1. PROMOTION.
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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 organsation.of funds, property and managerial ability into a business concen fo the purpose of makng profits therefrom. Promotion begins when someone discoves on dsa regarding some business which can be profitably undertaken by a company and includes pretiminary and detailed investigation of the feasibility of the idea nbling of business elements and making provision of the funds necessary launch the enterprise as a going concern. Any person who assumes priman responsibility for these matters, is a "promoter".
The Promoter.
Section 2(69) defines the term 'promoter for the first time. Accordings promoter means a person:
(a) who has been named as such in a prospectus; or is identified by the compan the Annual Return;
(b) who has control over the affairs of the company, directly or indirectly, whee as a stareholder, director or otherwise;
(c) accordance with whose advice, directions or instructions the Board Cevectors of the company is accustomed to act.
The term 'promater thus includes persons who have control over the affairs of
the company whether as a sharehokder, director for otherwise and excludes a person acting in a professional capacity.
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 of Association 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 desirethata company be formed and is prepared to take some steps to implement it, is a promoter. Proviso to Section 2(69) 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 a 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 llability of disclosure of profits by disclosing to a Board of Directors who a 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 Olympla are 85 all Company and to promote and register a company to which the Olympia 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 they bought the Company for £ 1,40,000. Out of this money, provided by themselve the debentures were repaid in full and a profit of £ 20,000 was made thereon The promoted a new company, and sold Olympia to it for E 1,80,000. The profit of 40,000 was revealed in the prospectus, but not the profit of E 20,000. It was hel that the profit of E 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
A promoter must act with utmost good faith because he stands in a fiduciary relationship towards the proposed company. 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:
(1) it may sue the promoter for an account of profit not disclosed by him and recover the same with interest; or
(2) 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 promote for damages caused to it because of his fraud or beach of duty. Other liabilities of a promoter as provided in the Companies Act, 2013 are ibter below :
(1) A promoter may be made liable to the original allottee of shares for mis-statements contained in the prospectus (SeC. 35). He may also be imprisoned for a term which may extend to ten years and may be punished with the fine up to three times the amount involved in the fraud, for such untrue statements in the prospectus (Sec. 34 read with Sec. 447).
(2) In the course of the winding up of the company, on an application made by the Official Liquidator or the Company Liquidator, the Tribunal may make a lable for misfeasance or breach of trust (Sec, 340).Further, where fraud has been olleged by the Company Liquidator against a promoter, the Tribunal may order for s nublic examination (Secs. 300 and 317).
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 womoter his estate remains liable, and upon the Insolvency of a promoter the company is entitied to prove its claim in the insolvency proceedings.
Promoter's Remuneration
The remuneration to a promoter, in consideration of his services in the formation of the company, may be paid in cash or partly in cash and partly in shares and debentures of the company. But in the absence of an agreement with the company after its incorporation, a promoter cannot file a suit in a court of law for the recovery of his remuneration and other preliminary expenses incurred by him because he acted for a person who is yet to take birth [ewborne vs. Sensolid (Gt. Britain) Ltd.'] and therefore, there cannot be any binding contract in the absence of consensus-ad-iadem between the two parties,.
Pre-incorporation Contracts
Along with the discussion about promoters it would be desirable to know the legal position of the contracts which the promoters enter into to acquire some property or right for the company before its incorporation. Such contracts are called "pre-incorporation" or "preliminary" contracts. Such contracts are not legally binding upon the company, i.e, the company can neither sue nor be sued by the other party on the basis of such contracts because two consenting parties are necessary to a contract, whereas the company before its incorporation is a non-entity.
The promoters will continue to be personally liable for pre-incorporation contract unless a new contract embodying the terms of the old one is made afresh by the company after its incorporation (Surendro & Co. vs. Punjab Tannery Co.). Until the company has been incorporated it cannot contract in the eyes of law. The facts of Natal Land & Colonisation Co. Ltd. vs. Pauline Colliery Syndicate Ltd, case provide an illustration on the point :
The Natal Company entered into a contract with A'who was acting as the nominee of the syndicate (which was not then registered), to grant a lease of certain mining property for three years. After registration, the syndicate sued te Natal Company for specific performance of the agreement to grant a lease. It we held that the syndicate was not entitled to claim the lease as it was not in existen when the contract was signed and a company cannot obtain the benefit of a pre incorporation contract unless a new contract is made with the company after it's incorporation.
Again, in Re Northumberland Avenue Hotel Company's Case' it was held the merely taking the benefit of or acting on the original pre-incorporation contract does not make a case for, or against, the company.
The company cannot even adopt the pre-incorporation contracts by "ratification after its incorporation; because the doctrine of ratification requires existence of principal, competent to contract at the time of entering into the contract; unless contracts are such that are covered by the provisions of the Sections 15(h) av 19(e) of the Specific Relief Act 1963. These Sections providethat when the promoten of a company have, before its incorporation, entered into a contract "for th purposes of the company" and such a contract is "warranted by the terms of incorporation"the contract may be specifically enforced by or against the company if the company has accepted the contract and communicated such acceptance to the other party to the contract.
Thus, by virtue of these Sections of the Specifc Relief Act, the company can validly 'ratify' or 'adopt' certain types of pre-incorporation contracts.
The phrase "for the purposes of the company" mentioned above implies such contracts as are necessary for the incorporation and working of the company, for instance, a contract for printing the 'Memorandum' and 'Articles' of Association or for the supply of machinery indispensable for the functioning of the company. The facts of Imperial Ice Mfg. Co. vs. Manchershaw provide a good example on the point :
The promoters of an ice manufacturing company entered into a contract with for purchase of ice manufacturing machinery for the company. The company oe formation, subsequently adopted the contract and sent the communication d acceptance to Mr. M. It was held that the contract was "for the purposes of the company" and, therefore, enforceable by or against the company.
It must be noted that a contract not deemed to be necessary for the incorpora and working of the company, e.g., a contract with the promoters to buy silae the the company, is not covered under the above phrase- "for the purposes o company" and, therefore, cannot be ratified by the company.
The purpose of the above mentioned Sections of the Specific Relief Act is to empower the company to take the benefit or burden of certain types of contracts made on its behalf prior to its incorporation, because, as the Law Commission observes, "there would appear to be no reason why the company should not be entitled to take the benefit or burden of a contract made on its behalf by its promoters, by communicating its acceptance of the benefit or the burden to the other party to the Contract."
Provisional Contracts
Contracts which were entered into by a company after obtaining the 'Certificate of Incorporation' but before getting the 'Certificate of Commencement of Business' are known as 'provisional contracts'. Such contracts are not legally binding on the company until the company obtains the Certificate of Commencement of Business.
The Companies (Amendment) Act 2019 passed on 31st July, 2019 has reintroduced the concept of Certificate of Commencement of Business. Under the new lan, no company will be entitled to commence its operations except by filing a declaration within 180 days of its incorporation stating that the subscribers to the Memorandum d the company has paid the value of shares so agreed by them, and files a verification of its registered office address with the Registrar of Companies (ROC) within 30 days of its incorporation. Non-compliance with this provision will result in the removal of the company's name from the Registrar of Companies.
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