Promoter – Meaning, duty and liability

By | June 16, 2017

Last Updated :

Introduction and Definition of Promoter

A promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery which leads to the formation itself. (Bosher v. Richmond. Land Co, Va 455:16 SE 360) A promoter is 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 term, therefore, “has no very definite meaning”.  Whether a person is a promoter or not is a question of fact in each case. Much depends upon the nature of the role played by him in the promotion of business.

Statutory definition [S. 2(69)] – The Companies Act, 2013 contains a statutory definition of Promoter which is also more or less in terms of functional categories. Promoter means a person (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; (b) who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise, (c) in accordance with whose advice, directions or instructions the board of directors of the company is accustomed to act. The proviso excludes persons acting in a professional capacity.

Fiduciary Position

The position of promoters in relation to the company was explained by Lord Cairns in Erlanger v. New Sombrero Phosphate Co (1878 LR 3 AC 1218) in the following words:

They stand, in my opinion, undoubtedly in fiduciary position. They have in their hands the creation and moulding of the company. They have the power of defining how and when, in what shape and what supervision the company shall start into existence and begin to act as a trading corporation.

Duty and Liability

The chief duty of the promoter as a fiduciary agent is to disclose to the company his position, his profit and his interest in the property which is the subject of purchase or sale by the company. The duty continues even after incorporation until the profits are fully disclosed and fully accounted for.

Author: Mayank Shekhar

Mayank is a student at Faculty of Law, Delhi University. Under his leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.