Promoters Under Companies Act

A promoter of the company is a person who has been specified under such role in the prospectus or an annual return of the company. People with the responsibility of the promoter have to solicit people to invest in the company when it is under the process of formation.

Who is the Promoter of a company?

A promoter for a company can be an individual who performs all the initial duties that are essential to bring the companies into existence. They are the people that conceive the idea and introduce it to the people to induce them to join the company in a specified role.

As per companies Act, 2013 following people are treated as promoters:

  • An individual whose name is appearing specified as a promoter in the annual return or prospectus
  • A person who has direct or indirect control over the affairs of the company which can be based on the role as a shareholder, director or anyone else otherwise.
  • A person on whose advise the board of directors act upon
  • A subscriber to the memorandum whether an individual or company can be a promoter of the company
NOTE: A person serving on a mere  professional capacity are not considered promoters of the company

Legal Stand of Promoter

A promoter of a company is neither a trustee or an agent of a company they have a simple fiduciary duty to follow. The trustee has to disclose all the facts about any secret profit that is made by him while forming the company.

There are certain liabilities that the promoter has under companies act 2013

  • The promoter in case of misstatement has an obligation to pay compensation for error in the prospectus
  • A promoter of the company can be compelled by the members of the company to provide full disclosure as to any secret profit the made while imparting his duties.
  • Promoters have an obligation to give exit opportunity to dissenting shareholders.
  • Upon the report of company liquidator the liability to be examined before the tribunal
  • Promoters have both civil and criminal liability under the companies act in case the prospectus contains an untrue state.
NOTE: The promoter of the company is liable for misstatements if any for original allottees of shares only and the subsequent allottees are not included in it.

Penalties and Fines

The promoter of the company will be liable for imprisonment for a term that may extend for 2 years and a fine which may go upto Rs.50,000 for any untrue statements made in the prospectus.

Promoters Role for Company

Promoters have to prepare a scheme for the formation of the company and in that event following are the role of the company:

  • A promoter has the power to appoint a director in case the office of all the director is vacant
  • In case the office of all director is vacant after the resignation of all the directors of the company.
  • They also have to arrange for funds and managerial expertise
  • The promoters have a duty to come up with business ideas.

Termination of Promoter Duties

The role of promoters comes to an end once the board of directors have been formed and they take over as the governing body of the company. Once the control is transferred to the directors of the company the fiduciary duty as well as other extensive duties of the promoter comes to an end.

Status of Promoter to Pre-incorporation

The promoter of the company is obligated to bring the company into existence and to ensure the successful running, the promoter has to enter into contracts with various parties himself as the company is not in a legal existence he has to enter into contract himself, and these contracts are called 'Pre-incorporation Contract'

The status of such a contract is different from others that entered after the company incorporation. The contract will be introduced between the interested party and the promoter but later on, when the company comes into existence the liability of promoter will cease to exist.

Post incorporation Contracts

Any contracts that the company forms after incorporation of the company are the obligation of the company and any liability that might arise out of it will be the responsibility of the company completely.

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