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Promoters: Definition, Types, and Responsibilities in Company Formation

Learn about the role of promoters in company formation, including their definition, types, and fiduciary duties. Understand their responsibilities in selecting a company name, settling capital, and registering the company.

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Promoters: Definition, Types, and Responsibilities in Company Formation

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  1. RECAP SELECTION OF THE NAME TO BE CONSIDERED WHILE SELECTING THE NAME OF A COMPANY PRIOR APPROVAL OF SECP RECTIFICATION OF NAME OF A COMPANY CHANGE OF NAME BY A COMPANY REGISTRATION OF CHANGE OF NAME AFFIXING, MENTIONING ETC OF COMPANY’S NAME

  2. TODAYS TOPIC “PROMOTERS”

  3. DEFINITION Promoters may be an individual ,a firm, or a company and can be defined as: “The one who undertakes to form a company, with reference to a given object and to set it going and who takes the necessary steps to accomplish that purpose.”

  4. Other definition: Promoters is one who is responsible for the formation of the company. He is the one who is responsible for the preliminary steps taken in the formation of the company.

  5. Promoter Before a Company is incorporated, or in the process of incorporation, it is common for someone lay the groundwork of the Company. In practice, one does not always wait to receive the Certificate of Incorporation before commencing business. Negotiations for the purchase of material or land would already have commenced. The people who take the responsibility of starting the Company are referred to as Promoters.

  6. Corporate Promoter A corporate promoter is a person who solicits people to invest money into a corporation, usually when it is being formed. An investment banker, an underwriter, or a stock promoter may, wholly or in part, perform the role of a promoter. Promoters generally owe a duty of utmost good faith, so as not to mislead any potential investors, and disclose all material facts about the company's business .

  7. Types of Promoters Promoters may be classified into the following types. Professional Promoter They are experts who specialize in company promotion. They float the company and hand it over to the shareholders or their representatives. Promotion is their main profession or occupation. Occasional Promoters These promoters take interest in floating some companies. They arenot engaged in promotion work on a regular basis. They take up the promotion of some company and once it is over they go to their original profession. For instance, engineers, lawyers etc. may float some companies.

  8. Types of Promoters Entrepreneur Promoters They are both promoters and entrepreneurs. They conceive idea of a new business unit, do the groundwork to establish it and subsequently become a part of the management. Financial Promoters Some financial institutions, like investment banks or industrial banks, may take up the promotion of a company with a view to finding opportunities for investment.

  9. Function of promoters To conceive the idea of forming a company. To select the name of the company. To settle the amount and form of its capital. To get the company registered. To get together a number of person who may sign the memorandum of association and to act as first directors.

  10. To arrange for underwriting. To select banks, auditors, brokers and legal advisors. To pay preliminary expenses. To prepare the memorandum and articles of association and prospectus. To obtain certificate of commencement of business. .

  11. To make arrangement for the issuance of share capital. To secure allotment of shares and debentures To make arrangement for officers, factory, machinery and staff etc To arrange for the compliance of contracts with vendors and underwriters. To make filing, issue and advertising of prospectus.

  12. Duties liabilities and responsibility of promoters:

  13. Duty to disclose material facts: It is the duty of promoters to disclose all the material facts regarding the formation of the company.

  14. Liability for Secret profits: If the company comes in to existence a promoter is liable for all his acts and for all the secret profits, if any, made during the formation of company.

  15. THE FIDUCIARY DUTIES The promoter lays the foundations for a Company in terms of negotiations, registration of the Company, obtaining directors and shareholders and preparing all the paperwork.However, because the Promoter is such an important person in the formation of the company, the law places several responsibilities on him. These are known as fiduciary duties.THE FIDUCIARY DUTIESThe following are some of the fiduciary duties that the Courts will insist that a Company promoter has to observe.1.Top of the list is not to make a secret profit at the expense of the company

  16. THE FIDUCIARY DUTIES 2. A duty to account to the company for the benefit for any property he might purchase with the intent of selling the property to Company for a profit later.3.a duty not to defraud the Company by active concealment of any affairs relating to the company4. a duty not to disclose confidential information to outsiders5. a duty not to hide his personal interests through a nominee. A Promoter is in a fiduciary relationship with the Company he promotes and as such he owes fiduciary duties towards it. This means that he is in a position of trust and must at all times act honestly and in good faith for the Company as a whole.However, the most important aspect of his duty is not to make a secret profit at the expense of the Company.

  17. THE FIDUCIARY DUTIES "Promoters have a legal duty not to make a secret profit out of the promotion of the Company without the Company's consent and also to disclose to the Company any interests the promoters have in any transaction proposed to be entered into bythe Company“ There are many cases where Promoters did not remain true to their fiduciary duties. The bottomline requirement from Promoters is that they must be transparent in their dealings with the Company.There are three remedies in situations where the Promoters have breached the Fiduciary Duties.1. Rescission 2. Recovery of the Secret Profit. 3. Damages for breach of FD or deceit

  18. THE FIDUCIARY DUTIES RESCISSIONIf the Company has entered into a Contract with the promoter and it is later discovered there had been no transparency, the Company is entitled to rescind the contract. It is irrelevant that the promoter has made no profit from the contract.

  19. THE FIDUCIARY DUTIES DAMAGES FOR BREACH OF FIDUCIARY DUTIES.In the case of RE LEEDS & HANLEY THEATRES OF VARIETIES LTD.(1902) The Court ordered the Promoter to pay damages to the Company. The Court held that the Promoters had fraudulently omitted to disclose the profit made by them on the sale of the property to the Company. The amount of damages was equivalent to the amount of profit made by the promoters.

  20. Modes of payment: A promoter is entitle to a reasonable remuneration… The following could be the modes of payment: The vendors may agree to pay him a commission on sale of their property to the company. The promoter may purchase a property and sell it to the company at a profit The promoter may be given deferred of founder’s shares as fully paid up. A lump sum amount may also be paid as remuneration.

  21. Registered Office A Registered office is the official address of an incorporated company, association or any other legal entity Generally it will form part of the public record and is required in most countries where the registered organization is incorporated A Registered physical office address is required for incorporated organization to receive office correspondence and formal notices

  22. Registered OfficeSection 142 Under companies ordinance 1984 following are the provisions A company shall have a registered office to which all communications and notices may be addressed With in 28 day from the date of Incorporation or date of commencement of business A Company shall file, with the registrar, a notice of change of its registered office with in 28 days from the date of change

  23. Registered OfficeSection 142 Publication of registered office address in any document or annual return etc, does not dispose with company’s liability under (b) above The situation of the registered office shall also be stated in the Annual Return of the Company.

  24. CRO Company Registration Office One of the important functions of the SECP is the incorporation/registration of companies. This task has been entrusted to the Registration Department, Company Law Division which has its field offices known as Company Registration Offices (CROs) for the purpose of incorporation / registration of different type of companies.

  25. CRO Company Registration Office Since the inception of SECP, a number of operational changes have been introduced and a friendly environment has been created at the CROs. Incorporation of companies has been made much easier, smooth and swift ensuring completion of this process within three days. Other public services like availability of name, providing of certified copies etc., are rendered within one day. eServices has been launched by the SECP in Sep. 2008, which facilitates online availability of name, online incorporation of companies and e-filing of statutory returns. It enables the promoters and management of the company to interact online using the eServices portal, without visiting the SECP offices. Online services save time and resources, increase efficiency, create a paperless environment, promote confidence and strengthen the country’s economy.

  26. CRO Company Registration Offices For the convenience of general public, promoters and directors of companies, SECP has established its eight CROs at Islamabad, Karachi, Lahore, Peshawar, Faisalabad, Multan, Sukkurand Quetta. Online facilities for incorporation of companies and filing of returns have been made available.

  27. Functions of CRO Functions of CRO’s include Registration of companies and monitoring of their working according to law Providing services and guidance and also To ensure that the companies and their directors comply with the statutory requirements as provided under the Companies Ordinance, 1984 (the Ordinance). The record of companies maintained by the CROs is public record and the investors, shareholders, creditors and general public, may inspect the record of any company whenever they need and they may also obtain certified copy of any specific document on payment of nominal amount of fee.

  28. Topics Covered So Far we have covered first part of Corporate law and that is the ELEMENTS OF COMPANIES LAW COURTS, SECP AND REGISTRAR TYPES OF COMPANIES INCORPORATIONS OF COMPANIES STATUS OF CONVERSION OF COMPANIES COMMENCEMENT OF BUSINESS MOA AND AOA THE NAME OF A COMPANY REGISTERED OFFICE PROMOTERS CRO

  29. UPCOMMING LECTURES The part SHARE CAPITAL will be taught in the upcoming lectures, we shall cover PROSPECTUS TYPES OF SHARES AND SHARE CAPITAL ALLOTMENT OF SHARES ISSUE OF SHARES AND SHARE CERTIFICATE ALTERATION OF CAPITAL REDUCTION OF CAPITAL AND PURCHASE OF SHARES TRANSFER AND TRANSMISSION OF SHARES

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