SUMMARY OF ARGUMENTS

ISSUE 1: WHETHER THE SHAREHOLDERS CAN SUE MR. RAJESH FOR BEING

THE PROMOTER, MAJOR SHAREHOLDER AND FOR HAVING ACTED OUT OF

PERSONAL INTEREST?

Mr. Aakash cannot be sued by the shareholders since it is contended that the investment made

by Mr. Aakash was for the benefit of Skyline & Co. Ltd. as part of his duty as the majority

shareholder and promoter of the company and the same was not done out of any personal

interest. Further, Mr. Aakash fulfilled all his duties as a promoter of the company by not

making any secret profit and did not have any personal interest in the transaction that needed

disclosure either. It is also contended that the promise made by Mr. Aakash was in good faith

and that he cannot be sued as he worked in accordance to norms mentioned in the ‘business

judgement rules’ that were created and are followed to prevent any frivolous law suits against

the actions of the company as it presumes the presence of good faith in the actions of the

directors of the company. Lastly, it is also contended that duty of good faith was duly

discharged by Mr. Aakash.

 ARGUMENTS ADVANCED

~ISSUE I~

WHETHER THE SHAREHOLDERS CAN SUE MR. AAKASH FOR BEING THE
PROMOTER, MAJOR SHAREHOLDER AND FOR HAVING ACTED OUT OF
PERSONAL INTEREST?
1. The contention in relation to the inability of the shareholders to sue Mr. Aakash for being
the promoter, major shareholder and for having acted out of personal interest, is sought to be
contended by establishing the fact that [1.1] the investment was made merely as a part of duty
of the promotor to benefit the company and was in the interest of the company and that [1.2]
the promise made by Mr. Aakash was in good faith.

[1.1] The investment was made merely as a part of the duty of the promoter to benefit
the company and was in the interest of the company.

2. Mr. Aakash, as the majority shareholder, managing director and promotor of the company
has always showcased his interest in fulfilling his duties for the benefit of the company. As
the promoter, at the pre-incorporation stage itself, Mr. Aakash promised to invest in Apex
Limited, a software development company, after its incorporation in return for their services
relating to developing the enterprise resource planning software. The investment was of 120
crores. As part of his duties as a promoter, he was entrusted with the responsibility to
establish the company and ensure its legal stability. To discharge this duty, a promoter is
allowed to enter ‘pre-incorporation contracts’ that may be for the advantage of the
‘association of persons’ or potential firm. The term ‘promoter’ was not defined in Companies
Act, 1956 but was defined in the case of Whaley Bridge Co. v Green1 where it was 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
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1897 QBD 111
 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.”

Section 2(69) of the recently passed Companies Act, 2013 defines ‘promoter’ 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 of
the company is accustomed to act

2. Thus it is clear from the various aforementioned definitions that Mr. Aakash only worked
in his capacity as a promoter as he had control over the affairs of the company, directly or
indirectly as a majority shareholder and managing director. The promise made by the
promoter was duly executed by the Board of Directors as they are accustomed to act upon the
advice of the promotor. Promoters are deeply involved in the incorporation process of a
company. Since there is no company in the eyes of the law when a company is in a pre-
incorporation state, promoters cannot be considered the agent of the company, nor are they
trusties of a company as the company is not a beneficiary.

3. The fiduciary capacity of a promoter has been defined in the case of Erlanger v New
Somrero Phosphate Co. Ltd.2 where it was stated 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.”

Thus this case, establishes the fiduciary position of Mr. Aakash as the promoter of the
company as he only invested in Apex Ltd. as part of his duty to create and mould the future
of the company and not out of personal interest. The pre-incorporation agreement with Apex
Ltd. was only reached for the greater good of Skyline & Co. Ltd.

4. The Fiduciary Duty of a promoter has also been defined in the Indian Companies Act,
2013. The two fiduciary duty of a promoter are:

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1878 3 AC 1218
a) Duty to not make secret profit

b) Duty to disclose to the company any interest in a transaction

Mr. Aakash fulfilled his fiduciaries by not making any secret profits from the transaction
between Skyline & Co. Ltd. and Apex Ltd. Further, no disclosure regarding any interest in
the transaction was made to the company was made as there no interest in the transaction on
part of Mr. Aakash.

5. The legality of a pre-incorporation contract in India has been validated by Section 15(h)
wherein it is stated that:

“when the promoters of a company have, before its incorporation, entered into a
contract for the purposes of the company, and such contract is warranted by the
terms of the incorporation, the company: Provided that the company has accepted the
contract and has communicated such acceptance to the other party to the contract.”

In the case of Weavers Mills Ltd. v. Balkies Ammal3, the promoters had entered into a
contract on behalf of the company and the validity of the same was then confirmed by the
court in its judgement.

5. Thus, to conclude, it is contended that Mr. Aakash did not act out of personal interest and
only worked for the welfare of Skyline & Co. Ltd. and fulfilled his duties and responsibilities
as a promoter of the company and he cannot be sued for the same reasons.

[1.2] The promise made by Mr. Aakash was in good faith

6. The counsel for the respondent contends that the promise between Mr. Aakash as the
promoter of Skyline & Co. Ltd. was in good faith. Mr. Aakash has complied with the norms
of conduct outlined in ‘business judgement rules.’ The business judgment rule protects
companies from frivolous lawsuits by assuming that, unless proved otherwise, management is
acting in the interests of the corporation and its stakeholders.

7. It is also contended before the Hon’ble that the duty of good faith was discharged by Mr.
Aakash. The duty of good faith is the principle that directors and officers of a corporation
who are making decision in their capacities as corporate fiduciaries, must act with a
conscious regard for their responsibilities in that role. In the case of Heritage Surveyors &

3
AIR 1969 Mad 462
Eng’rs, Inc. v Nat’l Penn Bank4 it was held that ‘the duty of good faith has been defined as
honesty in fact in the conduct or transaction concerned.’

4
801 A.2d 1248