Promoters and Directors of a Company

In a company, important roles are played by both promoters and directors albeit in different stages of its life. However, these two classes of persons have an intertwined relationship. Let us get into it.


PROMOTER:

A promoter is a person who does the necessary preliminary work for the formation of a company i.e. someone who takes all the necessary steps to bring into existence an incorporated company. Therefore, a promoter is the first person who is in charge of a company’s affairs and it is they who have to take a company through initial legal compliances and any other operations necessary for incorporation into the Companies Act, 2013.


As per Guthmann and Dougall: “Promoter is the person who assembles the men, the money and the materials into a going concern.”

A person presenting

A promoter may be an individual, firm or association of persons but not the professionals who assist them in such endeavours (like Advocates, Company Secretaries, Solicitors, and Chartered Accountants etc.).


Definition:


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.

Legal Position of a Promoter:


A promoter stands in a fiduciary relation (i.e. a relationship that requires confidence or trust) with the company he promotes. He is neither an agent nor an employee of the company and therefore, has to fulfil certain duties towards the company that do not resemble that of any agency or employee-employer relationship. This was also observed by Lord Cairns in Erlanger V. New Semberero Phosphate Co. where he also defined the extent of the role of a promoter.


Duties of a Promoter:


Henry E. Heagland, A successful promoter is a creator of wealth. He is an economic prophet. He can visualize what does not yet exist and to organize business enterprise to make the products available to the using public.”

1. Duty of Disclosure:


A promoter is duty-bound to disclose all material facts to the company’s stakeholders. As mentioned already, there exists a fiduciary relationship between a company and its promoter so, in case of non-disclosure of any fact or profit made by him shall make him liable to punishment with a fine of Rs. 50,000 or five times the amount of benefit received by him for the aforesaid act [as under Section 102(5) of the Act]

#- In the case of the promoter selling his own property to the company, he may disclose such interest and act in good faith during the deal.

Such disclosure may be made-

  • To the Directors of the Company.

  • In the Articles of Association of the Company.

  • In the prospectus of the company.

  • To the existing and potential shareholders, directly.

2. Duty not to make secret profits:


A promoter is duty-bound to not make any profits directly or indirectly at the expense of the company as it breaches the fiduciary nature of their relationship and incapacitates such promoter from its legal definition. In a case where any secret profit made by a promoter becomes known to the company’s stakeholders then they can compel him to surrender such profit.

3. Duty as regards Prospectus:


Some certain facts and reports need to be set out in the prospectus of a company. Section 62(1) of the Act provides that a promoter is liable to pay compensation to every person who subscribes to the faith of the prospectus for any loss or damage sustained by them due to any untrue statements in the same.

As under Section 63 of the Act, a promoter making any misleading statements in a prospectus may face imprisonment for a term that may extend to 2 years (in cases of grave fraud and subsequent offences) or may be penalized with a fine of Rs.5000 per false statement in the prospectus.

Rights of a Promoter:


1. Right of indemnity:


In case there is more than one promoter working together, one may claim against the other for the compensation or damages paid by him in course of fulfilment of duty. Promoters are severally and jointly liable for any untrue or misleading statements and breach of any other duty.


2. Right to receive preliminary expenses:


A promoter is entitled to receive all the expenses incurred by him informing the company such as cost of advertisement, the appointment of assisting professionals, compliance fees etc. However, this right is not a contractual right and depends upon the discretion of the Directors of the company (in case there is no actual contract between the two). The claim for preliminary expenses has to be supported by a properly ordered series of receipts and vouchers.


3. Right to remuneration:


Technically, promoters have no right against the company for remuneration unless there is a contract to that effect. The authority to provide the promoter with payment of remuneration for services offered vests with the Directors of the company. Usually, most promoters are directors themselves and therefore, receive payment for their additional service to the company.

4. Right to recover, proportionate amount from co-promoters: