Primary duty of Promoter

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Querist : Anonymous

Querist : Anonymous (Querist)

04 September 2010 Please tell me what are the duties of promoters towards the company formed?

CA Sanat Pyne

CA Sanat Pyne (Expert)
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04 September 2010 He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members.
He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

In case of default on the part of the promoter in fulfilling the above duties, the company may :-

Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered

Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit.

If these are not appropriate (eg cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages upto the difference between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are :-

The company may to pay some remuneration for the services rendered.

The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.

The promoter may sell his property for fully paid shares in the company after making full disclosures.

The promoter may be given an option to buy further shares in the company.

The promoter may be given commission on shares sold.

The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement

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