The “promotion” is the first stage in the formation of a company. Promotion may be defined as “the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.” Promotion begins when someone discovers an idea regarding some business which can be profitably undertaken by a company and includes preliminary and detailed investigation of the feasibility of the idea, assembling of business elements and making provision of the funds necessary to launch the enterprise as a going concern. Any person who assumes primary responsibility for these matters, is termed a “promoter”.
The Promoter :
There is no statutory definition of a promoter, although the term is used expressly in Sections 62, 69, 76, 478 and 519. In the words of Bowen, L J. The term promoter is a term not of law but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.” Justice C. Cockburn described a promoter as “one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.”
The promoter is usually an industrial expert who, with the help of a big team of experts, does all the preliminary work necessary before a company can be brought into existence. He selects and settles with persons to become signatories to the memorandum and the first directors; instructs and directs the solicitors to prepare the memorandum, the articles and other documents necessary to be filed with the Registrar of Companies; finds funds for the registration expenses and prepares the climate to secure the initial capital for the company. Where to situate the registered office of the company, from where to get necessary plant and equipment etc., are other worries of a promoter.
A promoter may be an individual, a firm, an association of persons or even a company. Whether a person is or is not a promoter depends upon the facts in each particular case. Only one who has a desire that a company be formed and is prepared to take some steps to implement it is a promoter. Section 62(6) makes it clear that persons .assisting the promoter by acting in a professional capacity e.g., counsels, solicitors, accountants and other experts are not promoters.
Legal Position of a Promoter :
A promoter is neither a trustee nor an agent of the company which he promotes because there is no trust or principal in existence at the time of his efforts. But certain fiduciary duties, like an agent, have been imposed on him under the Companies Act. As such he is said to be in & fiduciary position (a position full of trust and confidence) towards the company and the original allottee of shares. Consequently, a promoter must make full disclosure of the relevant facts, including any profit made.
He must not make any secret profits out of the transactions he makes on behalf of the company. It is to be observed that it is not the profit made by the promoter which the law forbids, but the non-disclosure of it. If full disclosure is made to an independent Board of Directors or to the shareholders as a body (and not to a selected few), the profit is permissible. A promoter vendor cannot evade his liability of disclosure of profits by disclosing to a Board of Directors who are mere nominees of his own, or in his pay. A good illustration on the point is to be found in Gluckstein vs. Barnes.
In this case, a syndicate of persons was formed to purchase the Olympia Company and to promote and register a company to which the Olympia property was to be resold. At that time the Olympia Company was in a bad shape. The syndicate first bought the debentures of the Olympia Company at a discount. Then they brought the Company for £ 1,40,000. Out of this money, provided by themselves, the debentures were repaid in full and a profit of £ 20,000 was made thereon. They promoted a new company and sold Olympia to it for £ 1,80,000.
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 made by the syndicate as promoters of the company, and they were bound to pay it to the company which was at that time in liquidation. On behalf of the syndicate it was argued that they had in fact made a proper disclosure, but it was turned down on the plea that disclosure made by them in the capacity of vendors to themselves in the capacity of directors of the purchasing company was not sufficient. The disclosure ought to be to an independent Board or to all shareholders by means of a prospectus.
Promoter’s Liability :
If any profit made out of a transaction to which the company is a party is not disclosed by a promoter, the company can follow one of the following two courses:
(i) it may sue the promoter for an account of profit not disclosed by him and recover the same with interest; or
(ii) it may set aside the transaction or contract with the promoter, i.e., it may restore the property to him and recover its money.
In addition to one of the above remedies, the company may also sue the promoter for damages caused to it because of his fraud or breach of duty. Other liabilities of a promoter as provided in the Companies Act are listed as follows:
(1) A promoter may be made liable to the original allottee of shares for the mis-statements contained in the prospectus (Sec. 62). He may also be imprisoned for a term which may extend to two years or may be punished with fine up to 5,000 rupees, for such untrue statements in the prospectus (Sec. 63).
(2) In the course of the winding up of the company, on an application made by the official liquidator, the court may make a promoter liable for misfeasance or breach of trust (Sec. 543). Further, where fraud has been alleged by the liquidator against a promoter, the court may order for his public examination (Secs. 478 and 519).
Where there is more than one promoter, they are jointly and severally liable and if one of the co-promoters is sued and damages are recovered from him, he can claim contribution from the other co-promoters. In case of the death of a promoter his estate remains liable, and upon the insolvency of a promoter the company is entitled to prove its claim in the insolvency proceedings.