Promoters — Definition and Importance

Introduction 

In many company matters, the term "promoter" is of frequent occurrence. The Companies Act itself uses the word at several places for the purpose of imposing liability. Yet the term has never been clearly defined either judicially or legislatively. The difficulties in defining it led judges to state that "promoter" is not a term of art, nor a term of law, but of business. 

Bowen LJ captured its commercial essence by describing the term as summing up "in a single word a number of business operations, familiar to the commercial world, by which a company is generally brought into existence."  

Whether a person qualifies as a promoter is a question of fact in each case, depending substantially upon the nature of the role played in the promotion of the business.

Statutory Definition — Section 2(69) 

• The Companies Act, 2013 provides a statutory definition of "promoter" in Section 2(69), framed in functional categories. A promoter means a person who: 

(a) Has been named as such in a prospectus or is identified by the company in the annual return under Section 92.  

(b) Has control over the affairs of the company, directly or indirectly, whether as a shareholder, director, or otherwise; or 

(c) In accordance with whose advice, directions, or instructions the Board of Directors is accustomed to act. 

• The proviso expressly excludes persons acting in a professional capacity. Thus, a solicitor who prepares incorporation documents, or an accountant or valuer who assists in a professional capacity, is not a promoter.  
• However, any such person may become a promoter if they perform acts outside the scope of their professional duty — such as helping procure purchasers for shares or assisting in personnel recruitment for the company.

Fiduciary Position 

• The position of promoters in relation to the company was authoritatively explained by Lord Cairns in Erlanger v. New Sombrero Phosphate (1878). 
• Promoters stand undoubtedly in a fiduciary position — they have in their hands the creation and moulding of the company and hold the power to define how and when it shall come into existence.  
• The courts have therefore fixed promoters with the responsibility of a fiduciary agent, treating them as akin to trustees of the company. 
• The foremost duty of a promoter is full and faithful disclosure.  
• If a promoter intends to sell his own property to the company and draw payment from shareholder funds, he must disclose all material facts relating to the property, his personal interest, and any profit made. Concealment entitles the company to rescind the transaction or claim compensation.

Conclusion 

The law surrounding promoters reflects a careful balance between facilitating the incorporation process and protecting the company and its shareholders from abuse of the promoter's privileged position. The statutory definition under Section 2(69), read with the fiduciary obligations imposed by equity, establishes a robust framework of accountability.