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Unit 4: Formation of Company

Liabilities of a Promoter for Non-Disclosure Notes

In case a promoter fails to make full disclosure at the time the contract was made, the company
may either:
Rescind the contract and recover the purchase price where he sold his own property to the
company, or
Recover the profit made, even though rescission is not claimed or is impossible, or
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.

Liabilities of a Promoter under the Companies Act

Promoter is liable to the original allottee of shares for the mis-statements contained in the
prospectus. It is clear that his liability does not extend to subsequent allottees. He may
also be imprisoned for a term which may extend to 2 years or may be punished with fine
up to 50,000 for such untrue statements in the prospectus (Ss.62 and 63).

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 (s.543). The court
may also order for the public examination of the promoter (Ss.478 and 519).
Where there are more than one promoter, they are jointly and severally liable and if one of them
is sued and pays damages, he is entitled to claim contribution from other or others. However,
the death of a promoter does not relieve his estate from liability arising out of abuse of his
fiduciary position.

4.1.2 Registration (Ss.12, 33)

Section 12 states that, “any seven or more persons or where the company to be formed will be a
private company, two or more persons, associated for any lawful purpose may, by subscribing
their names to a memorandum of association and otherwise complying with the requirements
of this Act in respect of registration form an incorporated company, with or without limited
liability.” Thus, the promoters will have to get together at least seven persons in the case of a
public company, or two persons in the case of a private company to subscribe to the memorandum
of association.
Section 33 states that the following three documents are required to be presented to the Registrar
of Companies of the State in which the registered office of the company is to be situated, for the
purpose of registration of a company:
1. The memorandum of the company;
2. The articles, if any;

3. The agreement, if any, which the company proposes to enter into with any individual for
appointment as its managing or wholetime director or manager.
The documents in (1) and (2) above are required to be signed by seven persons in the case of a
public company and by two persons in the case of a private company. As we shall see later,
certain types of companies need not frame their own Articles of Association; in that case
“Regulations for Management of a Company Limited by shares” (given in Table A of Schedule
I to the Act, 1956) may be adopted.

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