Duties of Promoter | Company Law - CLAT PG PDF Download

Introduction

• Promoters hold a crucial role in the formation of a company, possessing significant powers and responsibilities.
• Legally, they are neither agents nor trustees of the proposed company, yet they maintain a fiduciary relationship with the company and potential shareholders.

Duties of the Promoter

Duty to Disclose Secret Profits

• A promoter is allowed to make a profit from promotion as long as it is disclosed to the company, similar to how an agent can retain profits with the principal's consent.

Duty of Disclosure of Interest

• A promoter must disclose any personal interest in transactions involving the company, even if selling personal property to the company.
• This disclosure is necessary to maintain transparency and accountability.

Promoter's Duties Under the Indian Contract Act

• The duties of promoters under the Indian Contract Act are not extensively covered in court rulings.
• Since the company is not incorporated at the time of promotion, the duties are similar to those of someone acting on behalf of another without a contract of employment.
• Promoters must avoid deception and exercise reasonable skill and care.
• If a promoter negligently allows the company to overpay for property, they may be liable for the loss.
• Promoters making misrepresentations in a prospectus could be accused of fraud and liable for damages under the Indian Contract Act.

Termination of Promoter’s Duties

A promoter's responsibilities do not conclude with the incorporation of the company or the appointment of a Board of Directors. These duties persist until the company has acquired the property or business it was established to manage, raised its initial share capital, and the Board of Directors has taken over the management of the company's affairs from the promoters. Once these conditions are met, the promoter's fiduciary and contractual duties come to an end.

Remedies Available to the Company Against the Promoter for Breach of Duties

When a promoter breaches their duties, the company has several remedies available, primarily due to the promoter's duty of disclosure. The main remedies include:

• Rescission of Contract
• Recovery of Secret Profits

Rescission of Contract

The right to rescind a contract with a promoter must be exercised based on normal contractual principles. The company should not show any intention to ratify the agreement after discovering a breach involving non-disclosure or misrepresentation.

Recovery of Secret Profits

If a promoter makes a secret profit or fails to disclose any profit made, the company has the right to take action against him to recover those secret profits.