PROMOTERS OF A COMPANY-An Overview

ABSTRACT

Promoters are individuals or entities who take the initiative in the formation and organisation of a company. They act as intermediaries between the company and potential investors, employees, and suppliers. Promoters identify business opportunities, formulate the business plan, and set up the company’s vision and mission. This article delves into the key aspects of  promoters’ rights and liabilities, shedding light on their legal responsibilities and potential risks. By understanding these rights and liabilities, entrepreneurs and stakeholders can navigate the promoter’s role more effectively and mitigate associated risks.

Introduction

Promoters are vital actors in the formation and early stages of a company. They play a crucial role responsible for the initial setup, promotion, and incorporation of a company, bringing together the necessary resources, and laying the foundation for its establishment. As a result, a promoter is the first person in control of a business venture’s activities, and it is their responsibility to guide a company through initial legal compliances and any other procedures required for incorporation under the Companies Act, 2013. ^[1]

Definition of a Promoter

“Section 2 (69) of the Companies Act, 2013 (hereafter referred to as “the Act” in this article) defines a promoter as a person-

1. Who has been named as such in the prospectus or identified as such by the company in the annual return.
2. Who has control over the affairs of the company directly or indirectly, whether as a Shareholder or a Director.
3. In accordance with whose advice, directions or instructions, the Board of Directors of the company is accustomed to act.”^[2]

Types of Promoters

1. Active Promoters: Active promoters are individuals or entities who take a proactive role in initiating and establishing a business venture. They actively identify opportunities, mobilise resources, and drive the formation and early stages of the company. Active promoters often have a significant influence on the strategic direction and decision-making processes of the company.
2. Occasional Promoters: Occasional promoters are individuals who engage in promoting a business venture occasionally or on a project-specific basis. They may not be involved in the day-to-day operations of the company but contribute their expertise, network, or resources for specific projects or opportunities.
3. Financial Promoters: Financial promoters are primarily focused on securing funding and financial support for the business venture. They specialise in raising capital from investors, financial institutions, or other sources. Financial promoters play a critical role in structuring investment deals, negotiating terms, and ensuring the financial viability of the venture.
4. Professional Promoters: Promoters who specialised in promoting and launching new business ventures are known as professional promoters. They are knowledgeable in company planning, market research, feasibility studies, and marketing tactics. In order to maximise the success of the venture, professional promoters frequently collaborate with business owners and investors to develop and implement thorough business plans.

Promoters Rights:

1. Right of  Reimbursement

Promoters are entitled to reimbursement for reasonable expenses made during the company’s promotion and incorporation. This includes legal fees, promotion, and marketing, as well as other necessary charges.

2. Right of Indemnity

Promoters are jointly and severally liable for any hidden profits or fraudulent representations made in the prospectus. Each promoter is independently and equally liable for the affairs of the company. As a result, a promoter may seek damages from the other promoters.

3. Right of remuneration

Promoters have the right to engage in discussions to determine the compensation they will receive for the services they provide. This compensation can take various forms, including monetary payment, shares in the company, or other agreed-upon benefits. The specific arrangement is based on the mutual agreement between the promoter and the company.

4. Right of Information

Promoters possess the privilege to obtain access to pertinent information regarding the company’s operations and advancements. This encompasses financial records, strategic business plans, and other essential details that enable the promoter to effectively fulfil their obligations and duties.

Liabilities of a Promoter

1. Fiduciary Obligation

Promoters are bound by a fiduciary duty to the company and its stakeholders, compelling them to prioritise the best interests of the company. This duty necessitates them to act diligently, with unwavering loyalty and utmost good faith in all their undertakings and decisions.

2. Misrepresentation

Promoters can be held accountable for misrepresentations made during the process of promoting and incorporating a company. This includes providing false or misleading information about the company’s future prospects, financial situation, or other significant details. Promoters bear the responsibility of ensuring the accuracy and completeness of the information they provide.

3. Pre-incorporation Contracts

Before the formal incorporation of the company, promoters possess the power to enter into contracts on behalf of the company. However, if the company does not later adopt or assume these contracts after incorporation, the promoter may face personal liability. This implies that the promoter can be held personally responsible for any obligations arising from those contracts if the company is unable to fulfil its contractual obligations.

4. Compliance with Laws and Regulations

Promoters are accountable for ensuring adherence to all relevant laws and rules during the promotion and incorporation process. A violation of the law may result in legal repercussions, fines, or additional penalties.

5. Duty of Disclosure

Promoters have to disclose all material information to potential investors, stakeholders, and relevant authorities. This includes disclosing any conflicts of interest, financial risks, or other significant information that could impact the decision-making of stakeholders.

6. Personal Liability for Negligence or Breach of Duty

 If a promoter acts negligently or breaches their fiduciary duty, they can be held personally liable for any resulting damages or losses suffered by the company or its stakeholders.

Legal Position of a Promoter

A promoter has a fiduciary obligation towards the company he promotes (i.e. a connection that demands confidence or trust). Promoters are required to perform or conduct certain activities for the company that do not resemble those of an employee-employer relationship because they are neither the company’s agent nor an employee. They act in the best interests of the company. They execute the necessary steps to establish the company and pay the requisite fees for its incorporation, including stamp duty, registration, and professional services.^[3] They have a fiduciary obligation to the company and are personally liable for any gains made in company transactions. This was also observed by Lord Cairns in Erlanger V. New Semberero Phosphate Co.^[4] where he also defined the extent of the role of a promoter.

Promoters Rights and Liabilities

• Firstly, it ensures legal compliance. Promoters must be familiar with their rights and liabilities to adhere to applicable laws and regulations throughout the company formation process. This knowledge helps them conduct their activities in a lawful and ethical manner, reducing the risk of legal disputes and penalties.
• Secondly, having knowledge of their rights enables promoters to safeguard their interests. Being aware of their entitlements empowers promoters to engage in fair negotiations regarding compensation for their services and seek reimbursement for the expenses they have incurred throughout the promotion and incorporation process.
• Third, understanding their liabilities assists promoters in fulfilling their responsibilities, including upholding fiduciary duties and refraining from misrepresentations that could potentially result in legal repercussions.

Conclusion

Promoters serve as catalysts for business ventures, wielding significant influence and assuming substantial responsibilities. While they possess certain rights, the role of a promoter also entails various liabilities. Understanding these rights and liabilities is crucial for all parties involved to ensure legal compliance, transparency, and effective risk management.  Promoters can help the firm expand and succeed while protecting their interests and reducing risks by creating a balance between their rights and liabilities.

This article is written by by Nyssa Shah, NMIMS Kirit. P. Mehta School of Law, Mumbai, B.B.A LL.B. (Hons.) in 1st Year during her internship at LeDroit India.https://www.linkedin.com/in/nyssa-shah-15a233217

^[1] https://www.northeastlawjournal.com/post/promoters-and-directors-of-a-company

^[2] The Companies Act, 2013

^[3] https://cleartax.in/s/promoters-of-a-company

^[4] https://lawcasesummaries.com/knowledge-base/erlanger-v-new-sombrero-phosphate-co-1878-3-app-cas-1218/