Liability of Promoters

01/03/2020 0 By indiafreenotes

A promoter stands in a fiduciary position with the company which he promotes. But he is neither an agent nor a trustee to the future com­pany. The reason is obvious, there cannot be an agent of a person not in existence, nor there can be a trustee for a non-existent beneficiary.

Even then, the principles of agency and trusteeship are returned to the care of a promoter. A promoter, even though he may act only as agent or trustee, is personally liable where the contract is made on behalf of an intended company.

Duties of Promoters:

Promoters have some duties, the violation of which makes them li­able for punishment.

The duties are:

(i) To prepare and submit documents Memorandum, Articles and Prospectus.

(ii) To see that all property and assets are taken over by the proposed company at reasonable prices and on justifiable terms.

(iii) To disclose to the company or to the independent Board of Direc­tors after the company has been formed secret profits, if any, en­joyed by them as vendors.

Liabilities of Promoters:

A promoter may be made liable in a suit by an aggrieved share­holder or debenture holder for damages for deceit, besides, being liable for compensation. A promoter, even though he may only act as agent or trustee, is personally liable for the contract on behalf of the com­pany.

A promoter is liable to pay compensation for misstatements in prospectus, for non-disclosure of any matter in the prospectus and for non-compliance of the provisions under Sec. 56. There is a liability of the promoter under the general law enforceable by suit for recovery of damages on the ground of fraud etc. For untrue statements in the pro­spectus, a promoter has criminal liability.

Rights of Promoters:

Since promoters have duties, it implies that they have rights too.

Rights are:

(i) They are entitled to take assistance of the experts in preparing the documents.

(ii) They can enter into preliminary or pre-incorporation contracts on behalf of the proposed company.

(iii) They may claim reasonable remuneration for their services.

Company Promotion in India:

The industrial history of India is the history of company promotion by managing agents during the British regime. Directors and partners of old firms did also promote business enterprises. In India, we do not have generally any professional or specialized agencies for promotion of companies.

The National Industrial Development Corporation was started in 1954 as a specialist promoting institution. It prepared project reports for a number of industrial units.

In company promotion in India, promoters usually follow the stan­dard stages. But, if necessary, they also undertake the task of incorpo­ration and formation, underwriting of shares, substantial share contri­bution and, above all, direct charge of routine management of busi­ness.

Promoters in India, therefore, perform various functions in the formational stage of a company. They act as manager and controller of new companies. A controlling interest in the affairs of the company is generally retained by the Indian promoters. Promoters are generally the first directors of a company.