Promoter
Promotion
Twycross v Grant, (1877) LR 2 CPD 469 (Justice C.J. Cokburn)
(See also Emma Silver Mining Co. v Lewis, 4 C. P. D. 396 (1879) J. Lindley)
“… who undertakes to form a Co. with
reference to a given object & sets it going &
takes the necessary steps to accomplish that
purpose.”
(Adopted in Weavers Mills Ltd. v Balkia Ammal, AIR
Mad 1967 462)
One need not necessarily be associated with the
initial formation of the Co.; one who
subsequently helps to arrange floating of its
capital will equally be regarded as a promoter
Promoter is “a term not of law but of business”
Arthur Dewing –
“…. Person conscious of the possibility of
Transforming an idea into a business capable of
yielding a profit;
Who brings together various persons concerned &
Who finally, superintendents the various steps
necessary to bring the new business into existence.”
*Bowen J - Whaley Bridge Calico Printing Co. v Green,
(1879) 5 QBD 109
“MIDWIFE” of the business (Henn & Alexander, “Law of
Corp’s”)
Acting in a professional capacity?
Not Promoter
Re Great Wheel Polgooth Co Ltd (1883) 53 LJ Ch 42)
Promoter ??
Legal Position - Relationship with the Co. ?
Agent ?
Trustee ?
A Co. becomes a legal entity in the eye of the law only when it is
incorporated. Prior to its incorporation, it simply does not exist.
CIT, TN v City Mills Distributors (P) Ltd., AIR 1996 SC 2888
Fiduciary Relationship?
Erlanger v New Sombrero Phosphate Co. (1878) 3 App Cas 1218;
Lagunas Nítrate Co. v Lagunas Syndicate [1889] 2 Ch. 392
Duty of promoter commences from & continues up to ?
Day the work of floating the Co. starts
Upto the time that the directors take into their
hands what remains to be done in the way of
forming the Co.
Sec. 2(69) “Promoter” means a person -
(a) Who has been named as such in a prospectus
/ is identified by the Co. in the annual return (S.
92) /
(b) Who has control over the affairs of the Co.,
directly / indirectly whether as a SH, director /
otherwise; /
(c) In accordance with whose advice, directions /
instructions the BOD’s of the Co. is accustomed
to act:
P…nothing in [Link]. (c) shall apply to a person
who is acting merely in a professional
capacity;
Kinds of Promoters
Professional Promoters
E.g. England - Issue Houses
U.S.A. - Investment Banks
Germany - Joint Stock Banks
Occasional Promoters:
Not on a regular basis but take up the promotion of
some Co. & then go to their earlier profession.
Engineers - Lawyers, etc.
Financial Promoters:
Financial institutions take up the promotion of a Co.
Erlanger v New Sombrero Phosphate Co. (1878) 3 App Cas 1218 Lord Cairns LC
(Accepted in Weavers Mills Ltd. v Balkia Ammal, AIR Mad 1967 462)*
“They stand in my opinion, undoubtably in a
fiduciary position … I do not say that the owner
of property may not promote & form a JSC…?
Can a Promoter sell his property to the Co.?
But I do say that if he does - He is bound to take
care that he sells it to the Co. through the
medium of a BOD who can & do exercise an
independent & intelligent judgment on the
transaction, & who are not left under the belief
that the property belongs, not to the promoter,
but to some other person’.
Rescission Not granted
Gluckstein v Barnes, [1900] A.C. 240
Profit of 40,000 was revealed in the, prospectus, but not
the profit of £ 20,000.
Held that the profit of £ 20,000 was a secret profit made
by the syndicate as promoters… & they were bound to
pay it to the Co. (at that time in liquidation)
Argument – was they had in fact made a proper
disclosure
Held - Disclosure made by them in the capacity of
vendors to themselves in the capacity of directors of the
purchasing Co. was not sufficient.
Disclosure ought to be to an independent Board / to all
SH’s by means of a prospectus.
Re Leeds & Hanley Theatres of Varieties Ltd. [1902] 2 Ch 809.
Liabilities of a Promoter
Prabir Kumar Misra v Ramani Ramaswamy [2010] 154
Comp Cas 658 (Mad) (P. Jyothimani)
To fix liability – should promoter be - Signatory
to MOA / AOA / SH / Director of the Co. ?
Not necessary
Promoter’s Civil Liability to the Co. & 3 rd
parties remain in respect of his conduct &
contract entered into by him during pre -
incorporation stage as agent / trustee of the Co.
Thiruvenkatachariar, OL of National Live Stock Registration
Bank Ltd. (In liquidation) v A.T. Velu Mudaliar & Anr., [1937] 2
MLJ 820
D.R. Patel v A.S. Dimellow, AIR 1961 MP 4
Duties & Liabilities
Liabilities of a Promoter
Sec. 26 - Matters to be stated in a prospectus
Promoter may be held liable for non-compliance of the
provisions of the Sec.
Sec. 34 – Criminal liability for misstatements in prospectus
Sec. 35 - Civil liability for misstatements in prospectus
Sec. 300 - Power to order examination of promoters, directors,
etc. -
During WU of the Co. - If NCLT directs on a liquidator’s
report alleging fraud in the promotion / formation of the Co.
Sec. 340 – Power of NCLT to assess damages against delinquent
directors, etc –
Co. may proceed against a promoter on action for deceit /
breach of duty - where the promoter has misapplied /
retained any property of the Co. / is guilty of misfeasance /
breach of trust in relation to the Co. (During WU)
Promoter Remuneration ?
Pre-incorporation of contracts
Promotional expenses?
Kelner v. Baxter, (1866) LR 2 CP 174
Contract by a promoter purporting to act on behalf of a Co. prior it its
incorporation never binds the Co. - Was not in existence. (No legal existence)
Even if the parties act on the contract it will not bind the Co.
(Northumberland Avenue Hotel Co., (1886) 33 Ch.D 16 (CA)
Co. takes some benefit from a contract which is made before its
incorporation, the contract is not binding
In Re. English and Colonial Produce Co. (1906) 2 Ch. 435 (C.A.).
Co. not entitled to take the benefit of a pre-formation contracts made by its
promoters.
Natal Land Co. v Pauline Colleiry Syndicate Ltd., (1904) A.C. 120; Newborne v
Sensolid Ltd., (1950) 1 All ER 708 (C.A.)
Co. cannot ratify a pre-incorporation contract, but it is open to it to enter into
a new contract after its incorporation to give effect to a contract made before
its formation
Howard v Patent Ivory Co.(1888) 38 Ch.D
Seth Sobhag Mal Lodha v Edward Mill Co. Ltd. 1972 42 CompCas 1 Raj
CIT, TN v City Mills Distributors (P) Ltd., AIR 1996 SC 2888
Bharucha S.P.
When did the pre-incorporation profit accrue ?
Did it accrue before incorporation ?
If so, who was the legal entity which carried on the
business & earned the income at the time of accrual ?
Co. becomes a legal entity in the eye of the law only
when it is incorporated. Prior to its incorporation, it
simply does not exist.
Assessee Co. did not exist when income …was earned.
It is not the assessee Co. which earned the income when
it accrued & it is not liable to pay tax thereon.
It is he who carried on the business & received the
income when it accrued who is liable to bear the
burden of tax thereon.
Pre-incorporation of contracts
Promotional expenses?
Re English & Colonial Produce Co Ltd [1906] 2 Ch 435
Sec. 15 (h) of the Specific Relief Act, 1963
…. Specific performance of a contract may be obtained by…
P… when the promoters of a Co. have, before its
incorporation, entered into a contract for the
purposes of the Co., & such contract is warranted by
the terms of the incorporation, the Co.
U/S 19 (e) of the Specific Relief Act, 1963
Except as otherwise P/B/T/Ch. - Specific performance of
a contract may be enforced against the Co., when the
promoters of a Co. have, before its incorporation, entered
into a contract for the purpose of the Co. & such contract
is warranted by the terms of the incorporation.
SEBI
(Substantial Acquisition of Shares & Takeovers)
Regulations, 2011
Reg. 2(s) Promoter has the same meaning as in
SEBI (Issue of Capital & Disclosure
Requirements) Regulation, 2009 (ICDR) &
includes a member of the promoter group;
Reg. 2(t) Promoter group has the same meaning
as in the SEBI (ICDR) Regulations, 2009
SEBI (ICDR) Regulations, 2009
C
Any spouse of that person / any o
parent, brother, sister / child of the n
person / of the spouse t
…
(iii) In case promoter is a body corporate:
(A) SC / HC of such body corporate;
(B) Any body corporate in which –
Promoter holds 10% / more of Equity SC /
Which holds 10% / more of Equity SC of the
promoter;
(C) Any body corporate in which
A group of individuals / Co’s / Combinations thereof
which hold 20% / more of Equity SC in that body
corporate
Also holds 20% / more of Equity SC of the issuer; &
