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:

In case any secret profit is made by the promoters during the formation of the company and the entire amount is then paid by a single one of them to the Directors then, he is entitled to recover the proportionate amount from co-promoters.

DIRECTORS:

A Director of a company is a person that is elected or drafted in by shareholders to manage the affairs of the same (in accordance with the MOA and AOA). A Director, therefore, sits at the apex of either a branch of a company’s management or manages it all together by holding executive positions like CEO, CFO, and CXO etc.


Some Definitions:

  • Section 2 (34) of the Companies Act, 2013 defines a Director to mean a “Director appointed to the Board of a company”.

  • A Director is not a servant but, a controller of the affairs of a company (As held in Moriarty v. Regent’s Garage Co.)


A director out through a window
“It does not matter what you call them, as long as you understand what their true position is, what is that they are commercial men managing a trading concern for the benefit of themselves and all other shareholders in it.”(As held in Re. Forest Dean Coal Mining Co)

Composition of Board of Directors of a Company (Section 149):

  • 149 (1)- “Every company shall have a Board of Directors consisting of individuals as Directors”-For Public Companies- Min. 3 Directors and for Private Companies- Min. 2 Directors and, in case of a One Person Company- 1 Director

  • 149 (1) (b) - Every company shall have a maximum of 15 directors. However, a company can appoint more than 15 Directors provided they pass a Special Resolution in General Meeting. In such a case, the approval of the Central Govt. is not required.


Appointment of Directors (Section 152):

Directors are appointed in the following manner:

1. First Director by the article:


Where no provisions for appointing first directors are made in the articles of a company (AOA) then, the subscribers to the Memorandum of Association shall become the first Directors of the company until the Directors are duly appointed.

2. Small shareholder Directors:


A company may have a sole Director in the Board who is appointed by small shareholders in a manner consistent with the Articles of the company and with conditions and requirements as may be prescribed by the Act or any of the subsequent rules.

3. Appointment of Directors other than retiring Directors [Section 2 (60)]:


An individual who is not a retiring Director shall be eligible for appointment at any General Meeting of the company. However, a notice in writing has to be given under 14 days before the meeting at the registered office of the company.

Here are some of the different types of Directors generally appointed by companies:

  1. Managing Director: It is an individual vested with substantial powers to manage the affairs of a company and is named as such in the MOA and AOA or in a resolution passed in a General Meeting or formally elected by the Board of Directors of a company – Section 2 (54).

  2. Executive Directors: This is a class of Directors who are responsible for the day-to-day operations and management of the company. It is a full-time job.

  3. Ordinary Directors: This is a class of Directors who simply attend the Board Meetings and take part in matters put before the Board. They are not required to work full-time for a company and generally stay on as investors or key experts/advisors in different business domains.

  4. Additional Directors: These are Directors appointed by the Board of Directors between two Annual General Meetings (AGM) of the company (in accordance with the Articles of Association of the company) – As under Section 161 (1)

  5. Alternate Director: These are Directors appointed by the Board to substitute for original directors for not less than 3 months in cases of the latter’s absence or incapacity. Usually, they are appointed for Non-Resident Indian Directors or Foreign Directors of a company.

4. Independent Directors:


Every public company shall have at least 1/3rd of the total number of Directors as Independent Directors whereas, unlisted public companies are mandatorily required to have at least 2 Independent Directors (as per Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014)

Independent Directors in companies registered under the Companies Act, 2013 are appointed for a term of 5 consecutive years to the Board of Directors.


However, as per Section 149 (10) to be read along with Rule 4 and Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014) these Directors can be reappointed by a Special Resolution in a General Meeting provided the disclosure is given in the Board’s report.

An Independent Director is one-

  1. Who is not a Promoter of the company

  2. Who is not related to the Promoters or Directors of the Company in any capacity.

Duties of Directors (Section 166):


  1. A Director shall act in accordance with the Articles of Association of the company.

  2. A Director shall promote the objects of the company for the benefit of its members, employees, shareholders, sister concerns and community.

  3. A Director shall exercise his duties with reasonable care, skill and independent judgement to manage the affairs of the company. He cannot assign his office to any other person as well.

  4. A Director shall not involve himself in a situation that gives rise to a conflict of interest between him and the company.

  5. A Director shall not receive any undue gains or advantages from the company.

  6. A Director shall act in good faith in all his operations.

Powers of Directors (Section 179):


Even though most Directors of a company hold a lot of responsibilities, they seldom act alone. As a general rule, they work together as Board of Directors (BOD) to collectively work for the best interests of the company.


Board of Directors

The BOD of a company has the power to exercise all such acts and things as the company is authorized to exercise within the limits of the Companies Act, 2013, Memorandum of Association (MOA) and Articles of Association (AOA) of the company. Here are some of the powers they hold under Section 179 (3), provided they are done through resolutions passed at meetings of the Board:

  1. Power to make calls on a shareholder in respect of unpaid money on shares.

  2. Power to issue securities of the company (including debentures) outside India.

  3. Power to borrow money i.e. use debt to finance the company’s operations.

  4. Power to invest the funds of the company in different securities as well as assets like shares of other companies, mutual funds, real estate, research teams etc.

  5. Power to grant loans in the name of the company.

  6. Power to diversify the business of the company.

  7. Power authorizes buyback of securities.

  8. Power to authorize merger/takeover of the company.

However, the BOD has to pass a special resolution to sell, dispose of or lease the company. Also, according to Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014 the BOD has been provided with additional powers to:

  1. Make political contributions.

  2. To appoint or remove Key Managerial Personnel (KMP)

  3. To appoint secretarial or internal auditors.

The BOD may also delegate powers by passing a resolution to provide similar powers to:

  • Any committee comprising directors

  • The Managing Director

  • Any principal officer of the company

  • Any manager and in case of a branch, the Branch Manager


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