Liabilities of Promoters of a Company - Indian Companies Act, 1956

A Promoter of a company is subject to certain liabilities under the Indian Companies Act, 1956. They are:

1. Matters to be set out in the prospectus are mentioned in Section 56 of the Act. The promoter may be held liable for non compliance of the provision of this section.

2. The Promoter is liable for any untrue statement in the prospectus to any person who is subscribed shares or debentures of the company and liable to pay damage.

Any false statement in the prospectus may lead the following consequences:
(a) The Allotment of shares or debentures may be set aside;
(b) The promoter may sue for damages and also for compensation
(c) Criminal proceedings may instituted against the promoter and may incur criminal liability.
(d) If it appears that the promoter has been guilty of any offence punishable under Section 542 (whether he has been convicted or not), the court may restrain the promoter from taking part in the management of the company for a period of 5 years.

3. Section 63 of Indian Companies Act, 1956 makes a Promoter criminally liable for the issue of prospectus containing false or deceptive statements. The punishment may be for a term which may extend to two years or with fine which may extend to Rs. 5,000/- or with both.

4. The promoter may however escape liability if he proves that he had reasonable ground to believe that the statement was true or the statement was immaterial from the point of view of attracting the investors.

5. If the company is being wound up by the order of the court and the liquidators report alleges any fraud in the promotion and formation of the company, the promoters shall be liable to public examination like any other officer or director of the company.

6. If the promoter retained any property of the company, he can be sued by the company for breach of duty or deceit, as the case may be

7. In the event of death of promoters, the company may recover damages or compensation from the property of the deceased.

The liability of Promoter commences only after they have started functioning as promoter and not for earlier acts. The promoters are liable for only those acts which are purported have been done for the company which they intend to float.