PROMOTERS

MEANING
Promoters play a crucial role in establishing a company right from its inception
stage. An individual or a group of people who come up with the concept
of starting a business are the promoters of a company. They carry out the
required processes to establish the firm.
The company’s promoters shape the company and thus are moulding blocks
of the company. However, a promoter is not the owner of a company. The
promoter helps to establish and run the company, but the company
shareholders are the actual owners of the company.
Any person or set of individuals who come together collectively to establish a
business or idea can become promoters. Any person in whose mind the seed of
starting a business emerges can be a promoter. To be a promoter, it is not
essential to be a business founder. A person who arranges for capital and
assists in crucial work part-time can also be a promoter. However, a person
must understand the industry, marketing, or sales knowledge to be a promoter.

DEFINITION AS PER COMPANY LAW

As per Section 2(69) of the Companies Act, 2013, promoter means any of the
following persons:
 A person named as a promoter in the prospectus or identified by the
company in its annual return in Section 92.
 A person who controls the company affairs, indirectly or directly,
whether as a director, shareholder or otherwise.
 A person in accordance with whose directions, advice or instructions the
Board of Directors of a company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the
securities in the market, making the prospectus of the company, etc., for
establishing the company’s business. However, if a person is doing these things
professionally, they will not be considered a promoter.
FUNCTION AND ROLES OF PROMOTERS
A promoter plays many functions in the formation of a company, from
conceiving the business idea to taking all the required steps to make the idea
a reality. Below are some of the functions of a promoter:
 A promoter needs to comprehend/conceive the idea of company
formation.
 A promoter looks into the feasibility and viability of the business idea.
He/she assesses whether the company formation will be practicable or
profitable.
 Once the idea is conceived, the promoter organises and collects the
available resources to convert the business idea into a reality.
 The promoter decides the company name and settles the contents of the
company’s Memorandum of Association and Articles of Association.
 The promoter decides the location of the company’s head office.
 The promoter nominates associations or people for vital company posts,
such as appointing the auditors, bankers, and the company’s first
directors.
 The promoter prepares all the necessary documents required to
incorporate a company.
 The promoter decides the company’s funding sources and capital
requirements.
A promoter cannot be considered a trustee, employee, or agent of a company.
The role of the promoter ceases when the company is established and is
handled by the board of directors and the company management.

DUTIES OF A PROMOTER
The promoters have certain duties towards the company, which are as
follows:
Disclose hidden profits
The first duty of the promoters is to be loyal to the business and not involve in
malpractice. They should not earn secret or hidden profits while carrying out
promoting activities such as buying a property and selling it for a profit without
disclosing it. They are not barred from making such profits, but the only
condition is that they must disclose it. They must share all the information
regarding their profitability and earnings with all the relevant company
stakeholders.
Disclose all material facts
A promoter has a relationship of trust and confidence with the company, i.e., a
fiduciary relationship. Under this fiduciary relationship, the promoter has the
duty to disclose all material facts relating to the company’s business and
formation with the relevant stakeholders.
Act in the best interest of company
In all situations, promoters should prioritise the company’s interest over their
personal interests. They must give utmost consideration to the company’s best
interest in its formation and all business dealings.
Disclose all private arrangements
While forming and establishing a company, many private transactions take
place. However, such transactions must be disclosed by the promoters to the
stakeholders. It is the duty of the promoters to disclose all private transactions
and the profit earned from them to the stakeholders.
Rights of a Promoter
The rights of promoters include the following:
Right of indemnity
Promoters are jointly and severally accountable for any hidden profits made by
any of them and false statements made in the prospectus. All the promoters
are individually and equally responsible for the company’s affairs. Thus, one
promoter can claim the compensation or damages paid by him/her from the
other promoters.
Right of preliminary expenses
A promoter is entitled to reimbursement for preliminary expenditures incurred
for the company’s establishment, such as solicitors’ fees, advertising costs and
surveyors’ fees.
Right of remuneration
A promoter has the right to receive remuneration from the company unless a
contract to the contrary. The company’s Articles of Association can also provide
that the directors can pay an amount to the promoters for their services.
However, the promoters cannot sue the company for remuneration unless
there is a contract.

LIABILITIES OF PROMOTERS
A. Liability to account in profit:
The promoter is liable to account to the company for all secret profits made by
him without full disclosure to the company. The company may adopt any one
of the following two courses if promoters fail to disclose the profit.
 The company can sue the promoter for an amount of profit and recover
the same with interest.
 The company can rescind the contract and can recover the money paid.
B. Liability For Mis-Statement in The Prospectus:
Section 62(1), hold the promoter liable to pay compensation to every person
who subscribes for any share or debentures on the faith of the prospectus for
any loss or damage sustained by the reason of any untrue statement included
it. Section 62, also provides certain ground on which a promoter can avoid his
liability. Section 63, provide for criminal liability for misstatement in the
prospectus and a promoter may also become liable under this act.
C. Personal Liability:
The Promoter is personally liable for all contracts made by him on behalf of the
company until the contracts have been discharged or the company takes over
the liability of the promoter. The dead of promoter does not relieve him from
liabilities.
D. Liability at the time of winding up of the company:
In the course of winding up of the company, on an application made by official
liquidator the court may make a promoter liable for misfeasance or breach of
trust. Further, where fraud has been alleged by the liquidator against a
promoter, the court may order his public examination
LEGAL POSITION OF PROMOTERS
It is tough to define the legal status of a promoter. Promoters are not the
trustees or agents of the company. They behave in a fiduciary capacity for the
company. They take actions and activities to create the company and pay the
preliminary costs related to its incorporation, such as stamp duty, registration,
and professional fees. They have a fiduciary duty towards the company and are
liable
From the fiduciary position of promoters, the two important result follows:
 A promoter cannot be allowed to make any secret profits. If it is found
that in any particular transaction of the company, he has obtained a
secret profit for himself, he will be bound to refund the same of the
company.
 The promoter is not allowed to derive a profit from the sale of his own
property to the company unless all material facts are disclosed. If he
contracts to sell his own property to the company without making a full
disclose, the company either repudiate the sale or affirm the contracts
and recover the profit made out of it by the promoter.
or any profits made by them personally in company deals.

LIFTING OR PIERCING THE CORPORATE VEIL

INTRODUCTION
Incorporation of a company is very important for the commencement of
business and to have a separate legal entity. This doctrine of separate legal
entity has always been exploited by the offenders. The lifting of the corporate
veil is the provision available to the court, authorities, etc. to identify the
offenders and also to find the true persons who control the daily affairs of the
company.
MEANING AND DEFINITION OF COMPANY
Company under section 2(20) means a company incorporated under the
Companies Act, 2013 or under any previous Companies Act. Company is
generally a legal entity represented by a set of members or association of
people, with specific objectives. The line of business structure of the company
can be corporation, partnership, or proprietorship. These are the basic
structure and types which decide the ownership of the company.
According to Justice Marshall, “a company is an artificial person, has no
physical existence. It is invisible and intangible. It exists only in contemplation
of law.”
COMPANY: A SEPARATE LEGAL ENTITY (CORPORATE PERSONALITY)
Corporate personality is the reality expressed by the law that a company is
perceived as a legal entity distinct from its members. A company with such
recognition and personality will be considered as a separate legal entity having
an independent legal existence from the members of the company. A company
is known by its own name and has its own right, duties, obligations, and
liabilities. Therefore, there is a clear difference between the company and its
members, this is commonly called a Corporate Veil.
The separate legal entity is the basic feature on which company law is
premised. Establishing how a company comes into existence and how it is
managed and functioned all depends on the legal entity of the company. The
concept of a separate legal entity is not new and contrastingly there are many
cases and litigation on this topic and on its jurisdiction. There are two very
important judgments on separate legal entity one of them is Salomon vs
Salomon and Lee vs Lee, both cases are foreign but are applicable and
accepted universally.
SALOMON VS SALOMON
 As in the case of Salomon vs Salomon, Salomon was running a business
of boot making and leather merchant as a sole proprietorship and
transferred his business to Salomon Ltd, incorporated with members
comprising of his own family and himself.
 The value paid to Salomon for such exchange (transfer) was made with
the assistance of shares and debentures having a floating charge on the
resources of the company.
 The business was failed and was incurring losses. When the company’s
business failed it went into liquidation after one year. In total the
company had 6000 pounds of assets and liability of 17000 pounds out of
which Salomon was to be paid 10000 pounds for having secured
debentures and some unsecured creditors to be paid 6000 pounds.
Salomon’s right of recovery secured through floating charge against
debentures stood at a priority against the creditors of the company,
  The unsecured creditors contended that Salomon and his company
“Salomon Company” are one and the same. The liquidator on behalf of
unsecured creditors, alleged that the company was fiction and was (the
company) essentially an agent of Salomon.
 Salomon being the principal was made liable to pay the unsecured
creditors. In simple words, the liquidator disregarded the separate
personality of Salomon Ltd., particularly from its members making him
liable personally for the acts of the company.
 As Salomon was the major shareholder of the company, he was made
personally liable for the company’s debt. Hence, the issue was whether
the payment of debentures or the payment to the unsecured creditor be
given priority.
The judgement in this particular case held that the company is a real and legal
company, fulfilling all legal requirements. It had an identity different from its
members and therefore, priority is to be given to the secured debentures and
then to the unsecured creditors.

LEE VS LEE AIR FARMING CO. LTD

 Lee was a qualified pilot and formed a company named Lee’s Air Farming
Ltd. for the purpose of carrying the business of aerial top-dressing with
3000 shares, 1 Euro each forming the share capital of the company. 2999
shares out of 3000 shares were owned by Lee himself.
 Lee was the managing director and the chief pilot of the company also.
He exercised unrestricted power to control the affairs of the company.
He made all the decisions in relation to the contracts of the company.
 The company entered into many contracts with other companies,
insurance agencies, etc for insurance of its employees. The premiums for
these policies were paid from the companies’ bank account for the
personal policies owned and taken by Lee and the amount was debited
in the account of Lee in the companies’ book.
 Lee died while piloting the aircraft during the course of aerial top-
dressing. His widow wife claimed compensation under the New Zealand
 Workers’ Compensation Act, 1992 for the death of her husband in the
course of his employment.
 The company claimed that Lee was the owner of the company and had
the maximum number of shares in the company so his wife is not
entitled to compensation.
The judgement in this particular case held that Lee was a separate person from
the company he formed and his widow wife is entitled to get the
compensation. Though he was the master but at the same time was the
servant of the company. But the incident took place during the course of
employment where lee was acting as a servant of the company thus has the
right to be compensated in capacity of a servant.
This principle of CORPORATE PERSONALITY was applied in India in the case of
RE KONDOLI VS TEA CO. LTD., the court held that a company has 4 essential
characteristics;
- Separate Legal Personality from its members.
- Perpetual Succession, that is company’s member’s existence has no
effect on the existence of the company.
- Company can sue and can be sued.
- Limited Liability of the members of the company.

LIFTING OR PIERCING THE CORPORATE VIEL – MEANING

By a fiction of law, a company is seen as a distinct entity separated from its
members, but in reality, it is an association of persons who in fact the beneficial
owners of the company and its corporate property. This fiction is created by a
veil and is called the corporate veil. Lifting or piercing of corporate veil means
ignoring the fact that a company is a separate legal entity and has a separate
identity (Corporate personality). This concept disregards the separate identity
of the company and looks behind the true owners or real persons who are in
control of the company.
The separate personality of a company is a statutory privilege and it must be
used for a legitimate purpose only. Whenever and wherever a fraudulent or
dishonest use is made of the legal entity, the individuals will not be allowed to
hide behind the curtain of corporate personality. The appropriate authority will
break this shell of the company and sue the individuals who have done or
committed such a crime or offence. This lifting of the curtain is called a Lifting
of the Corporate veil.

GROUNDS UNDER WHICH CORPORATE VEIL IS LIFTED

1. Where the Company is a Sham (Fraud): Gilford Motor Company vs
Horne (1933)
 Mr. Horne was a former Managing Director of Gilford Motor Home
Company Ltd. His employment contract stipulated a condition that he
should not solicit customers of the company once he leaves his job.
 Mr. Horne was fired from his position and job. Thereafter, he established
a competing company with his wife, himself, and one of his friends, who
were the sole shareholders. The company established by Horne has
lower price tags than that of Gilford’s company.
 The shareholders started soliciting the customers of Gilford Motor
Company. Gilford did not have any legal restraints against Horne’s
company, only Horne himself.
 Gilford filed or commenced proceedings against Horne individually,
claiming that Horne’s company was an attempt to evade legal obligations
through soliciting customers.
It was held that the company was set up to evade Horne’s contractual
obligations and was used as an instrument of fraud to conceal Mr. Horne’s
illegitimate actions. The court pierced the corporate veil and ordered an
injunction against Horne.
2. Invocation of the principal of agency: RG Films Ltd (1953)
 An American company financed the production of a film in India in the
name of a Britain company.
 90% of the shares in the British Company was held by the president of an
American Company. The company had no business other than its
registered office and it had no staff also.
  Thereafter, the film at the time of release was refused by the Board of
Trade to register it as a British film because the British company acted
merely as an agent of an American company.
It was held that the decision was valid in the view of the fact that the British
company acted merely as a nominee of the American company. In this case,
the corporate veil was lifted and declared that the doctrine of separate legal
entity does not mean that the company will act as a mere agent of the
shareholders.
3. Public Policy: Connors Bros vs Connors (1940)
 In this case the acts done by the members of the company led the court
to lift the corporate veil to punish the offenders as the company had
been formed to accomplish an act that is against the public policy.
 The principle was applied against the managing director who made use
of his position to contrary to the public policy.
The House of Lords determined the character of the company as an enemy
company because the persons who were de facto were residents of Germany,
which was at war with the British during that time.
The alien company was not allowed to proceed with the action, which was
directly or indirectly meant giving money to the enemy, thus was considered
against the public policy.
4. Determining True Character of the Company: Daimler Co. Ltd vs
Continental Tyre and Rubber Co. Ltd (1916)
 A private company was incorporated in England for the purpose of
selling motor tires manufactured in Germany and was a German
company.
 The German company has almost all of the shares in their position and
all the directors of the company were Germans.
 During the First World War, the English company commenced an action
for recovery of Trade debt.
 The House of Lord held that the company was an enemy company for
the purpose of trading because its effective control or the management
was in the hands of Germans.
The court held that it would against public policy if there is a trade among
them and hence it was decided that the company will not be allowed to
proceed with the action.
5. Protection of Revenue (Tax Evasion): CIT vs Meenakshi Mills Ltd
The corporate veil may be ignored if the company is formed merely to evade
tax. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the
Supreme Court held that the Income Tax authorities have a right in this case to
lift the corporate veil.

CONCLUSION
A company has a legal personality just like all other natural individuals, the only
difference between the two is that a company even with its legal personality
cannot run or conduct its affairs as a natural person does. The company acts on
the concept of the corporate veil, this veil when misused for fraudulent acts
will reveal the true nature and real beneficiaries of the company, thus, called
the lifting of the corporate veil. The courts from time to time implemented this
rule and also brought in a few changes suitable for the situations and for future
reference.