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Duties and Liabilities of Promoters of a Company

Promoters of a Company

The promoter is a business term. It is used to describe the person or persons who initially take all necessary steps to form a company with reference to a given object and set it going.

“According to L.H. Haney promotion may be defined as the process of organization and planning the finance of a business enterprise under the corporate form”. In the words of Justice cokburu, “A promoter is one who undertakes to form a company with reference to a given object and sets it going and takes the necessary steps to accomplish that purpose”

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Classification of Promoters.

Promoter may further be divided into three classes

  1. Professional promoters
  2. Occasional promoters
  3. Promoters
  • Professional promoters

The professional promoters as the name signifies are the person who forms or float the company as their profession. When the company is incorporated, they either get the commission or a fixed amount for the formation of a company or get it going.

  1. The occasional promoters:

Occasional promoters are that person who undertakes to form a company occasionally and take the forming or floating of a company as their part time job.

  1. The person who makes all investigating, preparation and arrangements for incorporating a company are called promoters. The professional promoter and occasional promoter generally retire after the company is floated. The promoters, the third category, float the company for their own self-interest and take an active part for its successful operation.

Functions or duties of a Promoter of Company:

The main duties of promoters under common law are as follow;

  1. To discover and idea for establishing a company.
  2. To make detailed investigating about the demand for the product, availability of power labor, raw material etc
  3. To find out the suitable person who are willing to act as first directors of the company and are ready to sign the memorandum of association.
  4. To select bank, legal advisor, auditors, underwriters for the company
  5. To prepare essential documents of the company
  6. To prepare a draft of the memorandum of association, articles of association prospectus of the company and get them printed.
  7. To submit all the documents, required for incorporation with the registrar.
  8. To arrange for advertisement of the prospectus of the company in the newspaper.
  9. To meeting all preliminary expenses for floating of a company.
  10. To make contracts with vendors, underwriter and managing director of the company.
  11. To raise the required finances and get the company going
  12. To make proper arrangement for the office of the company

Rights of promoters

  1. Right to receive preliminary expenses
  2. Right to receive remuneration for their services.
  3. Rights to receive the proportionate money from co-promoters.

Liability of the promoters of Company:

  1. To disclose the liability and pay the secret profits if promoters have earned.
  2. Liability is up to the completion of contracts.
  3. Liability for statutory mistakes or fraud in the prospectus.
  4. His property becomes liable for payment even after his death.

Role of promoters of Company

Company promoters play an essential role in the formation of a company. A company is born only when it is duly incorporated. For including a company various documents are to be prepared and other formalities are to be complied with. All this work is done by promoters.

Gerstenberg has defined promotion as the discovery of business opportunities and the subsequent, organization of fun and property and managerial ability into a business concern for the purpose of making profits therefrom. After the idea is conceived, what promoter does is to make detailed investigations to find out the weaknesses and strong points of the idea, determine the amount of capital required and estimate the operating expenses and probable income. On being satisfied with the economic viability of the idea, the promoters take all the necessary steps for incorporating the company and start changing people’s lives.

Legal position of Promoter in a Company:

The promoters inhibit a key position and have extensive powers relating to the formation of a company. It is, however, interesting to note that so far as the legal position is concerned, he is neither an agent nor a trustee of the proposed company. But it does not mean that the promoter does not have any legal relationship with the proposed company. The promoters stand in a fiduciary relation to the company they promote and to those persons, whom they induce to become shareholders in it.

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About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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