Promotion of
Company
By
Asok Nadhani
3.1 Promotion of
Company
a.
The term ‘promotion’ means all those steps required
to bring a company into existence, and set it going.
b.
‘Promotion’ involves following stages:
i.
Generation of idea of starting a new company,
ii.
Registration of the company,
iii.
Floatation, i.e., arranging the financial resources
and raising of capital to carry on its business operations,
iv.
Obtaining the certificate of commencement of
business (for Public Limited Co.).
3.2 Promoter
A promoter is a
person who does the preliminary work incidental to formation of a company. They
are the first persons controlling a company’s affairs
a.
A promoter of Company normally undertakes the
following job :
·
Generating the idea of a starting a business and
forming a company;
·
Proposes the Name of the Company;
·
Compiles & registers the company's Memorandum,
Articles and other documents;
·
Makes necessary work related to appointment of
first directors, solicitors, bankers, auditors secretary and the registered
office of the company.
Thus the promoter is
responsible for bringing the company into existence for the object which he has
in view.
b.
Legal Status of a Promoter : A promoter is a
sort of Quasi Trustee. He is
neither an Agent (because there is no principal born by that time) nor
a Trustee (because there is no cestui que trust in existence) of
the company under incorporation. But he is under some fiduciary obligation
thrust on him under the Law.
c.
Fiduciary Position of a Promoter : A promoter shares a relation of trust and faith with the company. i.e. it
stands in a fiduciary relation with the Company he promotes, such as:
i. Not to make any
profit at the expense of the company:
The promoter must not make any profit at the expense of the company.
ii. To give benefit
of negotiations to the company: The promoter
must give to the company the benefit
of any negotiations or contracts into which he enters on behalf of the
company. [Erlanger v. New Sombrero Phosphate
Co.]
iii. To make a full
disclosure of interest or profit: A promoter must disclose (to the Board of directors or to the intended shareholders, as the case may be), all his interest or profits made while
making a transaction on behalf of the company. The Company may sue him for breach
of his fiduciary duty and can claim
damages for his failure to disclose the facts (profit is permissible but
non-disclosure is forbidden).
iv. Not to make
unfair use of his position: A promoter must not use his position in an unfair way to lead any
corruption, fraud or apply undue
influence.
3.2.1 Rights and Duties of Promoter
a. Duties of Promoter: Promoter
must ensure that the Prospectus or the Statement in lieu of
Prospectus issued contains:
-
all the necessary information (S. 56),
-
does not contain any false or misleading statements,
-
does not omit any material fact (S. 62, 63).
i.
If the promoter fails to perform this duty:
- Allotment of
shares may be set aside;
- He may be sued
for damages;
- He may be sued
for compensation for misrepresentation under sec. 62 of the Act.
- He may be sued
for damages by the shareholders who have suffered by reason of his non-compliance
with the statutory requirements of prospectus;
- He may become
liable to criminal proceedings.
ii.
The court may suspend a promoter from taking part
in the management of a company for a period upto five years, if: (i) he is
convicted of any offense in connection with the promotion, formation or management
of a company, or (ii) in liquidation it appears that the promoters have been
guilty of any offense for which they are punishable under Section 542.
b. Rights of
Promoter: In case the company has contracted
to pay remuneration or reimburse incorporation expenses, the promoters shall
have the right to:
receive any
remuneration from the company,
recover of any
expenses incurred by them for incorporation of the company.
3.2.2
Remuneration of Promoter
i.
A promoter cannot claim any remuneration for his
service towards the company (even if it is stated in the articles of the
company) unless there is a contract to that effect.
ii.
Normally, a promoter takes remuneration for his
services by:
ú selling his own
property at a profit to the company for cash or fully-paid shares, provided he
makes a disclosure to this effect.
ú option to buy
certain number of shares in the company at par.
ú taking a
commission on the shares sold.
ú taking lump sum
amount from the company.
3.2.3 Remedies
available to the company against the promoters
When secret
profit made by promoter comes to the knowledge of the company, the company will
have the following remedies.
1.
Rescission: The company may rescind the
contract (within a reasonable time) even if the company had adopted the
contract and communicated to the other party.
2.
Recovery of secret profit:
i.
Where the company has already paid the price, the
company may recover the secret profit made by the promoters.
ii.
If the company has not paid the price, the company
may pay the consideration after deducting the secret profit.
3.
Suit for breach of trust: The company may
sue the promoters for breach of trust.
3.2.4 Public
Examination of Promoter [Sec. 519]
The Liquidator
may make a report to the Tribunal if there is a fraud in the formation and
promotion of the Company and direct the attendance of the person concerned for
public examination as to the promotion and formation.
3.2.5 Misapplication
[Sec. 543]
During a
Company’s winding up, on the Official Liquidator’s application any person (including Promoter) shall be liable to
repay or restore the money or property, along with interest, as the NCLT thinks
fit, if he is guilty of –
i. misapplication
of money or property of the Company, or
ii.
misfeasance or breach of trust in the conduct of
business.
3.3 Pre-Incorporation (or Preliminary)
Contracts
a.
Pre-incorporation
contract (or Preliminary Contract): It means a contract
entered into by the promoters on behalf of a proposed company (i.e., before
incorporation of a company). [Inlec Investment (P) Ltd. vs. Dynamatic
Hydraulics Limited.]
b.
Liability: A Company does
not come into existence before the Certificate of Incorporation is issued. So,
the Company is not liable for pre-incorporation or preliminary contracts
(contracts entered before Incorporation) and the following rules apply:
i.
Company not bound by pre-incorporation
contract: A company, after
incorporation, is not bound by a pre-incorporation contract even where it takes
the benefit of the contract entered into on its behalf, nor it can enforce such
pre-incorporation contract.
ii.
Promoters Liable to Pre Incorporation Contracts: The promoters remain personally liable on Pre
Incorporation contract as if the promoters have been entered into such contract
in their personal capacity. [Kelner Vs.
Baxter]
c.
Ratification of
Pre-Incorporation Contracts
i. Pre-incorporation contract cannot be ratified by the company. The
doctrine of ratification applies only when the Principal is in existence at the
time of Contract. In the same way, the company cannot, by ratification,
legalise a pre-incorporation contract.
ii. The company, if
it desires, can enter into a new contract after its incorporation. In such case,
if the company makes a fresh contract in terms of the pre-incorporation contract,
the liability of the promoters in respect of such contract shall come to an end.
iii. Pre-incorporated
contracts may be enforceable if it is warranted by the terms of incorporation,
at the time of making the contract. [Imperial
Ice Manufacturing Company Vs Manchershaw]
d.
Specific performance of pre-incorporation contracts
If a Pre-incorporation
contract is warranted by the terms of the incorporation, specific performance
may be obtained by or enforced against the company, if the company has accepted
the contract and has communicated such acceptance to the other party.
3.4 Provisional Contracts
i. Contracts
entered into by a public company after its incorporation but before
issue of Certificate of Commencement (called Provisional Contract) shall not be
binding until it receives Certificate of Commencement and the following rules
would apply: (s.149 (4))
a.
If the company is unable to obtain the certificate
to commence business, the provisional contract automatically lapses;
b.
If it gets the certificate, the provisional
contract becomes binding on the company automatically without any need for
ratification by the company;
c.
If a company is wound up before it has obtained
certificate of commencement of business, the other party shall not have any
claim arising under the provisional contract. [Otto Electrical Manufacturing
Co.]
ii.
‘Provisional Contract’ is relevant only in case of
a public company having share capital. In case of private company, public
company limited by guarantee and having no share capital, or unlimited company,
no contract shall be provisional in nature.
3.4.1
Distinction between pre-incorporation and provisional contracts
|
Basis
|
Pre – incorporation contract
|
Provisional contract
|
|
1.
Entered By
|
Promoters of
the Company.
|
Company itself.
|
|
2.
Time of contract
|
Entered into by
the promoters before incorporation of a company.
|
Entered into by
the Company after incorporation but before the date at which it is entitled
to commerce business.
|
|
3.
Applicable Act
|
Governed by section
15 and 19 of the Specific Relief Act., 1963.
|
Governed by
section 149 of the Companies Act, 1956.
|
|
4.
Types of companies
|
a)
Applicable to public as well as private
companies.
|
a)
Not applicable to a private company.
|
|
b)
Applicable even to a company, having no share
capital.
|
b)
Not applicable to a company which has no share
capital.
|
|
|
5.
Ratification / Adoption
|
Requires
adoption after incorporation of the company.
|
Does not
require adoption after incorporation of the company.
|
|
6.
Effect
|
Not binding on
a company, unless the company adopts the contract
|
Binding on the
company only when it obtains certificate of commencement of business.
|
For
more details, refer to Business & Corporate Laws, by Asok Nadhani, BPB
Publications, www.bpbonline.com,
bpbpublications@gmail.com
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