Critical Study Of Position Of Promoters In A Company And Their Rights, Liabilities And Duties

INTRODUCTION

The word promoter is defined inS.2(69) of Companies Act 2013, as a person who has control over the affairs of the company, as a shareholder, director, directly or indirectly. A promoter is a person whose function is to form a company and set its objective. Judiciary has tried to define the term promoter in the case of Twycross v. Grant in which the court ruled that a promoter “is a person who undertakes to form a company and takes necessary steps to accomplish that purpose”.

DUTIES

There are certain duties of the promoter and they are as follow:

1. Disclosing of information to stakeholders

It is the duty of the promoters to disclose all the facts to the company’s stakeholders. There is a guardian relationship between company and its promoters, and if the promoter fails to disclose any fact of profit made by the company shall be punished with a fine of 50,000 rupees of 5 times the amount of benefit received by the promoter under S.102(5) of ICA.

2. Not to make secret profits

There is a fiduciary relationship between the promoter and the company, the promoter cannot directly or indirectly at the expense of the company make any profits.

3. Duty of good care/ regard of prospectus

A promoter is liable for paying compensation to every person who subscribes to the prospectus for any monetary loss faced by them due to untrue statements.

S.63 of ICA states that a promoter can be charged with imprisonment for 2 years if making misleading statements.

4. Duty to future allotees

It is the duty of the promoter to have a guardian relationship with future allotees of shares. Liabilities of the promoter

A promoter is compelled by the company to hand over all secret profit which he made without full disclosure. A promoter is subject to following liabilities which are as follow:

1. Accountability for profits

The promoter is held liable for accounting for companies all secret profits made by him without disclosing any information to the company.

2. Personal liability

The promoter is held personally liable for the contracts made by him on behalf of the company.

3. Accountability for misstatement

The promoter in case of mismanagement is held liable and is payable for compensation for loss sustained due to the wrong information.

4. Liability at the winding of a company

If a company is winding up, the curt can make the promoter liable for breach of trust. A promoter can be liable for public examination like any other directors if the court directs that the liquidators allegedly committed fraud.

5. Deceit/breach

A promoter can be held liable for the action of deceit/breach of duty by the company.

Right of the promoters

1. Right to Indemnity

Promoters for a company can be severally and jointly liable for any misstatement given when there is more there one promoter of the company, one promoter can recover damages by claiming it against another promoter paid by him.

2. Right to receive expenses

During the working of the company any legitimate expenses like advertisement, marketing and more spent by the promoter, the promoter has the right to receive such legitimate expenses is not contractual in nature but on the discretion of the directors.

3. Right to fair remuneration

The promoter has a right to receive proper remuneration by the company, it depends on the company to provide the remuneration in certain articles of the company the directors pay remuneration to the promoters but it’s not mandatory.

Conclusion

The word promoter can be used to identify any individual, association, partnership which takes necessary steps to create a company. The formation of company is overviewed by the promoters, they get together the subscribers, get the memorandum prepared, execute and get the company registered. So the promoters can be said to be the molding format for the company which helps the company to give it its shape and direction.