Characteristics, Importance, and Functions of Promoters in Company

What is Promoters?

Promotor means a person who originates the scheme for the promotion of company, has the memorandum and articles prepared, executed and registered and finds the first directors, settles the terms of preliminary contracts and prospectus, if any and makes arrangement for advertising and circulating the prospectus and paying the capital ~ Sir Francis Palmer

Read More: What is a Memorandum of Association? Features, Purpose, and Importance of MOA

Characteristics of a Promoter

the following characteristics of a promoter can be identified:

• A Promoter is a Person: A promoter is referred to as a person, but the term “person” here does not solely refer to an individual. A firm, association, or company can also function as a promoter.
• Originates the Idea for the Formation of a Company: Initially, the promoter conceives the nature, character, location, capital, and other aspects of the company’s business, while also considering the practicality of these ideas.
• Giving Practical Shape to the Idea: Promotion involves more than just the idea of forming a company. To bring the idea to life, the promoter not only invests personal resources but also enlists the services of experts and the resources of others.
• The Function, Not the Name, of the Promoter is Important: Anyone acting as a promoter is legally responsible as a promoter, regardless of how they are addressed. Hence, it is the function, not the name, that defines a promoter’s role.
• Promoter’s Membership in the Proposed Company is Not Necessary: It is not required for the promoter to become a shareholder or partner in the company they promote. The promoter may receive remuneration for their work and then sever ties with the company.

Read More: Difference between Private and Public company

Importance of Promoter

• Vision and Idea Generation: The promoter is typically the person or entity who conceives the original idea for the business. They envision the concept, scope, and potential of the company, laying the foundation for its formation and guiding its initial direction.
• Resource Mobilization: Promoters are responsible for gathering the essential resources required to start the company. This includes securing initial capital, attracting key personnel, and obtaining necessary assets and technology, ensuring the company has the means to operate.
• Legal Formation and Compliance: Promoters handle the legal aspects of establishing the company, such as registering the business, preparing foundational documents (e.g., Memorandum and Articles of Association), and securing necessary licenses and regulatory approvals.
• Initial Funding Acquisition: One of the critical functions of a promoter is securing the initial funding necessary to launch the company. This involves pitching the business idea to potential investors, negotiating terms, and establishing the initial financial structure of the company.
• Strategic Planning and Decision-Making: Promoters play a key role in making early strategic decisions that shape the company’s future. They decide on the business model, market approach, and overall strategy, setting the direction and ensuring the company’s long-term success.

Read More: Understanding the Differences Between Joint Stock Companies and Partnerships

Function of a Promoter

The function of a promoter encompasses a wide range of activities essential for the successful formation and early development of a company. Here are the key functions of a promoter:

• Conceiving the Business Idea: The promoter is responsible for originating the idea of forming a company. They identify a market opportunity or business concept and envision how to transform it into a viable enterprise.
• Feasibility Analysis: Before moving forward, the promoter conducts a feasibility study to assess the practicality of the business idea. This involves analyzing market conditions, potential competition, required resources, and financial viability.
• Assembling the Initial Team: The promoter brings together a team of co-founders, key personnel, and advisors who possess the necessary skills and expertise to launch the company. This team often includes legal advisors, accountants, and industry experts.
• Securing Initial Funding: A critical function of the promoter is to secure the initial capital required to start the business. This may involve personal investment, raising funds from investors, or securing loans. The promoter also determines the equity structure and negotiates with potential shareholders.
• Legal Formation of the Company: The promoter handles the legal procedures required to form the company, such as registering the business, preparing the Memorandum of Association and Articles of Association, and obtaining any necessary licenses or permits.
• Acquisition of Resources: The promoter arranges for the acquisition of essential resources, including property, equipment, technology, and raw materials. They negotiate contracts and agreements with suppliers and service providers.
• Coordination with Regulatory Authorities: The promoter ensures that the company complies with all legal and regulatory requirements. This includes liaising with government bodies, securing necessary approvals, and ensuring that all legal documentation is in place.
• Publicizing and Marketing the Company: The promoter often plays a role in creating awareness about the new company. This may involve marketing the company to potential investors, partners, and customers, and establishing the brand identity.
• Drafting Initial Business Plans and Strategies: The promoter develops the initial business plan, outlining the company’s mission, vision, goals, and strategies. This plan serves as a roadmap for the company’s early operations and growth.

• Transferring Control to the Board of Directors: Once the company is established, the promoter’s role often transitions to handing over control to a formal board of directors and professional management team. The promoter may remain involved as a director, shareholder, or advisor.

Rights of Promoters

1. Right to Recover Legitimate Preliminary Expenses

Before a company is incorporated, promoters often incur various expenses. These expenses are for the benefit of the company, even though the company doesn’t legally exist yet, and there’s no contract between the promoters and the company. So, can promoters legally recover these expenses from the company? Legally, promoters cannot sue the company for these expenses because they don’t have a contractual right to do so, and the company’s directors are not obligated to pay them. Whether these expenses are paid depends on the company’s decision. Even if the company’s articles mention such payments, it’s not a binding contract between the promoter and the company. However, practically and morally, companies usually cover these expenses, as failing to do so would discourage promoters from establishing new companies.

In the case of Melhado v. Porto Alegre Railway, the company’s articles stated that the company should pay necessary preliminary expenses up to £2,000. The plaintiff, a promoter, incurred these expenses while setting up the company. The court ruled that if the company pays these expenses under the articles, the promoter cannot sue the company. However, it was also held that after the company’s incorporation, a new contract could be made with the promoter to cover these expenses.

2. Right to Share Costs Among Co-Promoters

If a promoter is required to pay compensation due to misrepresentation in the prospectus, they have the right to recover a proportionate amount from co-promoters. It’s important to note that promoters are jointly and individually responsible for any secret profits they earn. If a promoter has to pay such an amount, they can recover it from other promoters proportionally.

3. Right to Receive Remuneration

Promoters work hard to establish and launch companies, so they are often rewarded with remuneration. This can be in the form of a fixed sum of money, a commission on property sold to the company, or by being given an important position in the company. Remuneration can also be provided in cash, shares, or debentures.

However, promoters do not have a statutory right to remuneration unless they enter into an agreement with the company after incorporation. Even if the remuneration has been agreed upon, it must be mentioned in the company’s prospectus to be valid.

Read More: What is a Company? Definition, Features, and Types

Liabilities of Promoters

Promoters play a crucial role in the formation of a company. While they have certain rights, they also bear significant liabilities. The scope of a promoter’s liabilities is broad, and the key liabilities are outlined below:

1. Liability Due to Fiduciary Relationship

• A promoter’s relationship with the company is fiduciary, meaning they must act in the company’s best interest. This creates two main liabilities:

1. If a promoter earns any secret profit in transactions made on behalf of the company, they must return that profit to the company.
2. If a promoter earns a secret profit by selling personal property to the company, the company can either terminate the contract, enforce it, or recover the profit. Essentially, the company can sue the promoter for breach of trust.

2. Liability for Misstatements in the Prospectus

• If a person buys shares or debentures based on the information in the prospectus, and that information is found to be untrue, false, or deceptive, the promoter is liable. The affected party can sue the promoter for compensation or damages. The consequences of misstatements in the prospectus include:

1. Cancellation of the allotment of shares or debentures.
2. Legal action against the promoter for damages and compensation.
3. Criminal proceedings against the promoter.

Under Section 34, the promoter can be held criminally liable for false or deceptive statements in the prospectus. However, the promoter can avoid liability by proving they had reasonable grounds to believe the statement was true or that the statement was not intended to mislead investors.

3. Liability for Fraud, Misfeasance, or Breach of Duty

• If a promoter is found guilty of an offense punishable under Section 339, the court can prohibit them from participating in the management of the company for up to five years. The court can also impose this ban if the promoter is guilty of fraud, abuse of power, or breach of duty.

4. Liability in Case of Insolvency

• If a promoter becomes insolvent, their personal property may still be used to settle the debts of the company.

5. Liability in Case of the Promoter’s Death

• If a promoter dies, the company can recover damages or losses from the promoter’s estate.

6. Liability During the Winding-Up of a Company

• If a promoter has misused company property, abused their powers, or breached trust during the promotion of the company, the court can order an inquiry. The court may also require the promoter to compensate for any misuse or loss. Under Section 543, if the company is wound up and a government report indicates that the promoter committed fraud during the company’s formation, the court can order a public inquiry against the individual responsible.

Duties of promoters

• Duty of Disclosure: Promoters must fully disclose any personal interest they have in the transactions or dealings they conduct on behalf of the company. This includes any profits they may earn from these transactions. The disclosure should be made to the company’s board of directors or shareholders to avoid conflicts of interest.
• Duty of Good Faith: Promoters have a fiduciary duty to act in good faith towards the company. This means they must prioritize the company’s interests over their own and avoid any actions that could harm the company or its future prospects.
• Duty to Avoid Secret Profits: Promoters are prohibited from making secret profits from the transactions they conduct while forming the company. If they do earn any profits without the knowledge of the company, they must account for and return those profits to the company.
• Duty to Act with Due Diligence: Promoters are responsible for conducting all necessary investigations, including legal, financial, and business due diligence, before forming the company. They must ensure that all representations made to potential shareholders and investors are accurate and based on sound information.
• Duty to Ensure Legal Compliance: Promoters must ensure that all legal requirements for forming the company are met. This includes properly registering the company, preparing and filing necessary documents like the Memorandum of Association and Articles of Association, and complying with all applicable laws and regulations.

These duties ensure that promoters act in the best interest of the company and its stakeholders, laying a strong foundation for the company’s success.

Type of promoters

The following are the major types of promoters:

• Professional Promoters: Professional promoters specialize in the promotion of new companies. The process of forming and incorporating a company is complex and technical, and not everyone who wishes to start a company can efficiently handle all the necessary formalities. Due to a lack of knowledge or patience, individuals often rely on the services of professional promoters to successfully form a company. In exchange for their services, these promoters receive fees.
• Occasional Promoters: Occasional promoters are individuals who convert their original business into a company or those who take on the task of forming a company on their own without external assistance. They do this as a one-time activity and may not engage in company promotion as a regular business. These promoters are also known as accidental promoters.
• Government Promoters: In many countries, the government has begun to take an active role in the promotion of business enterprises. In India, both the Central Government and State Governments have promoted numerous industrial and business institutions. The government has taken on the task of promotion for economic, social, and national reasons.

Read More: Stages of Company Promotion and Definition

Conclusion

Promoters play a critical role in the successful establishment and growth of a company. From generating the initial business idea to navigating legal formalities and securing necessary resources, their contributions are indispensable. Understanding the characteristics, importance, and functions of promoters helps stakeholders appreciate their responsibilities and the value they bring to the table. As key architects of a company’s foundation, promoters ensure that the company starts on a strong footing, setting the stage for long-term success and stability. Whether you’re an investor, entrepreneur, or business professional, recognizing the pivotal role of promoters is essential for fostering successful business ventures.

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