Meaning of a Promoter:

The idea of carrying on a business which can be profitably undertaken

is conceived either by a person or by a group of persons who are called
promoters. After the idea is conceived, the promoters make detailed
investigations to find out the weaknesses and strong points of the idea,
to determine the amount of capital required and to estimate the
operating expenses and probable income.

The term ‘promoter’ is a term of business and not of law. It has not
been defined anywhere in the Act, but a number of judicial decisions
have attempted to explain it.

As per Section 2(69) of Companies Act, 2013 the term Promoters is defined as:- “Promoter”

means a person— (a) who has been named as such in a prospectus or is identified by the

Company in the annual return referred to in section 92; or (b) who has control over the affairs of

the Company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in

accordance with whose advice, directions or instructions the Board of Directors of the Company

is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is

acting merely in a professional capacity

According to Palmer, “Company promoter is a person who originates a

scheme for the formation of the company, has the memorandum and
the articles prepared, executed and registered and finds the first
directors, settles the terms of preliminary contracts and prospectus (if
any) and makes arrangement for advertising and circulating the
prospectus and placing the capital.”

Legal Position of a Promoter:

The promoter is neither a trustee nor an agent of the company because
there is no company yet in existence. The correct way to describe his
legal position is that he stands in a fiduciary position towards the
company about to be formed.

Lord Cairns has correctly stated the position of promoter in Erlanger

V. New Semberero Phophate Co. “The promoters of a company stand
undoubtedly in a fiduciary position. They have in their hands the
creation and moulding of the company. They have the power of
defining how and when and in what shape and under what
supervision, it shall start into existence and begin to act as a trading
corporation.”

From the fiduciary position of promoters, the two important

results follow:
(1) A promoter cannot be allowed to make any secret profits. If it is
found that in any particular transaction of the company, he has
obtained a secret profit for himself, he will be bound to refund the
same to the company.

(2) The promoter is not allowed to derive a profit from the sale of his
own property to the company unless all material facts are disclosed. If
he contracts to sell his own property to the company without making a
full disclosure, the company may either repudiate/rescind the sale or
affirm the contract and recover the profit made out of it by the
promoter.

A promoter who wishes to sell his own property to the company must
make a full disclosure of his interest.

The disclosure may be made:

(i) To an independent Board of Directors, or

(ii) In the articles of association of the company, or

(iii) In the prospectus, or

(iv) To the existing and intended shareholders directly.

If the promoter fails to discharge the obligation demanded of his

fiduciary position the company may rescind the contract or may in the
alternative choose to take advantage of the contract and sue the
promoter for damages for breach of his duty to the company.

Secret profits on the sale of property can be recovered from a

promoter only when the property was bought and sold to the company
while he was acting as a promoter.

Rights of Promoter:
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company,
one promoter can claim against another promoter for the
compensation and damages paid by him. Promoters are severally and
jointly liable for any untrue statement given in the prospectus and for
the secret profits.

2. Right to receive the legitimate preliminary expenses:

A promoter is entitled to receive the legitimate preliminary expenses
which he has incurred in the process of formation of the company such
as cost of advertisement, fee of solicitor and surveyors. The right to
receive the preliminary expenses is not a contractual right. It depends
upon the discretion of the directors of the company. The claim for
expenses should be supported by vouchers.

3. Right to receive the remuneration:

A promoter has no right against the company for his remuneration
unless there is a contract to that effect. In some cases, articles of the
company provide for the directors paying a specified amount to
promoters for their services but this does not give the promoters any
contractual right to sue the company. This is simply an authority
vested in the directors of the company.

However, the promoters are usually the directors, so that in practice

the promoters will receive their remuneration.

The remuneration may be paid in any of the following ways:

(i) A commission may be paid to the promoter on the purchase price of
the business or property taken over by the company through him.

(ii) The promoters may be granted by the company a lumpsum

amount.
(iii) The promoters may be given fully or partly paid shares in
consideration of their services rendered.

(iv) The promoter may be given a commission at a fixed rate on the

shares sold.

(v) The promoter may purchase the business or other property and sell
the same to the company at an inflated price. He must disclose this
fact.

(vi) The promoters may take an option to subscribe within a fixed

period for a certain portion of the company’s unissued shares at par.

Whatever be the nature of remuneration, it must be disclosed in the

prospectus if paid within the preceding two years from the date of
prospectus.

Duties of Promoter:
The duties of promoters are as follows:
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any
secret profit, it is his duty to disclose all the money secretly obtained
by way of profit. He is empowered to deduct the reasonable expenses
incurred by him.

2. To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter
contracts to sell the company a property without making a full
disclosure, and the property was acquired by him at a time when he
stood in a fiduciary position towards the company, the company may
either repudiate the sale or affirm the contract and recover the profit
made out of it by the promoters.

3. The promoter must make good to the company what he

has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is
the duty of the promoter to make good to the company what he has
obtained as trustee and not what he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement
resulting him profit by the promotion of the company.

5. Duty of promoter against the future allottees:

When it is said the promoters stand in a fiduciary position towards the
company then it does not mean that they stand in such relation only to
the company or to the signatories of memorandums of company and
they will also stand in this relation to the future allottees of the shares.

Liabilities of Promoter:
The liabilities of promoters are given below:
1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary
position to the company. The promoter is liable to account to the
company for all secret profits made by him without full disclosure to
the company. The company may adopt any one of the following two
courses if the promoter fails to disclose the profit.
(i)The company can sue the promoter for an amount of profit and
recover the same with interest.

(ii) The company can rescind the contract and can recover the money
paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to every
person who subscribes for any share or debentures on the faith of the
prospectus for any loss or damage sustained by reason of any untrue
statement included in it. Sec. on 62 also provides certain grounds on
which a promoter can avoid his liability. Similarly Sec. 63 provides for
criminal liability for mis-statement in the prospectus and a promoter
may also become liable under this section.

The promoter may also be imprisoned for a term which may extend to
two years or may be punished with the fine upto Rs. 5,000 for untrue
statement in the prospectus. (Sec. 63).

3. Personal liability:
The promoter is personally liable for all contracts made by him on
behalf of the company until the contracts have been discharged or the
company takes over the liability of the promoter.

The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

In the course of winding up of the company, on an application made
by the official liquidator, the court may make a promoter liable for
misfeasance or breach of trust. (Sec. 543).
Further where fraud has been alleged by the liquidator against a
promoter, the court may order for his public examination. (Sec. 478).

Preliminary Contracts/Pre-Incorporation Contracts Made

by the Promoters:
Preliminary contracts are those contracts which are made by the
promoters with different parties on behalf of the company yet to be
incorporated. Such contracts are generally entered into by promoters
to acquire some property or right for and on behalf of the company to
be formed.

The promoters enter into preliminary contracts, generally as agents or

trustees of the company. Such contracts are not legally binding on the
company because two consenting parties are necessary to a contract
whereas the company is nonentity before incorporation

Jet Airways Case Study:

Jet Airways is the airline, which is based in Mumbai, India. Jet
Airways is supposed to be second largest international airline
in India after Air India and the largest airline in the country
which organizes inner flights.
The airline’s planes make more than 400 flights every day in 64
airports all over the world. In 2008 Jet Airways was called to
be the second largest airline which organizes long-term flies
after Singapore Airlines.According to the polls the company is
the seventh most popular airline in the world. In addition, the
company is supposed to have the most developed system of
catering. Due to the fact that Jet Airways organized all kinds
of flights about India (even the low-cost flies) the company is
supposed to be the largest and most popular airline of India.
Nevertheless, the company is in the harsh competition with
other airlines of India: Kingfisher Airlines, SpiceJet and IndiGo
Airlines.

In 2008 in order to reduce the competition and ‘distribute’

clients between one another Jet Airways and Kingfisher
Airlines started to cooperate closely. The companies share the
fuel, divide the international flights, share the staff, monitor
the safety of their services and support clients together. Such
an alliance is beneficial for both companies, so the decision
was accepted rapidly.Jet Airways is quite a young company,
because it was founded only in 1993 and started like a small
air-taxi service. With the run of time and the change of the
owners Jet Airways was developed greatly and the quality and
quantity of flights increased.
Bad business decisions
In 2007 Jet Airways incurred debt to fund its expansion. It bought debt-ridden
Air Sahara and rebranded it as its low-cost subsidiary Jet Lite. Unfortunately,
the burden of the debt coincided with the 2008 Financial crisis. Demand fell
and oil prices surged.
In 2013 Jet Airways started a fare war with low-cost carriers IndiGo and
SpiceJet. The airline’s market value dropped and the company started
posting losses.  To make things worse, this was combined with high fuel
prices and slow domestic growth.
In 2019 a consortium of 26 banks led by SBI approached NCLT to recover
dues.
The state decided to help prepare a rescue plan to save over 22000 jobs.
There were political reasons as well. Prime Minister Modi’s pro-business
image was threatened. He couldn’t afford for a prominent company to go
bust under his watch and leave so many people unemployed.
 
There were two options for Jet Airways:

1. An investment: Etihad Airways and Hinduja Group were announced

as potential investors. They could buy a (larger) share in Jet Airways
but would also have to take on its debt. However, the potential
candidates wanted other investors to join in too. They also expected
the banks to write off the loans. A very unlikely scenario.
2. Shutting down: In this scenario Jet Airways no longer operates as an
air carrier. Its aircraft are to be sold. Its international landing slots are
to be reassigned to other airlines. At least temporarily, until the
company is miraculously revived in the eleventh hour.

 
Initially, Naresh Goyal refused to step down which dissuaded many potential
investors to come to the rescue. In March 2019 the company founder (who
held a 51% stake in the airline) and his wife finally withdrew from the board
of directors. But it was too late.
In April Jet Airways made its final flight. Many passengers remained stranded
at international airports. Public owned Air India offered rescue fares to help
travelers with cancelled Jet Airways flights get home.
In June the insolvency procedure was started. Soon, the Economic Times
reported that Jet Airways’ shares had plunged 13%, hitting an all-time low.

Jet Airways bankruptcy proceedings

and claims
It has been announced that the company has 3 (instead of the usual 6)
months to complete the insolvency process as the matter is of national
importance.
Jet Airways published Guidance to refund claimants on its website. The
appointed Resolution Professional invited creditors to submit outstanding
claims. Conditions of refund claims were defined as depending on:

1. The claimant’s contract with their travel agent

2. The travel agent’s contract with IATA
3. Whether the ticket was booked directly from the JA website via cash or
credit card or through a JA ticket counter. 

Claimants were advised to consult their legal counsel when making an

independent claim so as to avoid double filings for the same refund. In other
words, the company wanted to avoid assessing/paying a refund twice - once
per individual claims and a second time as per a claim submitted by a travel
agency or a credit card company.
Claimants were subdivided into three categories: Employees, Ticket refund
and Operational creditors.
In June, the Resolution Professional announced receiving claims totaling
close to Rs 25000 crore. Claims were verified and some rejected, while
others - approved. 
Currently, Jet Airways’ debt is estimated to exceed 5 billion USD.

Similar Cases
It is not the first time that an Airline company has fallen from grace. Many
companies before Jet Airways have seen similar fate. Some of them are:

 Kingfisher Airlines
 Air Deccan    
 Air India Cargo
 Indian Airlines
 Sahara Airlines

The common link in all of these cases

The common link in all of the above examples was that they all were, at some
point, involved in a merger.

Kingfisher Airlines bought Air Deccan. Kingfisher was a full-service airline

whereas Air Deccan was a low-cost airline. When Kingfisher bought Air
Deccan, they incorporated some changes in Air Deccan’s fleet and we all
know what happened after that. Both the companies faced a downfall.

Before Air India and Indian Airlines merged, both the companies were
doing reasonably good. After coming together, the crown jewels of Indian
airspace were and continue to remain in the red. Air India has a debt north of
Rs 50,000 crore and nothing positive has come out of the government's efforts
to revive the national carrier.

Jet Airways merged with Sahara Airlines and Jet rebranded Sahara as “Jet
Lite”. Sahara Airlines has been lost in oblivion and Jet Airways is heading on
the same path.

Therefore, it won't be wrong to say that mergers and acquisitions in case of

airlines is a risky bet. A successful airline establishes a unique identity of its
own, and meddling with its brand and presence usually ends on a negative
note.

Reasons for Jet Airways' Failure

There are many reasons for the failure of Jet Airways. Here are just a few of
them:

1. Merger: Merging Sahara Airlines with Jet Airways was a mistake on Jet
Airways's part. Sahara was acquired by Jet Airways for $500 million which
was way above what the airline was actually worth.

2. Rebranding Sahara Airlines: Jet Airways renamed Sahara Airways as

JetLite. Sahara at the time was a powerhouse with its name on every Indian's
tongue. The rebranding cost Jet Airways flyers who were attracted towards
the Sahara brand image as these passengers couldn't resonate with JetLite.
3. Mismanagement: Every company and organization rests on the abilities of
its management board; there are no second opinions to this school of thought.
The founder of Jet Airways, Naresh Goyal decided to become a one-man
army for Jet Airways and did not hire a sound management committee to
assist him in running the airline. Insiders often talk about his poor financial
acumen. He relied on a single management team for handling all the
operations related to Jet. Understanding that specialized teams are needed to
run different departments is no rocket science. And when you acquire one
more airline, you can't rely on your existing management board that's already
burdened to pick on additional responsibilities!

4. Full-service airline: Full service airlines offer passengers the choice of

economy or business class travel and on some flights premium economy and
first class. The company was operating as a full-service airline. Operating in
India as a full-service airline is not an easy task. One needs formidable
financial support and customer relationships. Catering to the wealthy, the
middle class, and the lower sections of the Indian society requires strategy
and operational excellence beyond imagination. That is why most of the
companies focus on the middle-class segment and keep the prices as low as
possible. Jet Airways was biting off more than it could chew.

5. Drowning in Debts: Jet Airways was never good with money. It kept on
incurring debts and spending more than its revenue. The employees were
paid lavishly when compared to the industry standards. For the sake of
providing comfort and luxury, the Naresh Goyal backed airline compromised
with finances.

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Jet saga: All board members are equally liable for the crisis, say lawyers

By Dev Chatterjee | Mumbai | Last Updated at April 23 2019 02:48 IST

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With several independent directors quitting Jet Airways just before the airline shut
its operations, corporate lawyers said all board members are equally liable for the
crisis.

This is because they failed to put a proper risk management system in place.

In the last one year, the airline’s independent directors – Vikram Mehta, Rajshree
Pathy, and Ranjan Mathai – have resigned from the board, citing either lack of time
or not giving any specific reason.

Mehta, according to the annual report of Jet Airways, was heading the risk
management committee of the airline which did not meet a single time in fiscal
2017-2018.

Now, former Competition Commission of India (CCI) chairman Ashok Chawla and
former banker Sharad Sharma continue to remain on the board of Jet as
independent directors. The promoter-directors led by its chairman Naresh Goyal and
his wife Anita have already quit the airline. On Monday, Nasim Zaidi, also quit from
the board as non- executive, non-independent director. Another independent
director, Srinivasan Vishvanathan (head of the audit committee whose term expired
on August 9), ceased to be member of the board since conclusion of the annual
general meeting of shareholders last year.

“The independent directors have a fiduciary role to keep shareholders informed

about the status of the airline and whether proper risk management system was in
place. Just by resigning, they cannot escape liability,” said Shriram Subramanian,
founder and managing director, InGovern, a proxy advisory firm.

The role of independent directors has come into sharp focus when the Centre sacked
the entire IL&FS board, including the independent directors, in September last year
after the infrastructure company failed to repay its debt worth Rs 94,000 crore. The
Serious Fraud Investigation Office (SFIO) is looking into the role of IL&FS independent
directors in the financial meltdown of the infrastructure financier.

Corporate lawyers said the independent directors will have to answer questions
considering they were on the board and were supposed to safeguarding the interest
of all stakeholders, particularly the minority shareholders. In the last one year, Jet
has lost 76 per cent of its value and since November last year, it lost half of its
market value. As on today, Jet Airways had a market value of Rs 1,756 crore.

Jet saga: All board members are equally liable for the crisis, say lawyers

Lawyers said the action taken by the board on the allegations made by whistle-
blower Arvind Gupta about fund diversion from the airline to its promoter’s private
entities will be keenly watched.

The SFIO is already investigating accounts of the airline following Gupta’s allegations.
Gupta, who was also a whistle-blower in ICICI Bank’s former chief executive officer
(CEO) and managing director (MD) Chanda Kochhar and Videocon controversy case,
said the lenders did not aggressively pursue his complaint in the Jet Airways matter.

In a letter to the Prime Minister’s Office and the finance ministry, Gupta sought
forensic audit for the last 10 years into the airline’s books. But he said the banks
investigated only part of the allegations by audit firm, EY. EY, on the other hand, has
not given any clean chit to the airline and not conducted a full scale forensic audit,
said a source close to the development.
“The banks will now have to write off the entire dues to Jet Airways worth Rs 8,500
crore. Had the lenders taken action on my complaint earlier, the closure of the airline
could have been avoided,” Gupta said.