Promoters

A promoter is a person who brings about the incorporation and organisation of a corporation.
In common parlance the term is used to denote any individual, syndicate, association,
partnership or a company which takes all the necessary steps to create and mould a company
and set it going.
The term finds its definition in section 2(69) of the Companies Act, 2013 as 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 (b) who has control over the affairs of the
company, directly or indirectly, whether as a shareholder, director or otherwise; (c) in
accordance with whose advice, directions or instructions the Board of directors is
accustomed to act.
The proviso excludes persons acting in a professional capacity. That is to say a person acting
in a professional capacity is not a promoter. For example: A servant or an agent of a promoter
is not regarded as a promoter for that reason alone; also a solicitor doing any legal work isn’t
a promoter.
To be a promoter one need not necessarily be associated with the initial formation of the
company. One who subsequently helps to arrange floating of its capital will equally be
regarded as a promoter.
In Twycross v Grant, it was held that, “If certain persons framed the scheme, they not only
provisionally formed the company, but were in fact, to the end its creators, they formed the
directors and qualified them, they prepared the prospectus, they paid for printing and
advertising, and the expenses incidental to bringing the undertaking before the world.”

Duties of promoter

Fiduciary position - The position of promoters in relation to the company having a fiduciary
duty was explained in Erlanger v New Sombrero Phosphate Co.,
Facts:
It was held that they stand in a fiduciary position. They have the power of defining how and
when and under what supervision would the company start its existence and begin to act as a
trading corporation. The chief duty of the promoter as a fiduciary agent is to disclose to the
company his position, his profit and his interest in the property which is the subject of
purchase or sale by the company.
Facts - A group of persons headed by E purchased an island containing phosphate mines for
55,000. A company was then incorporated to take over the island and to work the mines. E
named five persons as directors. Two out of which were abroad and of the remaining three,
two were directly under E’s control. These three directors purchased the island for the
company at 1,10,000. A prospectus was thereby issued. The purchase of the island was
adopted by the shareholders at their first meeting but the real circumstances were not
disclosed to them. The company failed and the liquidator sued the promoter for refund of the
profit. The promoters contended that the company’s Board of directors had full knowledge of
the facts.
The HoL rejecting the contention held that they should sell the property to the company
through the medium of a Board of directors who can and do exercise an independent and
intelligent judgment on the transaction. If they sell the property to the company, it is
incumbent upon them to provide the company with an executive body who shall be
incumbent and impartial judges as to whether or not the purchase should be made.

Gluckstein v Barnes - A syndicate of persons was formed to buy a property called Olympia
and resell this Olympia to a company to be formed for the purpose. The syndicate first bought
the debenture of the old Olympia company at a discount. Then they bought the company
itself for £1,40,000. Out of this money provided by themselves the debentures were repaid in
full and a profit of £20,000 were made there on. They promoted a new company and sold
Olympia to it for 180,000. The profit of £40,000 was revealed in the prospectus but not the
profit of £20,000. It was held that the profit of £20,000 was a secret profit and the promoters
of the company would be bound to pay it because the disclosure of the profit by themselves
in the capacity of directors of purchasing the company was not satisfied.
Liability of promoters -
As per section 35 if the compliance laid down in section 26 is not complied with the promoter
maybe had liable to compensate the shareholders.
Section 35 further provides for civil liabilities for any mis-statements made in the prospectus.
A promoter can be held liable for any false statements in the prospectus by a person who has
subscribed for the shares and the debentures of the company acting on the fate of the
prospectus.
Section 34 which contains provisions relating to the criminal liabilities for issuing a
prospectus states that the promoters may be liable for imprisonment for a term which shall
not be less than six months but may also extend to 10 years. Besides, the promoter shall also
be liable to fine which shall not be less than the amount involved in the fraud but which may
extend to 3 times the amount involved in the fraud. The section also provides that where the
fraud in question involves public interest the term of imprisonment shall not be less than
three years.

KELNER V BAXTER – The Plaintiff intended to sell wine to accompany which was to be
phone but under the contract he agreed to sell to the proposed directors of the
company. The proposed directors intended to buy the wine and the whole of the
company but as it was not in existence when the contract was made the personally Took
the delivery it was held that as they had contacted on behalf the principal who did not
exist they having received the wine must pay for it. Contract can bind a company before
it becomes capable of contracting by incorporation to consenting parties are necessary
to contact whereas the company for the incorporation is in is a non-entity.