Q.What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.

Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking the initiative to form a company to exploit a business opportunity. The persons who do this are called promoters.

Legal position of promoters:

• They are neither agents nor trustees of the company.
• They cannot be agents because the company does not yet exist — so they are personally liable for contracts made on the company's behalf before incorporation, unless the company later ratifies them.
• They occupy a fiduciary position: they may earn a profit only if it is disclosed and must make no secret profits; on non-disclosure the company can rescind the contract and claim damages.
• They are not legally entitled to claim promotion expenses, though the company may choose to reimburse or reward them.

Meaning of Promotion

• Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking the initiative to form a company so that a practical shape can be given to exploiting an available business opportunity.
• It begins with someone discovering a potential business opportunity. Whoever then proceeds to form a company to exploit it is a promoter. A promoter conceives the idea, analyses its prospects, and brings together the men, materials, machinery, managerial ability and financial resources needed to set the organisation going.

Legal / fiduciary position of promoters

Promoters get the company registered and ready to commence business, yet the law treats their position carefully:

• They are neither agents nor trustees of the company.
• Not agents: a promoter cannot be an agent of the company because the company does not yet exist at the time of promotion. Consequently, the promoter is personally liable for all contracts entered into on the company's behalf before incorporation, unless the company later ratifies them.
• Not trustees, but in a fiduciary position: although not trustees, promoters stand in a fiduciary relationship with the company, which they must not misuse:
  • They may earn a profit only if it is disclosed; they must not make any secret profits.
  • If a profit or interest is not disclosed, the company can rescind the contract and recover the price paid, and can also claim damages for the loss caused.
• No legal claim to expenses / reward: promoters are not legally entitled to claim their promotion expenses from the company. However, the company may choose to reimburse pre-incorporation expenses, and may reward them by paying a lump sum or commission, allotting them shares or debentures, or giving them an option to buy securities in the future.