a person who originates a sheme for the formation of the company has the memorandum and articles prepared executed and registered and finds the first directors, settle the term of preliminary contracts and prospectus and makes arrangements for advertisin

Q: a person who originates a sheme for the formation of the company has the memorandum and articles prepared executed and registered and finds the first directors, settle the term of preliminary contracts and prospectus and makes arrangements for advertising and circulating the prospectus and placing the capital, is a promoter.


Persons, who are acting in a purely professional capacity who have been instructed by a promoter, for example, a lawyer or accountant, do not become promoters themselves[1]. Although, if they go beyond this and, for example, agree to become a director or secretary of the company, they will be held to have become promoters[2].

The term promoter is a term of business and not of law. It has not been defined anywhere in the Act, but a number of judicial decisions have attempted to explain it. In term of preliminary a promoter is one who undertakes to form a company with reference to a given object,who brings together various persons concerned and who finally superintendents the various steps necessary to bring the new business into existence,who originates the scheme of the promotion of a company, has the memorandum and articles prepared, executed and registered and find the first directors, settle the terms, preliminary contract, and prospectus if any, and make arrangements for advertising and circulating the prospectus and raising the capital[3].The promoter occupy an important position and have wide powers relating to the formation of a company. He is neither an agent nor a trustee of a proposed.The correct way to describe his legal position is that he stands in a fiduciary position towards the company about to be formed.A promoter starts working for the company even before the company is an entity or is in existence,there can be no contract between the promotor and company[4].There can be no such relationship because the promoter can act an agent,representative,trustee,official or employee of the company only if there is a contract to that effect,he acts like an owner but actually the promoter is not legally entitled to any profit before or after the formation of the company. a person who merely acts in his professional capacity on behalf of the promoter for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter. A promoter does not invest to the company but he invites the public to invest in company.A promoter has a specia relationship with the company there is a fiduciary relationship between them. The fiduciary position of a promoter impose conditionalities on his functioning, there’s not to make any secrete profit,not to earn profit on personal assets.

Types of promoter:

There are 3 type of promoter between which:

  • Occasional promotores These promoters take interest in floating some companies,which sometimes put to the mind of some persons blows of idea and then they try to convert in into the reality;
  • Professional promotores These are the persons who specialize in promotion of companies,which take the promotion as their profession and means of life, they realize the job of the promotion for several enterprises of transactions which can be an individual, a partnership firm, an association of persons, and even a company;
  • Financial promotores which take care and give certainty of the financial service of the company.

The duties of a promoter towards the company are:

I.        To disclose private arrangement

II.      To disclose secrete profits

III.    To disclose all material facts

IV.    To disclose the profit which he has earnd as  trustee

V.      To show goodwill towards future shareholders

Function of a Promoter:

  • To get the idea of the formation of a company.
  • To analyze the idea.
  • To consult experts of the field regarding the feasibility of the idea.
  • To search out the persons who may agree to be the first directors of the company and to sign the memorandum of association.
  • To decide the name, the place of registered office, the place of office, the objects of company, the amount of capital and its composition.
  • To prepare and enter into contracts with underwriters.
  • To select and decide the bankers, auditors, brokers and legal experts.
  • To prepare the memorandum of associations and articles of associations and prospectus.
  • To file the necessary documents with the registrar of companies.
  • To get the certificate of incorporation.
  • To get the permission and to arrange for the issue of capital.
  • If the company has to purchase a going concern business, to finalize the purchase of such business.
  • To enter into contracts with the vendors, underwriters, brokers and managing agents.
  • To collect the amount on the issue of share capital.
  • To get the certificate of commencement of business.
  • To pay the preliminary expenses.
  • To appoint the requisite personnel for the whole process.

To sum up, a promoter performs all activities right from the idea in his mind to the commencement of business by the company. He gets the company established and after the establishment of company, he comes out of the picture and lets the company go on with its business. Though the term ‘promoter’ has not been defined[5], refrerence term has been defined in the SEBI[6].

Liabilities of Promoters:

Promoters play a vital role in the formation of a company,where the promoters of a company enjoy some rights,they also have certain liabilities[7]. There are sphere of liabilities is very wide,but some of the main liabilities are as nunder:

I.        Liability due to fiduciary relationship

II.      Liability in case of fraud or breach of duty

III.    Liability for statutory mistekes in prospectus

IV.    Mis-statement in prospectus

V.      Liability on the death of a promoter

VI.    Liability on insolvency

VII.  Liability up to completion of contract

VIII.Liability for the loss of assets for which no account is given

IX.    Liability on winding up a company

Registration of a company:

Incorporation is the second stage of the company’s formation, which is done by getting the company registered with the registrar of companies. The required fee for registration is paid and the certificate of registration obtained from the registrar of companies. The company becomes an entify only after it is registered. It is, therefore, said that ‘floatation is the conception of a company whereas its incorporation is its birth when it takes on the form of an artificial person’. So long as a company is not incorporated, it cannot be called a ‘company’ from the legal viewpoint and it has not entity as such. After completing the promotional work and before getting the company registered, the preparatory steps can be listed as under. a company cannot be registered with a name which is the same as that already chosen by a registered company[8].

The memorandum of association:

This is a very important document. No company can be incorporated without having a memorandum of association. A company’s memorandum of association is its aharter without having a memorandum of association. A company’s memorandum of association defines the basic objectives for which the company is allowed to be incorporated. For a public company, a minimum of seven, and for a private company, a minimum of two persons named as directors need to be signatoried to the memorandum of association. Each signatory must be a shareholder of the company and the memorandum must be on a paper with the required stamp.

The firm’s charter it forms the firm’s constitution. Also called ‘memorandum. The memorandum is a public document and may be inspected by anyone, usually at the public office where it is lodged ;Called articles of incorporation in the US.

Is the constitution or charter of the company and contains the powers of the company. No company can be registered without the memorandum of association[9]. [10]The memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law[11].

The memorandum of association is an unalterable document, infact the word of memorandum cannot be changed easily.It is said Memorandum of association is an unalterable document alterable only in accordance provisions of law.The memorandum of a company defines the objects for which the company is being incorporated,wherease its articles define the procedure that is to be followed for achieving the object. The memorandum of a company specifies sphere of its activity. The articles of association of company cannot violate its memorandum of association.The Memorandum of association describes the company and how it is due to interact with other parties it must contains the name of company which is chosen by the promotores and it must contain “plc” or “ltd” must to be different and not be offensive;the registrer office of the company; liability clause; capital clause;  objects clause this details the aim of the company and any activities it is intended to carry out; association clause this must be the last clause in the memorandum. When the first limited companies were incorporated, the objects clause had to be widely drafted so as not to restrict the board of directors in their day to day trading.

The articles of association:

One of the important things of the articles of association is that the focus is on the content, rather than the form. Another easiest ways to prepare articles of association is to simply think in terms of the day to day operations of the company, and define what has to happen, and what positions are responsible for keeping the process moving along.

The “articles of association”is a contract between the company and it members setting  out the rights of members under the contract. According in the above definition it can be said that articles of association are a set of rules made under the memorandum of a company that regulate the management and control of the internel affairs of a company. The main purpose of the articles is to regulate the management of the company’s internal affairs and while accepting the memorandum as the charter of incorporation of the company,the articles define the duties,right and powers of the governing as between themeselves and the company,and the mode and form which the company shall conduct its buisness.The Articles of association describe the inner transaction of a company including the relationship between the director and shareholders.The memorandum and articles define the relationship between the company and members which have rights and obbligate contractual and they may only enforce these rights as shareholders[12].

Normally, every company has its own AA. However, if a company does not have its own AA, the model AA specified in Schedule I – Table A will apply. A company may adopt any of the model forms of AA, with or without modifications. The articles of association should be in any of the one form specified in the tables B,C,D and E[13]. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. However, a private company must have its own AA.


After gettting the company incorporated the promotors will raise finance,an invitation to the public subscribing to the share capital and debentures is issued. Public comes to acquaintance of the information detailed on the company throug“prospectuses”.Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares while pubblic companies can issue prospectus[14]. A prospectus must be an invitation offering to the pubblic, the invitation must be made on behalf of the company or intended company,must to be subscribed or purchase,and the invitation must relate to shares or debentures.

A prospectus brings to the notice of the public that a new company has been formed.The company tries to convince the public that it offers best opportunity for their investment. A prospectus describe the terms and conditions on which the shares or debentures have been offered to the public.

When a company is formed the promotores must arrange number of documents to complete the registry of company between which there are memorandum and articles.


The purpose of the memorandum is to give information to the shareholders of the company  about the sector of fields where their capital will be utilised;that means shows the permitted range of the shareholders its creditors and the person outside the company as well. That means a company cannot be incorporated without a memorandum of association. it is a fundamental document it is the basic and mandatory charter without which the company cannot be incorporated. It is an unalterable document the memorandum of a association could not be altered but it can be changed consideraing circumstance and condition. It defines the limitation of the company’s operation; it forms relationship between the company’s and outsiders; it contains clauses that give information about company.

Preliminary contruct:

to establish a company, the promoters have to deal with various people for and on behalf of the company being incorporated. They need to arrange for the purchase of land, building, machinery and equipment, and raw material for the use of the company after it has come into being—and as such, they make contracts with various parties. Since these contracts are made before the company has come into being as an entity, i,e., before it has been incorporated, they are called pre-incorporation or preliminary contracts.

A company cannot even adopt the pre-incorporation contracts by ‘ratification’ because such ratification calls for the existence of the principal competent to make a contract. When the promoters have entered into a contract ‘for the purposes of the company’(before its incorporation) and the contracts is warranted by the terms of its incorporation’, it may be specifically enforced by or against the company if the company has accepted the contract and communicated such acceptance to the other party of the contract. The expression ‘for the purposes of the company’ implies such contracts as are necessary for the incorporation and working of the company- like the contract for printing the ‘memorandum’ or ‘articles’ of association or for the purchase of machinery indispensable for the functioning of the company. It is important to note here that any contract that is not deemed to be ‘necessary for the purposes of the company’—e.g., a contract with the promoters to buy shares in the company –is not covered by the above expression and, as such, cannot be ratified by the company.

Rising the capital:

A private company or a public company not having share capital can commence its business immediately on its incorporation. As such, ‘capital subscription stage’ and’commencement of business stage’ are relevant only for a public company with a share capital. In case of capital subscription, a company has to complete the following procedures to obtain the necessary capital.


Promoters are the persons who conceive the idea of the company and translate it into a working reality. Promoters constitute the association of individuals that makes the plan, arranges the basic infrastructure. Incurs the initial expenses and manages the affairs of the company. A heavy responsibility rests on the promoter, and he undertakes a lot of risk because, if the company does not come into being, all his effort and expense go to serve no purpose. There is no definite definition of a promoter in the provisions of law, but various authorities have defined a’promoter’ as under[15]. A promoter starts working for the company even before the company is an entity or is in existence. There being no entity or existence of the company, there can be no contract between the proter or promoters and the company. A promoter conceives the idea of a company and puts in his time and effort to make the company a functioning entity. It is only reasonable that he should be adequately compensated for his initative and effort. The promoters performs all necessary functions relating to the establishment of the company as a going concern. But he is neither an agent of the company nor trustee of the company.


ü      In Duncans Industries Limited v. State of U.P., (2000) 1 SCC 633

ü      shall be a company incorporated under the Companies Act, 1992;

ü      Company Law Review: The Law Applicable to Private Companies, URN 94/529.

ü      See the Law Society’s Company Law Committee Memorandum No 360, which broadly

welcomes the DTI Review and agrees with this basic assessment.

ü      This is an offence of strict liability: R v Cole, Lees and Birch [1998] BCC 87.

ü      Erlanger v New Sombrero Phosphate Co Ltd (1878) 3 App Cas 1218, p 1236 per Lord CairnsLC

ü      Re Leeds and Hanley Theatres of Varieties [1902] 2 Ch 809; Clough v The London and North

Western Rly Co (1871) LR 7 Ex 26.

ü      R v Kite [1996] 2 Cr App R 295. There is also a report of the proceedings which the

company brought against the coastguard for negligence in the conduct of the rescue:

OLL Ltd v Secretary of State for Transport [1997] 3 All ER 897.

ü      See, also, El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 on the ‘directing mind

and will’.

ü      In the latter case, Leggatt LJ took the conservative view that it would be the ‘directing

mind and will’ which would probably be more relevant.

ü      See, eg, Wedderburn, KW [1957] CLJ 194; Goldberg, P (1972) 35 MLR 362; Drury, R

[1986] CLJ 219.

ü      Hickman v Kent or Romney Marsh Sheep Breeder’s Association [1915] 1 Ch 881.

ü      Companies Act 1985, s 111A (inserted by Companies Act 1989, s 131(1)).

style=”text-align: justify;” size=”1″ />

[1] Re Great Wheal Polgooth Co Ltd (1883) 53 LJ Ch 42.

[2] Bagnall v Carlton (1877) 6 Ch D 371.

[3] Source: Book of Knowledge: who invented, discovered, made the first…..Kenneth Ireland, Gauraw Publishing House, New Delhi.

[5] the Companies Act, 1956

[6] Discolsure for investor Protection (DIP) guidelines, 2000

[7] Public Offers of Securities Regulations 1995, reg 14(5).

[8] Companies Act 1985, s 26(1)(c).

[9] the Companies Act, 1956

[10] Section 2(28) of the Companies Act, 1956

[11] the Companies Act, 1956.

[12] Which requires a special resolution. See p 103.

[13] Schedule 1 to the Companies Act, 1956

[14] Section 2 (36) of the Companies Act

[15] See infra note 22 for examples of this claim.