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“Promoter would be personally liable for the preliminary contracts, if they are not ratified by the company after incorporation. Analyse the statement.

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Promotion: 

Promotion is the first stage in the formation of a company. The identification of business opportunities, analysis of its prospects and initiating steps to form a joint stock company is called promotion. The person who undertakes to form a company is called promoter.

Functions of a Promoter: 

1. Identification of business opportunity: 

The first and foremost activity of a promoter is to identify a business opportunity.

2. Feasibility studies: 

After identifying a business opportunity, the promoters undertake some feasibility studies to determine the viability and profitability of the proposed activity. 

  • Technical feasibility – To determine whether the raw materials or technology is easily available 
  • Financial feasibility – To determine the total estimated cost of the project
  • Economic feasibility – To determine the I profitability of the proposed project

3. Name approval: 

After selecting the name of company the promoters submit an application to the Registrar of companies for its approval. The selected name is not the same or identical to an existing company. 

4. Fixing up signatories to the Memorandum of Association: 

Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.

5. Appointment of professional: 

Promoters appoint merchant bankers, auditors etc. to assist them in the preparation of necessary documents. 

6. Preparation of necessary documents: 

The promoters prepare certain legal documents which are to be submitted to the Registrar of companies. 

They are

  • Memorandum of Association 
  • Articles of Association, 
  • Consent of proposed Directors 
  • Agreement, if any, with proposed managing or whole time director 
  • Statutory declaration

Position of Promoters: 

The promoter is neither an agent nor a trustee of the company. The promoter stands in the fiduciary relationship with the company. He should not make any secret profits out of the dealings. Any, such gains are to be disclosed. The promoter must act honestly, in good faith and in the best interest of the company. 

The promoter is personally liable for all the preliminary contracts with the other parties before incorporation. The promoter is also liable for any omission of facts or false statements in the prospectus.

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