Promoters – Meaning and Legal Concept
A promoter is a person who undertakes to form a company and takes necessary steps to bring it into existence. The concept of promoter is defined under Section 2(69) of the Companies Act, 2013. According to this provision, a promoter is a person who has been named as such in a prospectus or annual return, or who has control over the affairs of the company directly or indirectly, or on whose advice the Board of Directors is accustomed to act. Promoters play a crucial role during the pre-incorporation stage of a company by conceptualizing the business idea, arranging capital, acquiring assets, and completing legal formalities. Although promoters are not agents or trustees of the company, they stand in a fiduciary position and must act honestly and in good faith. Their duties arise even before the company comes into legal existence.
Legal Position and Duties of Promoters
The legal position of promoters is unique because they act on behalf of a company that does not yet exist. While the Companies Act, 2013 does not explicitly list their duties, courts have consistently recognized promoters as fiduciaries. Promoters must disclose all material facts relating to the company, especially any personal interest in transactions entered into on behalf of the company. If a promoter makes secret profits or conceals information, the company can either rescind the contract or recover such profits. Under Sections 26 and 35 of the Companies Act, 2013, promoters can be held liable for misstatements in the prospectus. This ensures transparency and protects investors. Thus, promoters are bound by principles of honesty, fair dealing, and full disclosure, failing which civil and criminal liabilities may arise.
Rights and Liabilities of Promoters
Promoters are entitled to certain rights, such as reasonable remuneration for services rendered, reimbursement of expenses incurred during incorporation, and indemnity against liabilities if agreed upon. However, these rights must be expressly provided in the contract or articles of association. On the liability side, promoters can be held personally liable for pre-incorporation contracts unless the company adopts such contracts after incorporation. Further, promoters are liable for breach of fiduciary duty, misrepresentation, fraud, and misstatements in prospectus under the Companies Act, 2013. Courts have emphasized that promoters must not misuse their dominant position to the detriment of shareholders or the company. Hence, while promoters are instrumental in company formation, they are subject to strict legal accountability.
Realtime Example
Suppose Mr. A plans to incorporate a technology startup and persuades investors to contribute funds by issuing a prospectus. He purchases land in his own name at a low price and later sells it to the company at a much higher value without disclosure. After incorporation, when shareholders discover this secret profit, the company can take legal action against Mr. A. As a promoter, he had a fiduciary duty to disclose his personal interest. The company may recover the excess profit or rescind the contract. This real-time scenario clearly demonstrates the legal responsibilities and liabilities of promoters under company law.
Mnemonic to Remember Promoters
A simple mnemonic to remember the concept of promoters is “FORM IDEA”:
F – Fiduciary position
O – Organizes company formation
R – Raises capital
M – Makes disclosures
I – Initiates business
D – Discloses interests
E – Enters preliminary contracts
A – Accountable under law
This mnemonic helps students recall the core functions, duties, and liabilities of promoters in exams effectively.
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