Page 210 - DMGT407Corporate and Business Laws

Unit 8: Formation of a Company

where he sold his own property to the company, or (ii) recover the profit made, even Notes
though rescission is not claimed or is impossible, or (iii) 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.
2. Under the Companies Act: (i) Promoter is liable to the original allottee of shares for the
misstatements contained in the prospectus. It is clear that his liability does not extend to
subsequent transferees. 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 (s.62 and 63). (ii) 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).

Notes Where there are more than one promoters, 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.
Self Assessment

Fill in the blanks:
1. …………………is a term of wide importance denoting the preliminary steps taken for the
purpose of registration and floatation of the company.

2. The persons who assume the task of promotion are called…………………..
3. Promoters have been described to be in …………………relationship with the company.
4. Under the Companies Act promoter is liable to the …………….allottee of shares for the
misstatements contained in the prospectus.
8.2 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 for the purpose of registration of a company, the following three documents
are required to be presented to the registrar of the State in which the registered office of the
company is to be situated: (i) the memorandum of the company; (ii) the articles, if any; (iii) the
agreement, if any, which the company proposes to enter into with any individual for appointment
as its managing or whole-time director or manager.
The documents in (i) and (ii) 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, 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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