Privileges of a Promoter: The Upsides of Corporate Matchmaking

1. Right to Indemnity: Sharing the Burden

Promoters are jointly and severally liable for any misstatements in the prospectus or undisclosed profits. However, if one promoter bears the brunt of a claim or compensation, they can seek indemnity from co-promoters.

Explanation:

Imagine promoters as teammates in a relay race. If one trips and falls (pays damages), they can ask the others to split the embarrassment (and cost).

Legal Principle:

The indemnity arises not as a statutory right but as a principle of fairness and equity, ensuring no single promoter unfairly bears the entire burden.

Example:
If Promoter A pays damages for a misstatement in the prospectus, they can sue Promoters B and C to recover their fair share of the liability.

2. Right to Recover Genuine Preliminary Expenditures: Show Me the Receipts!

Nature of the Right:

Promoters are entitled to reimbursement for valid preliminary expenses incurred during the formation of the company. These expenses may include:

• Advertising Costs: For publicizing the company.
• Solicitors’ Fees: For drafting legal documents.
• Surveyors’ Fees: For valuing assets or land.

Limitations:

• This right is not contractual — it is subject to the discretion of the company’s board of directors.
• To claim expenses, vouchers and documentation must be provided as proof.

Academic Perspective:

The right is based on the principle of restitution, ensuring the promoter is not unfairly out of pocket for genuine expenditures. However, companies often scrutinize claims to prevent promoters from sneaking in personal costs (e.g., luxury dinners labeled as “team-building meetings”).

3. Right to Remuneration: Pay Me (Maybe)

General Rule:

Promoters have no inherent contractual right to remuneration from the company unless:

1. A specific agreement exists between the promoter and the company.
2. The company’s articles authorize directors to pay promoters for their services.

Practical Reality:

In many cases, promoters themselves become directors after incorporation, thereby controlling the decision to award remuneration. While this may seem self-serving, it’s a common practice.

Example:
If the company’s articles allow directors to pay promoters ₹5,00,000 for their services, and the promoters happen to be directors, they can (ethically) approve their remuneration.

Limitations:

• The company’s directors must exercise this power judiciously.
• Promoters cannot sue the company for remuneration unless there’s a contractual obligation.

Key Considerations in Promoters’ Privileges

1. Discretionary Nature: Most privileges are subject to the company’s discretion, emphasizing the non-contractual nature of promoters’ entitlements.
2. Good Faith: Promoters are expected to act in the company’s best interest, even when claiming privileges.
3. Documented Proof: Claims for preliminary expenses must be backed by accurate documentation.
4. Equity and Accountability: The right to indemnity ensures fairness among co-promoters in sharing liabilities.

Humorous Side Note:

Being a promoter is like being the producer of a movie. You scout locations (survey expenses), run ad campaigns (publicity costs), and assemble the cast (board of directors). But if the film flops (company fails) or the director overspends, you might end up splitting the blame and bill with your fellow producers.