Promoters are individuals who conceive of and organize the formation of a new company. They take on important preliminary responsibilities like drafting founding documents, recruiting initial shareholders and directors, and facilitating the legal registration of the company. Promoters occupy a fiduciary role and are therefore prohibited from making secret profits or failing to disclose material facts about transactions between themselves and the company.

1. Made by : BHUPINDER KAUR
S.D.COLLEGE, AMABAL CANTT

2. Meaning of a Promoter
 The idea of carrying on a business which can be
profitably undertaken is conceived either by a
person or by a group of persons who are called
promoters.

3. Functions of a Promoter:
 To conceive an idea of forming a company and
explore its possibilities.
 To conduct the necessary negotiation for the
purchase of business
 To collect the requisite number of persons (i.e.
seven in case of a public company and two in
case of a private company) who can sign the
‘Memorandum of Association’ and ‘Articles of
Association’ of the company and also agree to
act as the first directors of the company.

4. Contd.
 To decide about the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The amount and form of its share capital,
(iv) The brokers or underwriters for capital issue, if
necessary,
(v) The bankers,
(vi) The auditors,
(vii) The legal advisers.

5.  To get the Memorandum of Association (M/A) and
Articles of Association (A/A) drafted and printed.
 To make preliminary contracts with vendors,
underwriters, etc.
 To make arrangement for the preparation of
prospectus, its filing, advertisement and issue of
capital.

6.  To arrange for the registration of company and
obtain the certificate of incorporation.
 To defray preliminary expenses.
 To arrange the minimum subscription.

7. Legal Position of a Promoter
 From the fiduciary position of promoters, the two
important results follow:
 (1) A promoter cannot be allowed to make any secret
profits. If it is found that in any particular transaction of the
company, he has obtained a secret profit for himself, he will
be bound to refund the same to the company.
 (2) The promoter is not allowed to derive a profit from the
sale of his own property to the company unless all material
facts are disclosed. If he contracts to sell his own property
to the company without making a full disclosure, the
company may either repudiate/rescind the sale or affirm the
contract and recover the profit made out of it by the
promoter.

8. Contd.
 The disclosure may be made:
 (i) To an independent Board of Directors, or
 (ii) In the articles of association of the company,
or
 (iii) In the prospectus, or
 (iv) To the existing and intended shareholders
directly.

9. Contd
 If the promoter fails to discharge the obligation
demanded of his fiduciary position the company
may rescind the contract or may in the alternative
choose to take advantage of the contract and sue
the promoter for damages for breach of his duty
to the company.
 Secret profits on the sale of property can be
recovered from a promoter only when the
property was bought and sold to the company
while he was acting as a promoter

10. Lord lindley emphasised the
following:
 Trustworthy fiduciary relations
 Binding of promoters by directors after
registration of company
 Directors not being personally liable
 Termination of contract on the basis of
misrepresentation
 No termination of voidable contract if the
situation of parties is changed

11. Liability of the promoters of
Company:
 To disclose the liability and pay the
secret profits if promoters have earned.
 Liability is up to the completion of
contracts.
 Liability for statutory mistakes or fraud
in the prospectus.
 His property becomes liable for
payment even after his death.

12. Rights of promoters
Right to receive preliminary
expenses
Right to receive remuneration
for their services.
Rights to receive the
proportionate money from co-
promoters

13. Liability of promoters
 Liability due to fiduciary relationship
 Liability for misstatement in prospectus
 Liability for fraud, misfeasance or breach
of duty
 Liability on insolvency
 Liability on the death of a promoter
 Liability on winding up of a company

14. Duties of promoters
To disclose private arrangements
To disclose secret profits
To disclose all material facts
To disclose the profit which he has
earned as trustee
To show goodwill towards future
shareholders

15. Remuneration of promoters
Cash
Option to purchase shares
Partly in cash and partly in shares
and debentures
Commission
Profit on assets

16. 1. Preliminary activities
 To decide where the registered office of
the company will be located
 To decide the name of the company
 To make appointments
 To get the important documents prepared
 To send the application to the registrar

17. Contd.
2. Documents to be filled with the registrar:
 Memorandum of association
 Articles of association
 Information about the head office of the
company
 List of directors
 Written consent of directors
 Statutory declaration
 Payment of prescribed fee