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PROMOTION OF A COMPANY
Promotion is the primary footstep in the development of a company. A promoter dwells in an exceptional position in the company. He is neither an agent nor a trustee of the company but has a fiduciary relationship with the company. A promoter is not allowed to make any undisclosed profits. In case he is found guilty of doing so he is bound to refund the money to the company. Added to this, the promoters are not permitted to obtain a profit from the sale of his own property to the company unless all material facts are revealed. Therefore, if promoter wants to sell his own property to the companies have to make a full revelation of his concern. The contracts which are entered before the incorporation of a company are called preliminary contracts. These contracts do not have any legal binding on the company as the company does not in exist at the time of the contract. Therefore, the company is not bound by any of the liabilities pertaining to such contracts.
PROMOTER: MEANING AND IMPORTANCE
Promoters take all the required steps for incorporating the company. The Companies Act has not defined the term promoters, but according to the need of an organization it is referred to the liabilities of the promoters. Many judicial decisions have defined the term promoter. L.J. Bowen has defined the term promoter is a term which is not of law but of business, gainfully summing up in a single word a number of business operations familiar to the profitable world by which a company is generally brought into life. Lord Blackburn defines that "the term promoter is a short and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company". A company can have more than one promoter. The promoter can be an individual firm, an association of persons or a body corporate. Even if someone takes a very insignificant piece of work in the promotion activities, he could still be termed as a promoter. But a person cannot be termed as promoter just because he has signed at the memorandum or that he has given money for the payment of arrangement expenses. The promoters provide useful services in the formation of a company. They provide a very valuable service to society and they play an important role in the industrial development of countries. A promoter can be defined as "a creator of wealth' and "an economic prophet'. The promoters carry significant risk because if the idea goes wrong then the time and money spent by them will be a waste.
FUNCTIONS OF A PROMOTER
Promoters perform various functions in order to form a company and to locate in a perfect functional position. They perform functions like to originate the scheme for formation of the company, to secure the cooperation of the required number of persons willing to associate themselves with the project, to seek and obtain the consent of the persons willing to act as first directors of the company, to settle about the name of the company, to get the documents of the proposed company prepared, to appoint bankers, brokers and legal advisers for the company, to settle preliminary agreements for acquisition of assets, to enter into preliminary contracts with the vendors and to arrange for filing of the necessary documents with the Registrar.
LEGAL POSITION OF PROMOTERS
The legal position of a promoter is to some extent unusual. The promoter is neither an agent nor a trustee of the company he only promotes. The legal position of a promoter can be described by saying that he has a fiduciary relationship which means that he has a relationship of faith and assurance in relation to the company he promotes. They create and mould the business. They have the power to shape, and supervise the organization. The promoter should not make, directly or indirectly, any profits at the expense of the company that he promotes, without the information and approval of company.
DUTIES OF PROMOTERS
The promoter in this fiduciary capacity has to perform various important duties they are
1) Not to make any undisclosed profit
2) To make full exposé to the company of all relevant facts
3) To give the advantage of the discussions to the company:
4) To render duty as a promoter towards future allottees
LIABILITIES OF PROMOTERS
The liability of the promoter, under the Companies Act, under Section 56 clarifies the matters that should be declared and the information that should be set out in the prospectus. If this provision is not compiled with, the promoter may be held liable by the shareholders. Section 62 confers the civil liabilities for any mis-statements in the prospectus. Section 63 talks about the criminal liabilities which says that he is not supposed to issue a prospectus which contains untrue statements . Section 478 defines the authority of the court to order public examination of all the promoters who are responsible of fraud in promotion or formation of a company. Section 543 of the Act clarifies the fact that the liability for breach of trust by misapplication of funds during the formation of the company. Section 203 states that the court can postpone a promoter from taking part in the management of the company for a period of five years if he is found guilty of any offence in connection with the promotion, formation or management of a company. The promoters are in person answerable for pre-incorporation contracts yet the death of the promoter does not minimize his liability.
REMUNERATION OF PROMOTERS
Promoter has to make preliminary expenses in the process of incorporation. However, promoters do not have a right of any remuneration from the company. As a result, he is not allowed to have any remuneration for his services except for the fact that if company enters into a particular agreement with the promoter for the purpose. Even if the promoter has entered into a contract with the future directors before the incorporation, he has no valid claim against the company for remuneration.
Therefore, the directors cannot enter into any contract on behalf of a company that is not incorporated so far. This remuneration may be paid to the promoters in various ways such as by selling his own belongings to the company and the price is higher than the valuation, when he has purchased a business or a property to be sold to the company, by allotting fully paid up shares of the company, by paying a an estimated amount for the services, giving commission on the sale of shares with fixed commission and by giving him an option to subscribe the unsold shares at par to him.
POSITION OF PRELIMINARY CONTRACTS
The contracts which are entered into by the promoters with the third party for the projected company before its formation are called 'preliminary contracts '. These contracts do not have any legal binding on the company after its formation as company before incorporation is non-entity. The position of these contract is that they are not bound by the preliminary contracts and neither they can enforce preliminary contracts The company is not in a position to approve the preliminary contracts, and finally they are personally liable for these contracts as company is not into existence
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