8/30/23, 2:27 PM Duties and Liabilities of Promoter - Black n' White Journal

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Duties and Liabilities of Promoter

Published by Sumeet Kapoor on 09/08/2021

Introduction:
The promoter, a term which was always been overlooked and ignored by the experts as well as
the law was suddenly on everyone’s tip of the tongue when the Companies Act, 2013[1]got the
president’s consent to become the ‘new company law’ of the country. It wasn’t just because the
new law clearly defined the term ‘promoter’ which its predecessors didn’t care enough about, but
because it also carried a complete package of Roles, Duties, and liabilities of a promoter. Let’s
take a deep look at it to understand clearly.

Definition of the Promoter

In layman terms, a Promoter is a person or a group of persons who comes first in the
chronological order of the company incorporation process. He not only conceives the idea of
setting up a company but also raises funds and capital for doing business as well as makes sure
about the future prospects of the company.

The term promoter was not defined in the Companies Act, 1956[2] but was frequently used in
various sections such as sec. 56, 62, 69, 76, 478 & 519. Section 2(69)[3]of The Companies act.
2013 provides the definition of the promoter as follows:

“Promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual

the return referred to in section 92; or

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(b) who has control over the affairs of the company, directly or indirectly whether as a

shareholder, director or otherwise; or

(c) in accordance with 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.[4]

Legal Status of the Promoter

During the pre-incorporation phase, since the company is not yet registered, it does not have a
separate legal identity and therefore is incompetent to form legal relations or form contracts.
According to company law, promoters doesn’t have a legal position. A promoter is a non-entity
until the company has been incorporated. He has a fiduciary relationship with the company. He is
neither an agent nor a trustee of the company but still works for the benefit of the company. It is
under the guidance and the supervision of the promoter a company comes into existence.

Duties of the Promoter

From the fiduciary position of promoters, he is bound by the following duties for his company:

(1) To disclose the secret profit: There should be no hidden profits for the promoter. It is not
permissible for a promoter to make any hidden profits. If it is discovered that he made a secret
benefit for himself in one of the company’s transactions, he will be required to refund the profit to
the company.

(2) To disclose all material facts and information: The company’s promoter is required to disclose
all material facts and information. If a promoter wants to sell his or her personal property to the
company, he or she must make a complete disclosure of his or her stake.

3) The promoter must repay the corporation for the benefits he received as a trustee: Because
the promotor and the company have a fiduciary relationship. It is the promotor’s responsibility to
make the best use of whatever he has earned as a trustee for his company.

(4) Duty to reveal private arrangements: It is the promoter’s responsibility to declare all private
arrangements that result in him profiting from the company’s promotion.

(5) Duty of promoter against the future allottees: The promoter has a fiduciary relationship with
the corporation and has a duty to future allottees. Similarly, the promoter has a fiduciary
obligation with the future allocatees of the share.
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Howard v. Patent Ivory Manufacturing[5]

The court observed that even while the promoter is personally liable for the pre-incorporation
contract, he can transfer his duty to the firm. The Specific Relief Act of 1963 codified this
novation of contract basis.

Gluckstein v. Barnes[6]
In this case, a group of people purchased ‘Olympia’ (an amphitheatre) and sold it to a firm they
promoted, making a covert profit of£20,000 pounds that was not declared in the prospectus. It
was claimed that a profit of £20,000 was a covert profit and that the promoters were obligated to
pay it to the firm because the disclosure was inadequate.

Rights and Liabilities of the Promoter

The Companies Act, 2013 places certain liabilities and gives certain rights to the promoters. They
are as follows:

Section 167(3)[7]: Power to appoint directors in case of vacation of office of all directors

Section 168 (3)[8]: Power to appoint directors in case of resignation by all directors

Section 7(6)[9]: Liability for furnishing false or incorrect information for incorporation of the
company

Section 13(8)[10]&Section 27(2)[11]: Obligation to give exit opportunity to the dissenting

shareholders

Section 35(1)[12]: Liability to pay compensation for misstatement or omission in the prospectus

Section 42(10)[13]: Penalty for accepting money in contravention of provisions of section42

Section 102(4)[14]: Liability to compensate for gain resulting from non-disclosure or insufficient
disclosure of information in the explanatory statement

Section 257 (3)[15]: Appearance before the meeting of the committee of creditors upon
instruction of interim administrator

Section 284 (1)[16]: Duty to extend full co-operation to company Liquidator

Section 300 (1)[17]: Liability to be examined beforeTribunal upon the report of Company
Liquidator

It could be observed that barring Sections 167 and 168, the Act provides only for liabilities of the
promoters.
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Prabir Kumar Misra v Ramani Ramaswami[18], HC 2009– The Madras HC stated that there is a
fix on a promoter’s liability. It is not required that his signature appears on the MoA/AoA, as a
Shareholder, or in the Board of Directors. His guilt and accountability are also determined by his
actions and contracts as an agent or trustee during the pre-incorporation period.

Privileges of Promoter

Right to Indemnity
The promoters are jointly and severally liable for any false statement made in the opportunities,
thus when more than one person acts as the organization’s promoter, one promoter can
guarantee against the other for the remuneration and damages paid by him.

Right to Recover Genuine Preliminary Expenditures

He has the right to recoup the genuine costs that were spent during the organization’s cycle in ad
expenses, specialist fees, and so on. The choice to obtain the fundamental costs is
unquestionably not a legally enforceable entitlement. It relies on the caution of the heads of the
organization.

Weaver Mills v Balkies Ammal[19]

In this case, the Madras High Court expanded the scope of Section 19(e) of the Indian Penal
Code. The promoter had engaged in a contract to purchase assets on behalf of and for the
company in this case. It was decided that the company’s title to the property could not be ignored
at the time of incorporation, even if the property was not present.

Kelner v. Bexter[20]
The promoter, speaking on behalf of and for the unformed company, agreed to Kelner’s proposal
to enter the wine business. Kelner received no payment from the company. According to ERLE,
CJ, a fiduciary relationship cannot exist prior to the company’s formation, and thus the company
cannot be held liable or accept any liability by ratifying or accepting the contract because the
business was not formed at the time the agreement was made (a non-existent state). As a result,
the promoters are to be hailed. As a result, because they were the agreeing party, the promoters
are accountable for any pre-incorporation agreements.

Conclusion
In India, promoters normally follow the standard stages when promoting a company. However, if
necessary, they also handle incorporation and formation, share underwriting, substantial share
contri­bution, and, most importantly, direct management of the business. As a result, Promoters in
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