COMPANY LAW-I,

STUDY MATERIAL[PPT NO.10]

THIS STUDY MATERIAL IS PREPARED BY

DR. PRADIP KUMAR DAS,
ASSOCIATE PROFESSOR,
DEPARTMENT OF LAW AND GOVERNANCE,
CUSB,
FOR THE STUDENTS
 COMPANY LAW-I,
PROMOTION ACTIVITIES & FORMATION OF A
COMPANY
Promoter:
A promoter is a person who does the preliminary work incidental to the formation of
a company, including its promotion, incorporation and floatation. He solicits people
to invest money in the company during promotion stage.

DUTIES OF PROMOTERS:

❑ Duty to disclose secret profits;

-Relevant Case: Erlanger vs. New Sombrero Phosphate Co.[1878]3App.Cas.1218

 COMPANY LAW-I,
PROMOTION ACTIVITIES & FORMATION OF A
COMPANY
❑Duty of Disclosure of interests;

❑Promoters duties under Indian Contract Act:

-Promoters will be personally liable for contracts before incorporation;
-During promotion, the company is not incorporated and hence it cannot
contract with its promoters;

❑ Termination of Promoters Duties

Case: Lagunas Nitrate Co. Vs. Lagunas Syndicate Ltd[1899]2 ch.392.]
 COMPANY LAW-I,
PROMOTION ACTIVITIES & FORMATION OF A
COMPANY
Liabilities of Promoters:
❑Section 26: This Section deals with the matters that should be stated and the
reports that should be set out in the prospectus. If this provision is not
complied with the promoters may be held liable u/s 35 to compensate the
shareholders.
❑Section 35:
Under this section, a promoter can be held liable for any false statement in the
prospectus, by a person who has subscribed for the shares and debentures of
the company acting on the faith of the prospectus.

❑ Section 34: This section contains provisions relating to criminal liabilities

for issuing a prospectus which contains untrue statements.
 COMPANY LAW-I,
PROMOTION ACTIVITIES & FORMATION OF A
COMPANY
Under this section, the promoters can be held criminally liable if the
prospectus issued by them contained misstatements. Promoters will be liable
for imprisonment for a term which shall not be less than 6 months but which
may extend to 10 years.

The promoters shall also be liable to five which shall not be less than the
amount involved in the fraud but which may extend to three times the amount
involved in the fraud.
 COMPANY LAW-I,
PROMOTION ACTIVITIES & FORMATION OF A
COMPANY

REMUNERATION OF PROMOTERS:

❑ A promoter is not entitled to recover any remuneration for his services from
the company unless there is a valid contract, enabling him to do so, between
him and the company. Without such a contract, he is not even entitled to
recover his preliminary expenses or the registration fees.