This article has been written by Ms. Aditi Mishra, a 4th Year B.Com. LLB (Hons.) student from Institute of Law, Nirma University.
Promoter
A promoter is essentially someone who has been involved with the company from the beginning. The term “promoter” can also be used to describe the founder or the business’s creator. The term “promoter” can be defined as a promoter who participated in the creation of the business prospectus, but it excludes anybody who assisted in the establishment of the firm in a professional position. The promoter is in charge of procuring funding from various sources and signing the initial contracts necessary to launch a business and incorporate a company.
Before the business is incorporated, the promoter plays a crucial role in negotiating contracts on the firm’s behalf. The term “promoter” has a position in company law, although the Companies Act of 1956 doesn’t define it. The word “promoter” isn’t defined in the Companies Act of 1956 because it doesn’t have any legal implications but yet has some essential commercial components for corporations.
Though not defined in the 1956 Act, but the term ‘promoter’ has been defined in the Companies Act, 2013. According to Section 2 (69) of the Companies Act, 2013, the term promoter can be defined as –
- A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or
- A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
- A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.
Pre-Incorporation Contracts
Pre-incorporation contracts, sometimes referred to as preliminary contracts or agreements, cover the terms of any agreements made before a firm is incorporated.
An agreement established on behalf of a business or corporation that does not yet exist is referred to as a pre-incorporation contract. Pre-incorporation contracts can be enforced and valued legally even if they have no legal standing or value. When someone signs a contract on behalf of a firm or corporation, they do so with the goal of holding that entity accountable until the company has fully formed.
These are early agreements or investments that often happen before the company is founded. The finest illustration of such a contract is a co-agreement. founder’s In the past, the judges had difficulties deciding whether promoters could transfer their obligation or how safe it was for a firm to avoid being held guilty since there was no clear definition of the law. The ratification of the agreements made at the time of incorporation to shield the organization or its members from responsibility, however, is not without its challenges.
Pre-incorporation contracts are agreements made on behalf of a business that does not yet have a legal existence, as defined by the 1956 Companies Act of India. Because of this, pre-incorporation is required in the event of a new incorporation. Simply put, the pre-incorporation is necessary since it gives newly incorporated organizations all the legal components necessary for their existence. Pre-incorporation contracts can also be utilized to acquire rights, a property, the expertise of managers, and managers’ services.
Promoter’s Obligations Under Pre-Incorporation Contracts
The role of a promoter is crucial, and they have significant influence over how a firm is formed. He is neither a trustee nor an agent of the proposed corporation in terms of the law. The promoter/s has a fiduciary duty to the firm they are promoting as well as to the people they persuade to become shares in it.
Duties Of A Promoter
- Duty to disclose secret profits
He is allowed to make profits but not secretly and not one’s which will be harmful to the company. He can profit but only with the consent of the company.
- Duty of Disclosure of Interest
He must declare his interest in every transaction that the company and he himself enters into. He must also request the company’s consent when he shows his interest.
- Duty under the Indian Contract Act
As said by the courts in due course of time, there is a business relationship between a company and a promoter, therefore a contract before incorporation with a promoter shouldn’t be construed as a contract with the new company. Thus, his liabilities come within the purview of the ICA, 1872.
- Termination of the Promoter’s Duties
The duty of a promoter doesn’t end even after he has appointed the Board of Directors or he himself is on the board. It ends when the capital has been acquired (First Call) and the BoD have taken the control and have started managing. That is when his fiduciary relationship with the company ends.
Liabilities Of A Promoter
As discussed in Duties, he is supposed to give full disclosure to the company and therefore is liable to pay secret profits acquired. He is liable under various provisions of the Companies Act, 2013:
- Section 26 [7] – It states the matters to be issued in the prospectus. He can be held liable if he fails to follow the rules of this section.
- Section 34 & 35 – a promoter may be held liable for any untrue statement in the prospectus to a person who subscribes for shares or debentures in the faith of such prospectus. However, the liability of the promoter in such a case shall be limited to the original allottee of shares and would not extend to the subsequent allotters.
- Section 63 & 68 – There is criminal liability for misrepresentation and there is a heavy penalty on promoters for making untrue statements in the prospectus.
- Section 300 – A promoter may be liable to examination like any other director or officer of the company if the court so directs on a liquidator’s report alleging fraud in the promotion or formation of the company.
- Section 340 – A company may proceed against a promoter on action for deceit or breach of duty, where the promoter has misapplied or retained any property of the company or is guilty of misfeasance or breach of trust in relation to the company.
- Section 543 – A company can even go against a promoter for breach of duty where the promoter can be found guilty of wrongful contract in relation to the company.
In Prabir Kumar Misra v. Ramani Ramaswamy, the Hon. Madras High Court ruled that the promoter’s responsibility had been fixed. It is not required that he sign the Articles of Organization, be a shareholder, or be a member of the Board of Directors. His actions and the agreements he made while serving as an agent or trustee prior to incorporation will also determine his culpability and accountability.
Role Of A Promoter
• The promoter chooses the company’s name and therefore establishes if it will be approved by the registered official of the office.
• He also determines the specifics or content of the corporate bylaws.
• He must suggest the directors, bankers, auditors, and so forth.
• He selects the location for the required registered office or head office.
• Pre-incorporation contracts typically subject the promoter to personal liability. According to the common law concept, if a business does not ratify or implement a pre-incorporation contract under the Special Relief Act, the promoter will be held accountable for breach of contract.
• When the pre-incorporation contract was made, the company was not responsible for it. Nevertheless, according to Sections 15(h) and 19(e) of the Special Relief Act of 1963, the company is now allowed to assume the promoter’s rights and obligations.
Conclusion
So, it is clear from the above discussion that the promoter is personally responsible for the pre-incorporation contract as neither a principal-agent relationship nor the business as a party existed at the time the pre-incorporation contract was formed. Company can assume the rights and liabilities of the promoter under the provisions of Sections 15(h) and 19(e) of the Particular Relief Act of 1963, even if Company is not legally responsible for the pre-incorporation contract at the time it is formed. The parties may always request novation or that the preliminary agreement be confirmed by the company after it has been established. Novation is the process of replacing an existing contract with a new one by adding new terms to it or by changing the parties involved. The old contract (in this case, the pre-incorporation contract) and the new contract would be made between the parties under novation. Pre-incorporation contracts may be entered into by the company after its incorporation either by entering into a new born contract with the other party or with the promoters, or by including the terms of the contract in the terms of incorporation by explicitly or implicitly accepting the benefits of the contract. So, with the company’s obligation, the pre-incorporation agreement becomes legally enforceable.
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