What is the legal status of a promoter in India?

Critical Analysis

A Company is created by a group that will manage and conduct a business, regardless of whether it’s commercial or industrial. Depending on the jurisdiction’s corporate law, a corporation can be structured in various ways.

Lord Justice Lindley says that a company is created when a group comes together and invests money in common stock. They then use the store in a business or trade and share any profits or losses. The formation of a business involves many steps, from the company’s conception to its initiation.

The formation of a new company has four phases. The first phase is the promotion phase. This phase involves the promoters who help make the idea for a new business a reality.

After identifying a business opportunity, the Promoter determines what type of business to conduct. He also determines financial, technical, and legal aspects by conducting a feasibility analysis. A promoter creates a company, shares a fiduciary relation and a fiduciary obligation towards the company. They also sign contracts on behalf of the new company before incorporation.

Promoters have a significant role in the formation of a new company. They also hold significant authority. The fact that he’s neither an agent nor a trustee in the eyes of the law is still enjoyable, but it doesn’t mean that the Promoter is not legally connected to the company.

Promoters owe fiduciary duties to both the company they promote and the people they convince to become shareholders. The courts have struggled to deal with advocates who appeared in the courtroom during the incorporation process.

This situation poses several problems, including the issue of what legal consequences should be applied when a promoter negotiates with a third party on behalf of a future corporation that still needs to be formed. The Promoter is not the agent or employee of the future corporation.

He also enters into a legal contract with a third party on behalf of an unexistent principal. There are many legal implications for promoters and pre-incorporation agreements.

Liability is one of the critical issues. If a promoter signs contracts on behalf of a business that has yet to be incorporated and fails to perform its obligations as promised later, the Promoter could be held liable for the breach. To avoid any repercussions, the promoters should be highly cautious when signing contracts for a business that has yet to be incorporated.

Contracts before incorporation often come with the disadvantage of being voidable by the company. The business can cancel the contract anytime if they do not want to be bound. A business can benefit from avoiding being bound by agreements, not in its best interest.

Legal Perspective and Analysis

Section 26 ([1]) of the Companies Act of 2013 specifies what information must be in a prospectus. The Promoter may be held responsible for violating the rules of this section. Under sections 34 [2], and 35 [3], a promoter can be held accountable for false information in the prospectus provided to the person who purchases shares or debentures based on this prospectus.

The Promoter is only liable for the first person to receive shares; those who have received them afterward are omitted. The court can investigate a promoter if it is ordered based on the liquidator’s report alleging promotion fraud.

In the matter of PG Electroplast Limited, the company and the promoter directors were held liable for non-disclosures in the prospectus and thus for violation of ICDR Regulations

The Madras High Court held that in Prabir Kumra v. Ramani Ramaswamy [6], a promoter does not have to be a shareholder or director of the company or a signatory to its memorandum and articles of association to be held responsible. The Promoter can be held liable for his contracts and actions while acting as the company’s trustee or agent during the period before incorporation.

In Seth Sobhag Mal Lodha V. Edward Mill Co. Ltd [7], Rajasthan High Court adopted common law principles about pre-incorporation agreements. The pre-incorporation agreement makes the Promoter personally liable under common law. However, the Promoter can transfer this responsibility to the company in certain circumstances.

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