Promoter Legal Duties — From Intuition to Precision
Imagine you want to start a company. You have an idea, you find some investors, you hire a lawyer, you get the paperwork done — but the company doesn't legally exist yet. Who is acting on its behalf? You are. You are the promoter — the person who conceives the business, gathers the resources, and brings the company into existence.
Now here's the tricky part: before the company is born, you are acting for someone who doesn't yet have a legal identity. That puts you in a position of enormous power — and enormous risk of conflict of interest. The law steps in to protect the unborn company from you.
The Intuition: You Are a Trustee for a Ghost
Think of the promoter as a trustee for a person who hasn't been born yet. The company, once formed, will inherit everything the promoter did on its behalf — contracts, assets, liabilities. But the promoter could easily slip in a secret profit, sell their own property to the company at an inflated price, or hide a personal interest in a deal.
The law says: you cannot do that. While you are a promoter, you owe fiduciary duties — duties of utmost good faith — to the company you are creating. You must act in its best interests, not your own.
A promoter stands in a fiduciary relationship with the company. This means the promoter must not make a secret profit and must disclose all material facts about any transaction in which they have a personal interest.
The Precise Statement of Duties
The legal duties of a promoter can be stated as follows:
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Duty not to make a secret profit. If the promoter makes any profit from a transaction entered into on behalf of the company, that profit must be fully disclosed to an independent board of directors or to all existing and prospective shareholders. If not disclosed, the company can rescind the contract and recover the profit.
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Duty to disclose any personal interest. If the promoter sells their own property to the company, or has any interest in a contract the company is entering, they must disclose the nature and extent of that interest. Non-disclosure makes the contract voidable at the company's option.
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Duty to act in good faith. The promoter must not mislead the company or its shareholders. They must present all material facts honestly.
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Duty to account for profits. Any profit made in breach of these duties belongs to the company. The company can sue the promoter to recover it.
Remedies for breach of promoter's duty:
- Company may rescind the contract (if still possible)
- Company may sue for damages for any loss caused
- Company may recover the secret profit in an action for money had and received
A Concrete Example
Suppose you, as promoter, buy a piece of land for ₹10 lakh. You then sell it to the newly formed company for ₹15 lakh, without telling anyone that you were the original owner. That ₹5 lakh profit is a secret profit. The company, upon discovering this, can: …