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Lectures by Dr. Tabrez Ahmad

Lectures by Dr. Tabrez Ahmad

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Formation of a Company Presentation Transcript

  • 1. Module III Formation of Company Promoters Meaning, position, duties, and liabilities; Pre-incorporation contracts Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 2. The term is not defined in companies Act although the term is used expressly in sections, 62,63,69,76,203,478,519,542,543 ,
    • USA securities exchange commission rule 405(a) defines promoter
    • A person who, acting alone or in conjunction of other persons directly or indirectly takes the initiative in founding or organizing the business enterprise.
    • Sec 62(6)(b) Companies Act 1956
    • Duties of a promoter
    • Erlanger v New Sombrero Phosphate co. 1878 3 App.Cas 1218 HL.
    • Lord Cairns said:
    • Have fiduciary position
    • To appoint the independent board of directors
    • To disclosures
    • Salomon v Salomon 1897 A.C. 22 HL.
    • Gluckstein v Barnes 1900 A.C. 240 HL. “It is too absurd”, said Lord Halsbury with his usual bluntness, “to suggest that a disclosure to the parties to this transaction is a disclosure to the company……
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 3. Statutory Interpretation Of The Term
    • Though the term “Promoter” finds its place in the company law, it has not been defined anywhere under the Companies Act, 1956 (“Act”). This is because the term does not have any legal connotation but contains a business element. Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. A promoter may be an individual, association, partner or company.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 4.
    • It is noteworthy that the concept of promoter is enunciated in the Securities Exchange Board of India (Disclosure and Investor Protection), 2000 (“DIP Guidelines”) which is mostly from the disclosure perspective. The term “Promoter” also finds place in the Securities Exchange Board of India (Substantial acquisition of Shares and Takeover Regulations), 1997(“Takeover Code”). It is stated that a promoter is neither an agent nor a trustee of a company under incorporation but certain fiduciary duties have been imposed upon him both under the English Companies Act and the Indian Companies Act. They have the power of defining how and when in what shape and under whose supervision the company shall come into existence.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 5. Definitions Under The DIP Guidelines
    • 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: (a) the person or persons who are in over-all control of the company; (b) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public; (c) the persons or 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.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 6.
    • 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
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 7.
    • 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” . The definition of promoter as stipulated in the DIP Guidelines employs the term ‘control’. Since the DIP Guidelines fail to define the term, reliance is placed upon the Takeover Code, 1997. Clause (c) of sub-regulation (1) of Regulation (2) defines the term as: “Control shall include the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding agreements or voting agreements or in any other manner.” .
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 8. Promoter Group
    • 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 group’ to include the following: a) Promoter, b) an immediate relative of the promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and c) in case promoter is a company:
    • i. a subsidiary or holding company of that company; ii. any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter; iii. any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company; and
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 9.
    • d) in case the promoter is an individual: i. any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member; ii. any company in which a company specified in (i) above, holds 10% or more, of the share capital; iii. any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total; and; iv. all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading shareholding of the promoter group.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 10.
    • The above definition not only encompasses within its ambit the promoter and his immediate relatives but also takes into account the subsidiary or the holding company or any other company in which the promoter holds 10% or more of the capital of the company. In cases of promoter being a natural person, any HUF or a firm in which the promoters and his immediate relatives possess an aggregate shareholding which is either equal to or more than 10% of the total capital of the company. The definition also tends to include persons whose shareholding is aggregated to satisfy the disclosure requirements in the prospectus.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 11.
    • In the light of the issues raised above, it may be noted that the above definition of ‘promoter’ is segregated into two parts. The first part deals with the general concept of the term ‘promoter’ whereas the second part differentiates between promoters as “natural persons” (including his immediate relatives, companies, HUF and partnership firms in which he possesses the prescribed shareholdings) and as “corporate promoters” (including the holding companies and its subsidiaries). It is pertinent to cite Clause 8.3 of the Malegam Committee Report which states that:
    • “ It needs to be clarified that the above definitions of “Promoter” and “Promoter Group” are designed specifically for the purposes of disclosure in the prospectus of shareholding and share transactions and are not to be used for any other purposes.”
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 12.
    • Judicial Decisions Reliance is placed on the celebrated decision of the U.S. Supreme court in the case of Rescue Army v. Municipal Court of Los Angeles wherein a promoter was defined to mean: "any person who for pecuniary compensation or consideration received or to be received, solicits or is engaged in the business of or holds himself out to the public as engaged in the business of soliciting contributions for or on behalf of any other person or any charitable association, corporation or institution, or conducts, manages or carries on or agrees to conduct, manage or carry on or is engaged in the business of or holds himself out as engaged in the business of conducting, managing or carrying on any drive or campaign for any such purpose. . . ." According to the judicial interpretation of the term ‘promoter’ there are certain activities attributed to him
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 13.
    • i. Controlling the management of such companies after its incorporation. ii. Activities undertaken and exertions made towards the forming of the company and assumption of subsequent duties towards it. iii. Persons involved in the process of finding directors, qualifying them, preparing the prospectus and incurring expenses in printing, advertising and other allied activities, incidental to bringing the company into existence. iv. Persons acting in their professional capacity are not promoters, unless they become a party to the issuance of shares, procurement of subscriptions or acting outside the scope of their professional duties.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 14.
    • Other Important Aspects III. A Promoters Lock-In Requirements According to the DIP Guidelines, a promoter is required to contribute to the extent of: • 20% of the post-issue capital in case of an unlisted company; • 20% of the proposed issue or of the post-issue capital in case of a listed company; • 20% of the post-issue capital after offer for sale.
    • And in all the abovementioned cases the promoter’s contribution shall be locked in for a period of three years starting from the date of allotment in the proposed public issue. Further the entire pre issue share capital of the issuer company shall be locked in for a period of one year.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 15.
    • Liabilities of The Promoter And The Promoter Group The DIP Guidelines stipulates the disclosure requirements in relation to corporate promoters and members of the promoter group.
    • III.B.1 Disclosure Regarding Promoters/ Promoter Group Entities 1. Date of incorporation. 2. Shareholding of the Company. 3. Nature of activities including the main objects. 4. Location of the registered office. 5. History of the Company and the promoters of the Company. 6. Financial information for the past three years, which includes: i. Reserves (excluding revaluation reserves). ii. Sales. iii. Profit after tax. iv. Earning per share. v. Net asset value. vi. Highest/lowest market price (if any)
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 16.
    • 7. Details in the change in management of the company, if any, including details of the persons holding controlling interest together with the applicability and compliance of Takeover code, 1997.
    • 8. A declaration, confirming that the Permanent Account Numbers, Bank Account Numbers, the Company Registration numbers and the addresses of the Registrars of Companies where the companies are registered have been submitted to the Stock Exchanges on which securities are proposed to be listed, at the time of filing the draft prospectus with them.
    • 9. Full particulars of the nature and extent of the interest, if any, of every promoter in the promotion of the issuer company or in any property acquired by the issuer company within two years of the date of the prospectus or proposed to be acquired by it need to be disclosed.
    • 10. Any amount or benefit paid or given within the two preceding years or intended to be paid or given to any promoter and consideration for payment of giving of the benefit is required to be disclosed.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 17.
    • 11. Litigation details regarding promoters and promoter group entities and details of contingent liability as on date of last audited financial statement.
    • 12. In case any of these entities are listed companies additional disclosures will be required to be made as per the DIP Guidelines.
    • 13. A note relating to promoters’ contribution and lock-in period, stating date of allotment, date when made fully paid up, nature of allotment (rights, bonus, etc.), number of securities, face value of securities, issue price of securities, percentage of promoters’ contribution to total issued capital and the date up to which the securities are locked-in.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 18.
    • Duty To Disclose Personal Profits The promoters who purchase property and then create a company to purchase that property stand in a fiduciary position towards the company. They must make a faithful disclosure to the company of all relevant facts which might affect the willingness of the company to purchase the property, including any profits made.
    • In view of this, the promoters have certain basic duties towards the company formed:- 1. He 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 sell the 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. 2. He must make full disclosure to the company of all relevant facts material to any transaction made by him with the company. He must use his position fairly and reasonably and in the interest of the company and must abstain from exercising undue influence and fraud.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 19.
    • In case of default on the part of the promoter in fulfilling the above duties, the company may:- 1. Rescind the contract and recover the purchase price where he sold his own property to the company. 2. Recover the profit made, even though rescission is not claimed or is not possible. 3. Claim damages for breach of his fiduciary duty. The measure of damages will be the difference between the market value of the property and the contract price can be recovered from him.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 20.
    • Liability Of Promoter For Misstatement In The Prospectus 1. Promoter is liable to the original allottee of shares for the misstatements contained in the prospectus- He may also be imprisoned for a term extending to two years or fine upto Rs. 50,000 for such untrue statements in the prospectus.
    • 2. In the course of winding-up of the company, on an application made by Official Liquidator, the court may make a promoter liable for misfeasance or breach of trust.
    • Where there are more than one promoter, they are jointly and severally liable and if one of them is sued and he pays damages, he is entitled to claim contribution from others. The death of a promoter does not relieve his estate from liability arising out of abuse of his fiduciary position.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 21.
    • Therefore it can be said that, a promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formation itself .In India, 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.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 22. Pre-incorporation contract Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 23. The Common Law Position
    • Kelner v Baxter (1866) L.R. 2 C.P 174( Common Pleas)
    • Newborne v Sensolid( Great Britain) Ltd. [ 1953] 1 All E.R 708
    • Balck v Smallwood & cooper (1966) 117 C.L.R 52(High Court of Australia)
    • Wickberg v Shatsky (1969), 4 D.L.R (3 rd ) 540 (B.C.S.C)
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 24. The new British Columbia Corporations Act 2002
    • Sec. 20 provides about Pre-incorporation contracts.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 25. Other ways of enforcing Pre-incorporation contracts
    • Promoter as a trustee of a chose in action
    • Company as Assignee ( as opposed to ratification by the company)
    • Restitution Principles- quasi contracts
    • Infer a second contract from a course of dealing
    • Offer to promoter as agent for the third party to make an offer to the company- purported ratification or adoption by the company could then be considered an acceptance of an offer conveyed by the promoter as agent for the third party.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 26. Indian Position
    • Position before 1963
      • A pre-incorporation contract never binds a company since a person (legal or juristic can not contract before his or its existence and a company before incorporation has no legal existence. Another reason is that promoters are proverbially profuse in their promises and if the corporation were to be bound by them, it would be subject to many unknown, unjust and heavy obligations.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 27. Position since 1963
    • Until the passing of the Specific Relief Act 1963, in India the promoters found it very difficult to carry out the work of incorporation.
    • Since contracts prior to incorporation were void and also could not be ratified,
    • People hesitated to either supply and goods or services for the cause of incorporation,
    • Promoters also felt shy of accepting personal responsibility.
    • Sec. 15(h) of Specific Relief Act 1963, provided relief to the promoters.
    • Sec.19, allows the other party to enforce the contract against the company.
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 28. Case Study
    • Vali Pattabhirama Rao v. Sri Ramanuja Ginning and Rice Factory Pvt. Ltd. [1986] 60 Comp. Cas. 568 (A.P.)
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I
  • 29.
          • Thanks
    Sunday, June 7, 2009 Dr. Tabrez Ahmad, KLS, KIIT, BBSR, Company Law-I