Promoters of a Company
1. Definition of Promoter
Promoters are individuals or entities who conceive the idea of forming a company, take necessary steps to bring the company into existence, and assist in its registration.
They play a key role in the pre-incorporation stage.
Not agents of the company, because the company does not exist before incorporation.
Legal Recognition
Companies Act, 2013 (India):
Section 2(69) defines a “promoter” as a person who undertakes to form a company and takes part in its formation, including incorporation and share subscription.
2. Characteristics of a Promoter
Acts Before Incorporation:
Their role is pre-incorporation, i.e., before the company comes into legal existence.
No Agency Relationship with Company:
Since the company does not exist yet, promoter cannot act as its agent.
Fiduciary Duty:
Promoters owe a fiduciary duty to the company and must disclose profits, avoid conflicts of interest, and act in good faith.
Can be Natural or Legal Persons:
Individuals or entities can be promoters.
Engaged in Incorporation Process:
Activities include:
Registration of company
Arranging capital/subscribers
Preliminary contracts for business operations
3. Duties of Promoters
A. Fiduciary Duties
Must act in good faith.
Must disclose any personal profit from pre-incorporation contracts.
Must not mislead subscribers or investors.
Case Law:
Kelner v. Baxter (1866) LR 2 CP 174
Promoters who entered into a contract before incorporation were personally liable, as the company did not exist yet.
Promoters cannot avoid liability by claiming company’s future liability.
Re Cape Breton Co. (1918) 2 Ch 4
Promoters must act honestly and disclose benefits; failure to disclose may lead to rescission of contract or personal liability.
B. Duty to Subscribers
Must provide accurate information to subscribers/shareholders.
Misrepresentation or concealment can lead to civil and criminal liability.
Case Law:
Official Liquidator v. Bright (1968) 1 WLR 59
Promoters were held liable for misstatements in the prospectus, emphasizing duty to subscribers.
C. Duty to Company
Must transfer pre-incorporation assets/contracts to the company.
Cannot embezzle or make undisclosed gains.
Case Law:
Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas (1966) 1 SCR 656
Promoters must account for secret profits made in the formation of the company.
4. Rights of Promoters
Right to Reimbursement
Promoters can be reimbursed for expenses reasonably incurred in formation.
Right to Remuneration
If there is an agreement with the company, promoters can claim remuneration for services.
Right to Compensation for Pre-incorporation Contracts
Only after the company adopts pre-incorporation contracts can the promoter avoid personal liability.
5. Liability of Promoters
Pre-Incorporation Contracts
Promoters are personally liable unless the company ratifies the contract after incorporation.
Kelner v. Baxter (1866) LR 2 CP 174 is the leading case.
Misrepresentation or Fraud
Promoters liable for fraud or misstatement in prospectus or pre-incorporation agreements.
Breach of Fiduciary Duty
Promoters must account for profits and cannot gain secret benefits.
6. Summary Table: Promoters
| Aspect | Details | Case Law |
|---|---|---|
| Definition | Person who undertakes to form a company and assists in incorporation | Section 2(69), Companies Act 2013 |
| Role | Pre-incorporation; arranging capital, registration, contracts | Kelner v. Baxter (1866) |
| Duty | Fiduciary duty to company and subscribers | Bhagwandas Kedia v. Girdharilal (1966) |
| Liability | Personal liability for pre-incorporation contracts | Kelner v. Baxter (1866) |
| Rights | Reimbursement, remuneration (if agreed) | Official Liquidator v. Bright (1968) |
7. Conclusion
Promoters are key actors in forming a company, but they are personally responsible for acts done before incorporation.
They owe fiduciary duties to the company and its shareholders.
Courts emphasize full disclosure, honesty, and avoidance of secret profits.
Proper legal agreements can protect promoters from undue personal liability once the company ratifies pre-incorporation acts.
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