Promoters

MODULE 4
What is Promotion?

Promotion involves forming a company, including conception, incorporation, floatation, and

commencement of business.
Types of promotion:
◦ Individual promotion
◦ Institutional promotion
◦ Professional promotion
 Definition of Promoter
1. Promoter is not defined in the Companies Act, 1956, but is frequently used in various sections.
2. Companies Act, 2013 (Section 2(69)):
“promoter” means a person—
(a) 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
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity
3. Whaley Bridge Co.v. Green Bowell LJ while defining the term promotion held that ‘promotion’ is not a term of law but of
business operations familiar to the commercial world, by which a company is generally brought in to existence. Promotion
includes wide range of commercial activities which include many technical and non-technical operations. Amongst the
technical include project planning, feasibility study, looking for technical cooperation and collaboration and locational studies.
Non-technical activities include assembling required number of signatories, obtaining advice on different legal requirements,
appointing key people like company lawyer who make documentation and enter into all types of pre-incorporation contracts.
Promoters perform a range
of activities:
1. Conceiving the idea of forming a company
2. Assembling subscribers
3. Preparing and registering company documents
4. Raising capital (IPO, private placement, etc.)
5. Compliance with laws and regulations
Legal Position of Promoters
Promoters are deeply involved in incorporation process of company so a pertinent question
arises what is the legal position of the promoters in the company. Promoters are not agents as
before incorporation the company is non est (does not exist) in the eye of law so there can be no
principal. They are also not trustees, as company is not a beneficiary. They are in fiduciary
capacity as in Erlanger v. New Somrero phosphate co. Ltd. Cairns LJ said that
“The promoters undoubtedly stand in a fiduciary position. They have in their hand the creation
and moulding of the company. They have the power of defining how and when and in what
shape and under whose supervision it shall come in to existence and begin to act as a trading
corporation.”
Fiduciary Duties of
Promoters

1- Duty Not to Make Secret Profit

◦ Promoters have access to information and business opportunities during company formation.
◦ They can sell assets (land, intellectual property, etc.) at reasonable rates but must not make secret
profits.
◦ Secret profits must be disclosed to:
◦ Independent board of directors
◦ Articles of association
◦ Prospectus
◦ Existing and intended shareholders
2- Duty to Disclose Interest in a Transaction

◦ Promoters must disclose any personal interest in transactions with the company.
◦ This applies even if the property was acquired before promotion began.
◦ Failure to disclose can lead to liability for conversion, misappropriation, or breach of trust.
◦ Disclosure Must Be:
◦ Full and transparent
◦ Made to the company or its shareholders
Liability of Promoters
Misstatements in Prospectus (Section 34 & 35)
If the prospectus contains false, misleading, or untrue statements, the promoter is liable for civil and
criminal consequences.
Civil liability (Section 35) – Promoters are responsible for compensating investors who suffer losses due to
misleading information in the prospectus.
Criminal liability (Section 34) – If misstatements are made knowingly or recklessly, the promoter may face
imprisonment of up to 10 years and/or a fine.
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Site Section 340. Power of Tribunal to assess damages against delinquent directors, etc

Section 340: Power Of Tribunal To

Assess Damages Against Delinquent
Directors, Etc
If in the course of winding up of a company , it appears that any person who has taken part in the promotion or
formation of the company, or any person, who is or has been a director, manager, Company Liquidator or officer of the
company—
(a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or
(b) has been guilty of any misfeasance or breach of trust in relation to the company,
the Tribunal may, on the application of the Official Liquidator , or the Company Liquidator , or of any creditor
or contributory , made within the period specified in that behalf in sub-section(2), inquire into the conduct of the
person, director, manager, Company Liquidator or officer aforesaid, and order him to repay or restore the money or
property or any part thereof respectively, with interest at such rate as the Tribunal considers just and proper, or to
contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer,
misfeasance or breach of trust, as the Tribunal considers just and proper.
(2) An application under sub-section (1) shall be made within five years from the date of the winding up order, or of the
first appointment of the Company Liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach
of trust, as the case may be, whichever is longer.
(3) This section shall apply, notwithstanding that the matter is one for which the person concerned may be criminally
liable.
Probir Kumar Misra v. Ramani
Ramaswamy
Port Development Private Limited (CPDP) was incorporated on 6 February 2006.The petitioners (Probir
Kumar Misra & Ramani Ramaswamy) were the original promoters of CPDP, which aimed to develop sea
port projects.
Later, SREI Venture Capital Ltd. (a subsidiary of SREI Infrastructure Finance Ltd.) invested in CPDP and
acquired a 70% stake.
The petitioners’ shareholding reduced to 30%, and SREI became the majority shareholder.
On 26 May 2006, CPDP signed an Investment Agreement with SREI, which was expected to provide full
financial support for CPDP’s projects. SREI’s nominee was appointed as a permanent director in CPDP’s
Articles of Association, giving SREI control over financial decisions.
Two key projects were awarded to CPDP:
1. Machilipatnam Port Project (Andhra Pradesh)
2. Subarnarekha Port Project (Odisha)
Allegations of Mismanagement and Oppression
The petitioners alleged that SREI mismanaged CPDP and engaged in unfair business practices:
✔ Failure to provide funding: SREI did not finance CPDP as promised, leading to operational
difficulties.
✔ Diverting business opportunities: SREI transferred CPDP’s Machilipatnam Port Project stake to
third parties (Maytas & NCC) for personal gains.
✔ Oppression of minority shareholders: SREI froze CPDP’s bank accounts and locked its
registered office, blocking access to funds and business records.
✔ Breach of exit agreement: In November 2007, SREI agreed to exit CPDP for ₹52.50 crores, but
later refused to honor the agreement.
1. Who is a Promoter?
Even if an entity does not sign the Memorandum of Association, it can still be a promoter based
on its actions. A majority shareholder is not necessarily a promoter, but if it controls the
company’s formation and business, it assumes promoter duties.
2. Promoter’s Fiduciary Duties
A promoter must act in the best interest of the company and cannot make secret profits.
Misappropriating business opportunities or harming the company’s finances is a breach of duty.
The argument advanced on behalf of the petitioners is that they are the only promoters of the first respondent-
Company and the second respondent has nothing to do with the floating of the first respondent-Company, while it is
the contention on behalf of the second respondent that even before the incorporation of the first respondent-
Company, discussions were going on between the petitioners and the second respondent and its officials, as found
on record, at the time when the petitioners were only a partnership firm "Creative Infrastructure" and during the
course of discussion, the Company was floated and therefore, the second respondent should also be treated as a
promoter of the company which floated the affairs.
Whether the second respondent is a joint promoter of the first respondent-Company along with the petitioners may
not be of much relevance for the purpose of deciding the issue involved in these appeals, nevertheless, on the basis
of the communication exchanged before incorporation of the first respondent-Company between the petitioners
and the representatives of the second respondent, it is clear that the second respondent has been taken as a Lead
Member in respect of the said projects, as admitted by the petitioners themselves when they were partners of the
Creative Infrastructure before incorporation of the first respondent-Company. It is true that at the time when the
first respondent-Company was incorporated none of the representatives of the second respondent-Company were
made a signatory to the Memorandum and Articles of Association. But, the presence of the representative of the
second respondent as a first and permanent Director of the company is available under the Articles of association as
stated above.
It is well known that the promoters of the Company, who act before the incorporation of the legal person,
need not necessarily be either a signatory of the Memorandum and Articles of Association or shareholder or
the Director of the Company. The promoter, who is called as a "midwife" of the business as coined by Henn
and Alexander in Law of Corporations, has not been defined under the provisions of the Act. Nevertheless,
before the legal person has come into existence, it is the promoter who does the major role for the purpose
of bringing the corporate person into existence like proposing the objects of the company to be
incorporated, arranging finance, formation of the original scheme, making arrangement to get the company
registered, preparing prospectus, Memorandum and Articles of Association, etc., which are very crucial for
the company to come into existence. In fact, they perform vital functions to bring out a corporate person
and are made liable to the Company as well as the third parties in respect of their conduct and contracts
entered by them during pre-incorporation stage including the statement in prospectus, either treating them
as the agents or trustees of the Company to be incorporated, but still they are not recognized in order to
focus the legal fiction of corporate personality. Law is clear that while the company which has come into
existence is not bound by the conduct of the Promoter, at the same time it is entitled to make claim against
such promoter in case it was subsequently found that the conduct of the promoter was detrimental to the
interest of the company incorporated on the basis of principles of breach of trust.