Promoter of a company – role, duties and liabilities

The Promoter can be defined as “ the person who is predominantly concerned with the embryo (the first stage before birth) of the company and initiate its formation, are popularly known as ‘promoters’

Promoters can be defined as individual who begins the thought or indicate towards the thought for aggregate or total of all activities that are intended for arrangement of an organization and taken up to bring into birth a company. It refers to the acts of all those persons who render helpful assistance and participate to encourage and complete the plan of formation and development of the company and to bring it into existence. Promotion merely starts from the stage of ‘conceiving an idea’ of forming a company and ended with the ‘registration of the company’ being registered as per the law.

Role of Promoters:-

Discovery of an idea:

This is the first stage in the promotion process when a person or group of people conceives what shall be the purpose of forming the company. In other words an idea of some business opportunity possible to be availed of by starting a company.

Exploring the Possibilities:-

After discovering an idea of starting a new business, the promoters have to make inquiries in the market about the potentiality of the proposed business and to identify certain possibilities or alternatives in this field.

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Carrying Detailed Investigation:-

The Promoters have to carry detailed investigation concerning various related matters like prospects and nature of the business, supply and nature of business, the demand of the business, the extent of business, and capital requirements needed.

Fulfilling legal formalities:-

In this step promoters of the company takes various preliminary steps before registration of the company such as applying the name of the company, filing the required documents with the Registrar of Companies for registration of the company.

According to 2(69) of the Companies Act 2013 defines;

Promoter means a person

• who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92 or
• who has control over the affairs of the company, directly or indirectly whether as a shareholder, directors or otherwise or
• By following whose advice, directions, or instructions the Board of Directors of the company is accustomed to act.

In short, it can be said that the promoters play an important role like:

• Conceive the idea of the Business
• Prepare the original plan for the formation of the company
• Carry necessary investigation like the formation of the company will be possible and profitable
• They get the company registered in the Registrar Office.
• They find out and finalize the suitable name for the Company.
• They get the important documents prepared like Article of Association, Memorandum of Association, and Prospectus of the Company.

Duties of Promoters:-

• Promoters should disclose Secret Profit: The Promoters of the Company should disclose the profits if any, enjoyed by them as Vendors.
• The Promoter must disclose all material facts related to the company: The Promoters of the Company is under a duty to disclose all material facts related to the formation of the Company
• The Promoter should not make unfair use of his position and powers: The Promoter of the Company enjoys extensive powers; therefore he should not make unfair use of his powers and position.
• Promoter has no right to claim on the Remuneration: Promoter has no right to claim on remuneration unless there is a contract to that effect. Even if there is no contract to that effect, the company may pay some remuneration for the services rendered by the promoters.
• Prepare necessary Documents: Promoters must prepare and submit documents like Memorandum of Association, Article of Association, and Prospectus timely in the Company.

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Liabilities of Promoters

Incorporation by furnishing false information:-

Section 7(6) lays down that where, at any time after the incorporation of a company, it is proved that it is incorporated by giving false information or false representation of the company or by suppressing any material fact or documents related to the company which shows fraudulent action, the promoters, etc. shall each be liable for action under Section 477.

Liability to accounts in Profits:-

The Promoter is at risk to record to the organization for all the mystery benefits made by him without full disclosure to the company. The organization will sue the promoter for the amount of profit and recover the same with interest.

Personal Liability

The Promoter is personally liable for all agreements made by him on behalf of the organization until the agreement has been discharged or the organization assumes control over the obligation of the promoter.

Liability at the time of Winding up of the Organization:-

In case of Winding up of the Organization, on an application made by the official liquidator, the court may make liable for the misfeasance or breach of trust. Further, where fraud has been alleged by the liquidator against the promoter, the court may order for his public examination.

False Statement:-

The promoter is liable under the general law enforceable by suit for recovery of damages on the ground of fraud etc. For untrue statements in the prospectus, a promoter has criminal liability.

Important Provisions of the Companies Act, 2013 concerning for Promoters:-

• Section 92 lays down that every company should manage and administer its Annual report in the prescribed form including the particulars regarding its promoters, directors, etc.
• Section 93 states that every listed company return should be filed with the Registrar in case the promoter’s stake changes.
• Section 184 provides that every Director of a company who is anyway, directly or indirectly, concerned or interested in a contract or arrangement entered into or to be entered in association, shall disclose the nature of his concern and interest at the meeting of the Board.
• Section 281 (2) provides describe the submission of the Report by the Company Liquidator which shall include in his report how the company was promoted and formed and whether in his opinion relation any fraud has been committed by any person in its promotion or formation or by any officer with concerning the company since formed.

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Author: Divya Tripathi,
Shri Ramswaroop Memorial University LLB 3 Year ( 2 Semester)

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