Q.Explain the legal position of a promoter of a company.

A promoter occupies an unusual legal position — not quite an agent, not quite a trustee, yet still bound by strict duties.

A promoter's legal position is often described as unique, because it does not fit neatly into any of the standard categories of legal relationship. He is not an agent of the company, since agency requires a principal who already exists in law, and the company itself is not yet in existence during the promotion stage. He is also not, strictly speaking, a trustee, since a trustee holds property that already belongs to a beneficiary, whereas at the promotion stage there is no company yet to hold property for.

What the law does impose on a promoter is a fiduciary duty — a duty of good faith and full disclosure towards the company he is bringing into existence and towards the persons who will become its shareholders. In practical terms, this means:

• a promoter must not make any secret, undisclosed profit out of the promotion — for example, by selling his own property to the company at an inflated price without revealing that he is the seller, or by pocketing a hidden commission from a third party;
• if a promoter does make such a profit, he must disclose it, ordinarily to an independent Board of Directors, or to the prospective shareholders through the prospectus or Articles; and
• if a promoter fails to make this disclosure, the company (once formed) has legal remedies against him — it can rescind the contract under which the secret profit was made, recover the amount of the secret profit from him, or sue him for damages for breach of his fiduciary duty, depending on the circumstances.

Because the company does not exist while the promoter is acting, any contract he signs "for" the company before incorporation (a pre-incorporation contract) does not bind the company automatically; the company can adopt such a contract after incorporation, typically through a fresh agreement on the same terms.

Many students state flatly that "a promoter is an agent of the company" without qualification — this is legally inaccurate, since agency presumes an existing principal. The precise, examinable position is the fiduciary relationship, not agency or trusteeship.