Question

What is meant by the term ‘promotion’? Discuss the legal position of promoters with respect to a company promoted by them.

Answer 1

Promotion refers to the process of innovating or discovering the idea of the formation of a company and developing it into a concrete form. It is the very first stage in the process of formation of a company. It starts when an individual or a group of individuals discovers an idea about a business that has the potential to be converted into a successful business opportunity. If they proceed further to form a company, then they are said to be the promoters of the company. Thus, in simpler terms, a promoter is one who takes the initiative to form a company with reference to a given idea or project and takes the steps necessary to fulfill this purpose. Besides discovering the business opportunity, the promoter is responsible for analysing the future prospects of the company and acquires the inputs necessary to establish the company, such as labour, capital, and machinery. In this regard, the following are the legal liabilities of the promoters towards the company, which highlight their legal position with respect to the company.

(i) The promoters are neither the trustees nor the agents of the company that they are forming. This is because the company does not exist as a legal entity before its incorporation.

(ii) They cannot make any secret profits by making deals on behalf of the company.

(iii) They are legally liable for any untrue statement filed in the prospectus of the company.

(iv) The promoters cannot claim the expenses incurred by them during the promotion of the company.

(v) The company may or may not indemnify the promoters for the payments made before its incorporation. The company may choose to allot shares to them in order to compensate for their services.