At this stage the idea of carrying on a business is conceived by a person or by a group of persons called promoters. For incorporating For incorporating a company various formal

ities are required to be carried out. The promoters perform these functions and bring the company into existence. Promoter: Meaning and Importance

A company is an artificial person by law. A company is born only when it is dul y incorporated. For inforporating a company various documents are to be prepare d and other formalities are to be completed. All these work is done by promoter s. Gerstenberg has defined promotion as the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits therefrom. After the idea is conceived, the promoters make detailed investigation to find out the weaknes s and strong points of the idea, determine the amount of capital required and es timate the operating expenses and probable income. On being satisfied about the economic viability of the idea, the promoters take all the necessary steps for incorporating the company. The Companies Act does not define the term promoters anywhere, it only refers to the liabilities of the promoters. A number of judicial decisions have defined the term promoter. According to L. J. Bowen, the term promoter is a term not of law but of business, usefully summing up in a single world a number of business operations familiar to the commercial world by which a company is generally bro ught into existence. Another definition given by Lord Blackburn states that "the term promoter is a s hort and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company". Justice C. Cockburn described a promoter as "one who undertakes to form a compan y with reference to a given project and to set it going, and who takes the neces sary steps to accomplish that purpose". A Company may have more than one promoter. The promoter may be individual, firm , and association of persons or a body corporate. Even if a person has taken a very minor part in the promotion activities, he may still be a promoter. But a person cannot be held as promoter merely because he has signed at the foot of th e memorandum or that he has provided money for the payment of formation expenses . Everyone who is associated with the process of the formation of a company cannot be called a promoter. For example, a solicitor who draws up the documents of t he proposed company in his professional capacity is not a promoter in the eye of law. Similarly, an engineer who advises on the selection of site or a valuer w ho helps with drawing the estimates would not be regarded a promoter. Section 6 2(6) makes it clear that persons assisting the promoters by acting in a professi onal capacity e.g. solicitors, accountants and other experts are not promoters. From the above it should be clear inary duties necessary to bring a o describe a person as a promoter a company and take steps to give that a promoter is one who performs the prelim company into existence. Thus, the true test t lies in finding out whether he is keen to from it a concrete shape.

The promoters, in fact, render very useful services in the formation of a compan y. They render a very useful service to society and they play an important role in the industrial development of countries. A promoter has been described as a creator of wealth and an economic prophet. The promoters carry considerable ri sk because if the idea sometimes goes wrong then the time and money spent by the m will be a waste. Functions of a promoter

A promoter plays a very important role in the formation of a company. A promoter may be an individual, an association or a company. In their capacity as promote rs, they perform the following functions in order to incorporate a company and t o set it going. To originate the scheme for formation of the company: Promoters are generally t he first persons who conceive the idea of business. They carry out the necessar y investigation to find out whether the formation of a company is possible and p rofitable. Thereafter they organize the resources to convert the idea into a re ality by forming a company. In this sense, the promoters are the originators of the plan for the formation of a company. To secure the cooperation of the required number of persons willing to associate themselves with the project: The promoters, in accordance with whether they wa nt to incorporate a private or public company, try to secure the co-operation of persons needed to from the company. Minimum number of members required to from a public company is seven and that for a private company the minimum number is two. Depending upon the form chosen, the promoters may decide upon the number o f primary members. To seek and obtain the consent of the persons willing to act as first directors of the company: The company has a system of representative management and is man aged by individuals appointed as directors. The first directors of the company are, however, generally appointed by the promoters. The promoters seek the conse nt of some individual whom they seem appropriate so that they agree to be the fi rst directors of the proposed company. To settle about the name of the company: The promoters have to seek the permissi on of the Registrar of companies for selecting the name of the company. The pro moters usually give three names in order of preference. The promoters should ens ure that the name of the company should not be identical with or should not too closely resemble the name of another existing company. To get the documents of the proposed company prepared: Certain documents like t he Memorandum of Association and the Article of association are required to be f iled with the Registrar of Companies before the company is registered and brough t into existence. As the company itself does not exist before incorporation, th is work of preparation of these documents has to be undertaken by the promoters. The promoters, on the advice of legal experts get the Memorandum and Articles of Association prepared and arrange for their printing. In case the proposed co mpany is a public limited company, intending to issue shares on incorporation, t he promoters must also arrange to get the prospectus prepared and printed. To appoint bankers, brokers and legal advisers for the company: The incorporati on of a company involves a lot of legal formalities. The promoters may need to c onsult the legal experts on several of these matters. They, therefore, appoint solicitors to assist them in the process of formation of the company. The compa ny is formed for the purpose of carrying on business and as such deals with fund s and their management. The promoters must, therefore, also appoint bankers for the company who will receive share application moneys. If the proposed company is a public limited company, the promoters must also ensure the success of the f irst capital issue made by the company by appointing underwriters and brokers. To settle preliminary agreements for acquisition of assets: The promoters may be required to acquire a suitable site for the factory, make arrangements for pl ant and machinery and may even make tentative arrangements for key personnel. So metimes in order to run the business the company may be required to take over pr operty of a running business. Promoters fulfill the function of seeing that suc h property and business is acquired by the proposed company on justifiable terms

. To enter into preliminary contracts with the vendors: In respect of the propert ies and assets mentioned above, the promoters would need to settle the terms of contracts with the third parties from whom these properties are to be bought. T hese contracts are called preliminary contracts. To arrange for filing of the necessary documents with the Registrar: The promot ers are required to pay the stamp duty, filing fee and other charges for registr ation of the company. The promoters are to see that the various legal formaliti es for incorporating the company are complied with