Rights and Liabilities of Promoter under Companies Act 2013

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Being in a feduciary relation with the company, the promoter have certain rights and liabilites.

Rights of Promoter

Right to receive preliminary costs

The board of directors or the company will pay all expenses to the promoter, which were incurred for the establishment and registration of the company. But the payments must not be ultra vires the Articles of Association. But the promoter cannot sue for the payment.

Right to remuneration

He/she can be paid for his/her efforts in the form of a lump sum, commission or fully or partly paid debentures or shares. The remuneration paid must be indicated in the prospectus if it is paid within the two years preceding its date.

Right to recover proportionate amount from the co-promoters

If there are more than one promoter, then they will be jointly liable. If one is made liable for the mis-statement in the prospectus, and has to pay a fine, he/she has a right to recover the proportionate amount from his co-prmoters. This rule will also apply in case of secret profits paid to the company.

Liabilities of Promoter

  • The Section 26 Companies Act 2013 states the matters to be stated and reports to be set out in the prospectus. The promoter may be held liable for failure to comply with the provision of this section.
  • Section 34 of the Companies Act 2013 makes a promoter criminally liable for issuing a prospectus containing false or misleading statements. However, he/she can be escaped from such liability if he/she is able to prove that there is reasonable grounds for believing that the statement was true or that the statement had no relevancy from the point of view of attracting investors.
  • Section 35 of the Companies Act 2013 makes a promoter liable for any misrepresentation in the prospectus to a person who has subscribed for shares or debentures on the basis of the prospectus. The injured party can sue the promoter for compensation for any loss or damage suffered by him. Any false declaration in the prospectus may have the following consequences: –
    • the allocation of shares or debentures may be canceled,
    • the promoter can be sued for damages and also for compensation.
    • the promoter may incur criminal liability and criminal proceedings may be brought against him.
  • According to Section 300 of the Companies Act 2013, if the company is wounded by the court order and the liquidator’s report alleges fraud in the promotion and formation of the company, the promoter or the share of the promoter can be subject to public scrutiny like any other officer or director of the company.
  • The court may prohibit a promoter from participating in the management of the business for a period of five years if it appears that he has been guilty of an offense punishable under section 339 (which he has been convicted or not) or while being an officer of the company has otherwise been guilty of fraud or mischief in relation to the company or has committed a breach of his obligations towards the company of which he / she is a promoter.
  • According to Section 340 of the Companies Act 2013, when a promoter has misused or kept in his/her possession the company’s property or is guilty of mischief or breach of trust in relation to the company, he may be sued by the company for breach of its obligations or deception, as the case may be.
  • In the event of the death of the promoter, the company may recover damages or compensation from the property of the deceased promoter.