In the eyes of law, a promoter is not an agent or a trustee of the company. He stands in a fiduciary relationship with the company he is promoting. Fiduciary relationship is the relationship based on trust and faith. The promoter must ac honestly and sincerely in the best interest of the company. He must not make secret gains out of dealings on behalf of the company. If there is any gain out of dealings, it must be disclosed.

The promoter is not an agent of the company because a person cannot be agent of a principal (company) who is yet to come into existence. The company will come into existence only after it has been incorporated. This means promoters will remain personally liable for preliminary contracts even after incorporation of the company.

The legal obligations of a promoter are as under:

(i)    To exercise due care and intelligence in the work of promotion.

(ii)    To act without deceit, misfeasance or breach of trust towards the company.

(iii)    To disclose full details of the nature and extent of money taken by him in the process of promotion.

(iv)    To deposit all money received on behalf of the company in the company’s bank account.

(v)    To refrain from selling his own property to the company at unreasonably high prices.

(vi)    To surrender any profits made during promotion of the company.

(vii)    To be personally liable for preliminary contracts till they are approved by the company.

(viii)    To pay compensation to those who have invested money in the company on the basis of untrue statements or misrepresentation in the prospectus.

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