Last updated on May 5th, 2021
According to Companies Act 2013, A Promoter in Company refers to the person who:-
- has been named in the Prospectus of the company or is identified by the company in its Annual Return.
- directly or indirectly, has control over the affairs of the company.
- Advises, instructs, or directs the Board of Directors of the Company.
A Promoter is a person who is engaged in promoting the formation and incorporation of the Company. He conceives the idea of setting up the business and took the steps for the formation of the Company. However, the persons who assist in the incorporation of the company are the Professionals and not the promoters.
Characteristics of a Promoter in Company
- Promoter conceives the idea for the formation of the Company.
- He takes all the preliminary steps for the formation of the company.
- A Promoter may be:-
- Any Individual
- Any Firm
- Association of persons
- A Company
- A Promoter is neither agent nor trustee of the Company.
- The promoter can be more than one person.
- He acts in a fiduciary position for the Company
Legal Position of a Promoter
A Promoter is neither an agent nor a trustee of the Company. He acts in a fiduciary position towards the Company. He takes steps for the formation of the Company and incurs the preliminary expenses for the Incorporation of the Company like Registration expenses, Stamp duty payment, professional fees, etc.
Functions of Promoters of a Company
- He generates the idea for the formation of a company and explores the opportunities.
- The promoter makes a feasibility study for the Business.
- He drafts or gets drafted the Memorandum of Association, Articles of Association, and other required documents for the proposed company.
- He arranges finance for the Company.
- Promoter arranges for the Subscribers of the company.
- He takes steps to make preliminary contracts for the proposed company.
- He defrays preliminary expenses.
- Promoter decides about the following
- Name of the Company
- Type of Company
- Location of Registered Office
- Amount and form of Share Capital
Rights of Promoter
- In the case of more than one Promoter, he has the right to recover the proportionate amount from the co-promoter if he pays the entire expenses.
- The promoter can enter into preliminary contracts on behalf of the company.
- Promoter has the right to receive remuneration. However, there must be a valid contract for remuneration.
- He has the right to receive legitimate preliminary expenses.
Duties of Promoter
The Promoter of a Company has certain duties and liabilities towards the Company and co-promoters.
- The promoter should not make any secret profit from the company. However, if he makes a secret profit he should disclose them.
- He should disclose all the material facts relating to the company.
- Furthermore, it is the duty of the promoter to make good to the Company.
- He must exercise due diligence and care.
- He should not make any contract prejudicial to the interest of the proposed Company.
- The promoter must consider the company’s interest prior to his personal interest in case any conflict arises between the company’s interests and his interests.
Remedies available to Company against Promoter
If the Company promoter acts against its duties, the Companies Act provides some remedies to Companies against the promoters. Those remedies are:-
- Rescission of Contract
- Recovery of secret profits
- Suit against promoter
- Cancel right of receiving remuneration by the promoter
What is pre-incorporation Contract?
A pre-incorporation contract is that contract that is entered by the promoter prior to the incorporation of the company.
Is Company liable and be sued for the pre-incorporation Contract?
The company is not liable for the pre-incorporation contract as the Company was not in legal existence when the contract was made. Hence Third Party cannot sue Company for the pre-incorporation contract.
However in case the Company ratifies the contract along with the acceptance of the third party or the company novates the contract, then only Company can be held liable.
What is the difference between promoter and director?
A promoter is a person who takes steps for the formation of a company. However, the director is the person who controls the day to day affairs of the company. Both can be the same or different in a company.