LOVELY INSITUTE OF MANAGEMENT

TERM PAPER SUB: CORPORATE AND BUSINESS LAW.

TOPIC: SEPARATING OF PROMOTERSHIP FROM COMPANY MANAGEMENT.IS IT FRUITFUL OR NOT. EXPLAIN.

SUBMITTED TO SUBMITTED BYMr. R.S. DEOL IRFAN BASHIR M.B.A IST SEM..DEP.OF MGMT. SECTION AL PU (LIM)

REG. NO. 10900856. . ROLL NO _B 47

ACKNOWLEDGEMENT

. I would like to express my gratitude for the helpful comment and Suggestions by my teacher.

Most importantly I would like to thank my lecturer Mr.R.S

DEOL SIR for his days of supervision. His critical direction and

support on work has played a major role in both the content and

presentation of our discussion and arguments in our tutorial

classes. Also his method of teaching and clearance of doubts

regarding with the topic have made me successful to complete it on

time. I would also thank my friends and related persons for their

help in making this term paper.

I have extended my appreciation to the several sources which

provided various kinds of knowledge base support for me during

the research.

IRFAN BASHIR

CONTENTS

Definition of the company. Characteristics of the company.

Incorporation of the company.

Definition of the promoter.

Role and duties of the promoter.

Legal status of the promoter

Remuneration of the promoter.

Need of promoter to company.

Introduction and objective of the term paper topic.

Impact of separating promoter from company management.

Expert opinion on the given issue.

Conclusion.

Bibliography.

References.

DEFINITION OF A COMPANY

A company ,in common parlance, means a group of persons associated together for the attainment of a common end, social or economic .It has “no strictly technical or legal meaning”.(STANLEY ,RE (1906)1 Ch.131,134).It represents different kinds of associations, both business and otherwise.

A company in broader sense, may mean association of individuals formed for some common purposes (SMITH V ANDERSON,(1880)Ch .D 247). But it is a voluntary association of persons. It has capital divisible into parts, known as shares .At the same time it is an artificial person created by a process of law. It has a perpetual succession and a common seal .It exists only in contemplation of law, i.e., it is regarded by the law as a person, just as a human being, RAM OR SHAYAM, is a person.

A company is an artificial person has no body or soul and no conscience nor is it subject to imbecilities of the body. It is not visible, save to the eye of law. These physical disabilities make a company an artificial person .But then a company really exists and it is not a fictitious entity.

LINDLEYS DEFINITION:

Defines a company as “ an association of many persons who contribute money or moneys worth to a common stock, and employ it in some common trade or business (i.e, for a common purpose)and who share the profit or loss(as the case may be)arising there from.

.

CHARACTERISTICS OF A COMPANY

SEPARATE LEGAL ENTITY.A company is in law regarded as an entity separate from its member’s .In other words; it has an independent corporate existence. (Salomon v Salomon & co.ltd (1897) A.C. 22

LIMITED LIABILITY: A company may be a company limited by shares or a company limited by guaranteed.. PERPETUAL SUCESSION: A company is a juristic person with a perpetual succession. As it never dies; nor does its life depends on the life of its members. COMMON SEAL: Since a company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal acts as the official signature of the company. TRANSFERABILITY OF SHARES: The capital of a company is divided into parts, called shares. These shares are subjected to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to company. SEPARATE PROPERTY: As a company is a legal person distinct from its members, it is capable of enjoying and disposing of property in its own name. CAPACITY TO SUE: A company can sue and be sued in its corporate

name. It may also inflict or suffer wrongs. It can in fact do or have

done to it most of the things which may be done by or to human being.

INCORPORATION OF COMPANY

Before a company is formed, certain basic preliminary decisions are necessary as

PRIVATE OR A PUBLIC COMPANY ITS CAPITAL PARTNERS LOCATION CONSIDERATION OF COMPANY ACT 1956 FUTURE OF THE COMPANY BUSINESS EVERY SMALL AND LARGE ISSUE RELATED WITH IT

All these primary steps and decisions are being taken by some person or persons called “PROMOTERS”

The overall process by which a company came into existence. It starts with the conceptualism of the birth of a company and determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital.Chronologically, the first persons who control a company’s affairs are its promoters .It is they who conceive the idea of forming the company, with reference to a given object and then to set it going .It is they who take the necessary steps to incorporate the company, provide it with share and loan capital and acquire the business or property which it is to manage. When these things have been done, they handover the control to its directors, who are often the promoters themselves, under different name(In Whaley Bridge Calico Printing Co. V Green &Smith (1880)5 Q B.D, 109,)

Bowen L.J stated that the term (promoter) is a term not of law, but of business, usefully summing up in a single word a number of business operations familiar to the commercial world, by which a company is generally brought into existence. It is a short and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company.

DEFINITON OF PROMOTER UNDER DIP GUIDE LINENESS.

Explanation I of sub clauses (k) and (l) of Clause 6.8.3.2 of Chapter VI of the DIP Guidelines defines the term ‘promoter’ to include: persons who are in over-all control of the company; persons who are instrumental in the formulation of a plan or programmed pursuant to which the securities are offered to the public; persons named in the prospectus as promoters(s).Provided that a director/ officer of the issuer company or person, if they are acting as such merely in their professional capacity shall not be included in the Explanation.

In view of the above, a promoter is a person who exercises substantial control over the company or a person who undertakes all necessary steps in the floatation of the company. The relationship between a promoter and a company which he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started .The status of the promoter is generally terminated when the Board of directors has been formed and they start governing the company

It is submitted that the definition of “promoter” is inclusive in nature and “is a term of wider significance, and does not confine itself to de jure control”.

FUNCTIONS OF A PROMOTER.

. A promoter of a company decides its name and ascertains that it will

be accepted by the registrar of companies .He settles the details of the company s memorandum and Articles, the nomination of directors, solicitors, bankers, auditors, and secretary and the registered office of the company. He arranges for the printing of the memorandum and articles, the registration of the company, the issue of prospectus, where a public issue is necessary. He is in fact, a responsible for bringing the company into existence for the object which he has in view.

LEGAL STATUS OF A PROMOTER

As the exact legal status of a promoter, the statutory provisions are silent in most parts, except for a couple of sections in the specific Relief Act ,1963.his legal status is incapable of precise statement ,but Lindley L.J described his position in (Lindsey & wig pool Iron Ore Co. V Bird,(1886)33Ch.D. 85 as follows“Although not an agent for the company, nor trustee for it before its formation, the old familiar principles of the law of the agency and of trusteeship have been extended and very properly extended to meet such cases.

QUASI-TRUSTEE ; A Promoter is neither an agent nor a trustee of the company under incorporation but certain fiduciary duties have been imposed on him under the company act 1956.He is not an agent because there is no principle born by that time and he is not a trustee because there is no (cestui queue trust) in existence .Hence he occupies the peculiar position of a quasi trustee [(Vali P.Roa V sri Raman Jana Ginning &Rice Factory (Put) Ltd. (1986)60Comp.Cas.568 (A.P)]

FIDUCIARY POSITION OF PROMOTER.

A Promoter stands in a fiduciary relation (relation requiring confidence or trust) to the company which he promotes (In Erlanger v New Sombreros Phosphate Co. (1878) App.Cas.1218, Lord Cairns observed in this regard.“In equity the promoters of a company stand in a fiduciary relation to it and those persons whom they induce to become shareholders in it, and cannot in equity bind the company by any contract with themselves as promoters without fully disclosing to the company all material facts which the company ought to know.

NOT TO MAKE ANY PROFIT AT THE EXPENSE OF THE COMPANY

. TO GIVE BENEFIT OF NEGOTIATIONS TO THE COMPANY.

TO MAKE A FULL DISCLOSURE OF INTEREST OR PROFIT.

NOT TO MAKE UNFAIR USE OF POSITION(Omni Electric Palaces Ltd. VS Baines,(1914)1 Ch.322)

RUMUNERATION OF PROMOTERS

A promoter has no right to get compensation from the company for his service in promoting the company unless there is a contract to that effect. If there is no such contract ,he is not entitled to get any compensation in respect of any payment made by him in connection with the formation of the company .In practice ,a promoter takes remuneration for his services in one of the following ways;

He may sell his own property at profit to the company for cash or fully –paid shares provided he makes a disclosure to this effect.

He may be given an option to buy a certain number of shares in the company ay par.

He may take a commission on the shares sold. He may be paid a lump sum by the company.

DUTIES OF PROMOTER.

The promoters have certain basic duties towards the company formed:- Promoters must not make any secret profit out of the

promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sells to concerned property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members.

Promoter must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

In case of default on the part of the promoter in fulfilling the above duties, the company may:-

Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered.

Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit.

If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue

him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are:-

The company may to pay some remuneration for the services rendered.

The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.

The promoter may sell his property for fully paid shares in the company after making full disclosures.

The promoter may be given an option to buy further shares in the company.

The promoter may be given commission on shares sold.

The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement.

NEED OF PROMOTERS TO COMPANY

A company needs promoter to give company stake.

Presence of promoter minimizes the threat of the company to sink.

A promoter works hard to make its company no 1 than its other authority employ.

All the issues relating with company can be solved in presence of the promoter

.

Social responsibility, past contradictory issues and making contracts, a promoter is required at the times.

A promoter adds more value to the business.

A promoter can’t be good at execution but may be good at conceptualization.

OBJECTIVE OF THE TOPIC

Promoters are person engaged in the formation of a company.

Promoters take the initiative of starting a business and bring a business enterprise into existence

. . Promoters hunt for business opportunities, make new ideas and

schemes, and assemble finance and other resources for executing the idea.

Promoters spot the prospects of gain in business, to form a mental picture of the proposed business, visualize the problems it might face and persuade others to invest money in it

Promoters perform all the preliminary work relating to the establishment of the company as a going concern.

A promoter opens the opportunities for profitable investments.

Thus promoters play an indispensable role in business

Promoter conceives business opportunities or the ideas of starting a new business.

Promoter conduct a preliminary analysis of the idea to determine its profitability and feasibility

Promoter carry out a detailed investigation in order to determine the nature, scope and requirements of the proposition, appoint brokers, underwriters, solicitors and bankers for the company.

Therefore, “A successful promoter is a creator of wealth”. A promoter gives birth to a business unit and nourishes it until it stands on its own feet. Therefore, a promoter serves both as a mother and a mid-wife.

IMPACT OF SEPARATING PROMOTER SHIP FROM COMPANY MANAGEMENT.

So the topic can be illustrated on the basis of above given information and is the central objective of the prepared term paper. Putting all the things into consideration, I concluded on the given issue as below:

On the basis of overall analysis, reading and consultation of the primary, secondary data I come to this point that the impact of separating promoter ship from company management will not be so fruitful in because companies are better performing under the control of family heads .Also after the analysis of some magazine articles I concluded that promoters should not be separated from company management ,but in case of in ability of the promoter to handle the business ,no knowledge about the basic rules of the company, at that time he or she can be put partially aside at the time from daily business dealings and genuine contracts .But cannot be avoided in the personal meetings as related with company development. If a promoter has got a potential or equally talented comparing to professionals ,then nothing wrong to handle the controlling chair of the company. Promoters already permitted to work in the company management as per company act 1956 as giving them rights. And also put restrictions to work against company act and as per rules of the company. They can be sued by the company if found guilty as per company act, so no freedom for them to operate the company as per their will. When he has got a potential to compete with professionals and has got knowledge of the subject ,then there is no need of separating him from company management .So I think it is better to have a desirable promoter to operate a company.

Therefore I concluded that, a promoter is a person who brings about the incorporation and organization of a company. He really works very hard to bring together the persons interested and required in the enterprise, aids in procuring subscriptions and sets in motion the machinery and required items which leads to the formation of a corporation .In real sense, promoters are usually persons who, in forming the company, secure for themselves the management of the company being formed or are persons who convert their own private business into a limited company and secure for themselves more or less a controlling interest into the company’s management. As per the company Act 1956, and general basis, if a promoter is separated from company management, then who will fulfill his role .when a promoter is bounded by law, why is it necessary to separate him from the management? Recently some cases took place where a promoter have violated the company laws and makes rest of the managing bodies of the companies to think to put promoter ship out of the company management (e.g. sat yam case) .But in the world, the most companies are headed by great and experienced promoters as their directors, executives etc.We have the name of some big famous and reputed companies like (reliance, king fisher, Bata etc) and many local companies. A promoter gives you the suggestions how to do a particular piece of work in business and rest of the duty is done by directors and concerned officers. There is a complete balance between professionals and promoters, so there is no need to disturb it. A company can make adjustments between the management and promotership.A successful company is that where the promoters work by meeting shoulders.

So it is better to have some part of the company management in the hands of promoter. But there will be negative effect on company performance by separating promoter as per company act a promoter is important for company management.

. SOME EXPERT OPIONON ON THE ISSUE

1. Ashok WADHA, C EO AMBIT.

A promoter faces lot of difficulties to establish a company over the year’s .How cans you say him to leave its control.

2. SOMASEKHUR SUNDERSAN, partner JCA.

If a share holder is running the corporation .He can be detriment of the remaining share holders.

3. M.A REDDY .CEO AMBIT.

A promoter is important as he adds value better than some one else.

4. HARSH MARIWALA, CMD Marico

If I have invested money and established a company and having blood ,then why I should leave it ?I can show how I can add value than a professional, if not having better execution but a very good conceptualization.

5. SOMASEKUR partner JCA.

A Promoter nurtures a company when it was being seeded and brought. How can he leave it now in the hand of those people who have been called by him?

CONCULSION

As the opinion of the experts totally reflects that no promoter wants to leave position of authority in the company management. So it is better to have a control in the hands of directors or chairman directed or guided by promoters as per company Act1 956 and also as per legal status of the company.

BIBLIOGRAPHY AND REFERENCES

Elements of Mercantile law. N.D.Kapoor.(vol. II )

Common business laws. (Avatar Singh).

Monthly journal of J.H.U DELHI

A verbatim transcript of the exclusive interview with Adi Godrej and David Childs on CNBC-TV18. Also watch the accompanying vide

Primary data collected consulting some special persons researching on given issue.

Articles related in some news papers and magazines.

Published on Mon, Feb 02 16:47, Updated at Sat, Feb 07 at 11:40Source: CNBC-TV18 should promoter ship separated from company management.