Promoters — Duties and Liabilities — Company Law Notes

Promoters — Duties and Liabilities

Before a company can be born, someone must have the idea, gather the people, prepare the documents and pay the first bills. That someone is the promoter — the midwife of the company. But history is full of promoters who quietly sold their own property to the company they were forming at inflated prices. The law responds by making the promoter a fiduciary: total honesty, or hand back the profit.

Who is a promoter?

A promoter is a person who conceives the idea of forming the company and takes the necessary steps to bring it into existence — preparing the memorandum and articles, arranging capital and directors, and getting it registered. A promoter is not merely a solicitor, accountant or banker acting in his professional capacity.

Section 2(69), Companies Act 2013: “promoter means a person — (a) who has been named as such in a prospectus or is identified by the company in the annual return… or (b) who has control over the affairs of the company… or (c) in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act.” (A person acting only in a professional capacity is excluded.)

In Simple Terms: The promoter is the person who builds the company before it exists — the founder-organiser. Once the company is running, the label falls away.

His legal position — a fiduciary

The promoter stands in a fiduciary relationship [a relationship of trust and confidence] towards the company he is forming. He is neither a trustee nor an agent (the company does not yet exist to appoint him), but the law imposes trust-like duties.

Duties of a promoter:

Not to make any secret profit — he must not profit at the company’s expense without disclosing it. If he sells his own property to the company, he must reveal his interest and the profit.
Full and fair disclosure — disclosure must be made to an independent Board or to the members as a whole, not to a Board he himself controls (Gluckstein v Barnes).
To account — any secret profit made can be recovered by the company; the contract may be rescinded.
Utmost good faith — he must act honestly in the company’s interest.

Liabilities of a promoter:

For secret profits — the company may rescind the contract or recover the profit (Erlanger).
For mis-statement in the prospectus — civil liability to compensate (ss.34–35) and even criminal liability (s.36) for untrue statements. (Detail in Unit 2.)
For pre-incorporation contracts — contracts he makes before incorporation bind him personally, because the company was not yet a person to be bound (Kelner v Baxter; Unit 2).
Statutory & winding-up liability — can be examined and made liable for misfeasance.

Remuneration. The promoter has no automatic right to be paid or reimbursed by the company (it did not exist to promise him anything). He is paid only if the company, once formed, agrees — commonly by a lump sum, commission, or an option on shares, disclosed in the articles/prospectus.

flowchart TD
    ROOT["Promoter (fiduciary)"]:::root
    ROOT --> D["Duties"]:::mid
    ROOT --> L["Liabilities"]:::mid2
    D --> D1["No secret profit"]:::leaf
    D --> D2["Full disclosure to independent Board/members"]:::leaf
    D --> D3["Account & good faith"]:::leaf
    L --> L1["Rescission / return of profit"]:::leaf
    L --> L2["Prospectus mis-statement (s.34-35)"]:::leaf
    L --> L3["Pre-incorporation contracts (personal)"]:::leaf
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    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
    classDef mid2 fill:#FDE2E2,stroke:#991B1B,color:#000;
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🧩 WORKED EXAMPLE — the promoter’s secret profit

Facts. A promoter buys a mine for ₹40,000, then sells it to the company he is forming for ₹60,000 without telling an independent Board.

Rule. A promoter is a fiduciary and must disclose any profit; an undisclosed profit is recoverable and the contract voidable (Erlanger; Gluckstein v Barnes).

Apply. The ₹20,000 profit was secret — disclosure to a Board he controls is not enough.

Conclusion. The company may rescind the sale or recover the ₹20,000 secret profit.

Case Laws

Erlanger v New Sombrero Phosphate Co. (1878) — promoter’s undisclosed profit; company entitled to rescind.
Gluckstein v Barnes (1900) — disclosure must be to an independent Board or the members, not to oneself.
[C-9] Kelner v Baxter (1866) — promoter is personally liable on a pre-incorporation contract.
Twycross v Grant (1877) — classic description of who is a promoter.

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