Who is the promoter of a company?

First time the idea of using the term for such a person performing the above mentioned functions was conceived in the case of Twycross v. Grant. In this case, the court held that the promoter is the person who undertaken to form the company with reference to a particular project and to set it going and who takes the required steps to accomplish that purpose.

Statutory definition [S. 2(69)] - The Companies Act, 2013 (“The Act”) comprises a statutory definition of promoter which is more or less in terms of functional categories. Hereby, Promoter means a person – Who has been named as such in a prospectus or is identified by the company in the annual return referred in Section 92; Who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; 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; (The proviso excludes persons acting in professional capacity.) 

What is the stature of Promoter vis-à-vis the company?

The relationship of the promoter vis-à-vis the company is a “Fiduciary Relationship or is a Fiduciary Position.” This position of promoters in relation to the company was ascribed early by Lord CAIRNS in the case of Erlanger v. New Sombrero Phosphate Co.

What are the Duties/liabilities of a promoter?

The most primary duty of a promoter is to make full disclosure and not make any secret profits and in this regard, section 102(4) and 102 (5) of the Act especially takes about insufficient disclosure by the promoter, director, manager. Further duties include duty to Utilise the amount raised through prospectus for the prescribed purpose if the said purpose changes [sec. 13(8)]; Duty to provide exit to the dissenting shareholder  [sec. 13(8)(ii)].

The liabilities of a promoter are prescribed under Section 26 of the Act which lays down matters to be stated in a prospectus on non-compliance of which, the promoter will be held liable; section 34 and 35- a promoter may be held liable for any untrue statement in the prospectus to a person who subscribes for shares or debentures in the faith of such prospectus; section 300- a promoter may be liable to examination like any other director or officer of the company if the court so directs on a liquidator’s report alleging fraud in the promotion or formation of the company; A company may proceed against a promoter on action for deceit or breach of duty under section 340- where the promoter has misapplied or retained any property of the company or is guilty of misfeasance or breach of trust in relation to the company; section 35(c) - Civil liability for mis-statements in prospectus, etc.

Hence, it has to be seen that promoter is the most important person in regards to the birth, nascent stage and the future course of its journey. The promoter has a key role and shares fiduciary relationship with the company owing to which the duties and liabilities imposed on him must be and are strictly adhered to.            

REFERENCES

·        The Companies Act, 2013.

·        Twycross v. Grant, 1877, 2 CPD 469

·        Erlanger v. New Sombrero Phosphate Co (1878) LR 3 AC 1218, 1236.

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