KSLU Solved Question Papers
Company Law
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 6
2015 Dec Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 6 Company Law 2015 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2015 Dec examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2015 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1Who is a promoter ? Discuss the legal position of a promoter under the Act.[16]
Answer
For full marks, cover: Part A, who a promoter is (Twycross v. Grant; section 2(69) of the Companies Act 2013; the professional-capacity exclusion) and his legal position (a fiduciary, neither agent nor trustee); Part B, his "powers": a promoter has no statutory powers, so explain what he may lawfully do in forming the company, his rights to remuneration and expenses, and the limits the fiduciary duty sets (Erlanger); Part C, his liabilities arranged by the stage of promotion: before incorporation (personal liability on contracts, Kelner v. Baxter), at incorporation (section 7(5) to (7)), on the prospectus (sections 34 to 36), and afterwards (account and rescission, sections 300, 339, 340, 447); a table.
Part A: who is a promoter
The courts' description. A promoter is the person who brings a company into being. In Twycross v. Grant, (1877) 2 CPD 469, Cockburn CJ described him as "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose". Whether a person is a promoter is a question of fact, judged by what he does.
The statutory definition. Section 2(69) treats as a promoter a person who:
- is named as a promoter in a prospectus, or identified as one by the company in its annual return;
- has control over the company's affairs, directly or indirectly, as a shareholder, director or otherwise; or
- is a person on whose advice, directions or instructions the Board is accustomed to act.
A person acting merely in a professional capacity, such as the advocate or chartered accountant engaged to prepare the documents, is not a promoter.
His legal position. A promoter is not the company's agent, because it does not exist while he works for it. He is not its trustee, because he holds nothing for it in the strict sense. But equity treats him as a fiduciary towards the company he is forming. That governs both what he may do and what he must answer for.
Part B: his "powers"
The Act gives a promoter no powers. He is not an officer and holds no office. What the question calls his powers is better understood as what he may lawfully do, and the rights he may claim, in forming the company.
1. What he may do.
- Decide on the business and the type of company, and choose its name, objects and capital.
- Find the subscribers and the first directors, and obtain their consents.
- Arrange for the memorandum and articles to be drafted, and file the documents for incorporation under section 7.
- Negotiate for property, premises, finance and contracts the company will need.
- Arrange the first issue of shares, including any underwriting and the prospectus.
2. His rights.
- Remuneration. A promoter has no right to be paid for his work unless the company, after incorporation, contracts to pay him. A clause in the articles is not enough by itself. In Eley v. Positive Government Security Life Assurance Co., (1876) 1 Ex D 88, the articles named the man who drafted them as the company's solicitor for life. The Court of Appeal held that the articles made no contract with him as solicitor. He could not sue when the company stopped employing him. When a promoter is paid, in cash, shares or commission, the payment must be disclosed.
- Preliminary expenses. The company is not legally bound to repay what he spent before it existed, such as registration fees. It cannot ratify a contract made before its birth. In practice the articles often authorise the directors to pay these expenses.
3. The limits on what he may do. Every step is subject to his fiduciary duty. He may sell his own property to the company, but only with full disclosure to an independent board or to the members. He may make a profit, but not a secret one.
Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218, is the classic example. A syndicate led by Erlanger bought the lease of a phosphate island for 55,000 pounds. It formed a company, named its own nominees as directors, and sold the lease to the company for 110,000 pounds. It did not tell the members of its profit. The House of Lords held that promoters stand in a fiduciary position and must disclose such an interest to an independent board or the members. The company was entitled to rescind.
Part C: his liabilities, stage by stage
Stage 1: before incorporation.
A promoter who contracts for the company before it exists is personally liable on the contract, because the company cannot ratify it. In Kelner v. Baxter, (1866) LR 2 CP 174, promoters agreed to buy wine "on behalf of" a hotel company not yet registered. The company used the wine and failed before paying, and the promoters were held personally liable. In India, the company may take over such a contract under sections 15(h) and 19(e) of the Specific Relief Act 1963. It must accept the contract after incorporation and tell the other party.
Stage 2: at incorporation.
- Filing false or incorrect particulars, or suppressing material information, in the registration documents makes the person liable for fraud under section 447 (section 7(5)).
- If the company was incorporated by false information or fraud, the promoters are named as liable under section 447 (section 7(6)).
- The Tribunal may then regulate the company's management, make the members' liability unlimited, strike it off or wind it up (section 7(7)).
Stage 3: on the prospectus.
- Civil liability (section 35). A promoter must compensate every subscriber who lost money relying on a misleading statement or omission in the prospectus. He escapes only on the defences in section 35(2).
- Unlimited liability. If the prospectus was issued to defraud, he is personally liable without any limit (section 35(3)).
- Criminal liability (sections 34 and 36). Authorising a misleading prospectus, or inducing investment by false or deceptive statements, is punishable as fraud under section 447.
Stage 4: after incorporation.
- To account. The company may make him hand over a secret profit, or rescind the contract in which he made it, as in Erlanger.
- Public examination (section 300). In a winding up, if the liquidator reports fraud in the company's promotion or formation, the Tribunal may order him to be examined on oath.
- Fraudulent conduct (section 339). If he was knowingly a party to carrying on business to defraud creditors, he may be made personally liable, without limit, for the company's debts.
- Misfeasance (section 340). A person who took part in the promotion may have misapplied the company's money or property. He may be ordered to repay it with interest, or to compensate the company.
An illustration
A promoter buys a factory site for ten lakh rupees, forms a company, and sells the site to it for fifteen lakh rupees. The first directors are his relatives, and the prospectus does not mention his profit. Investors subscribe on the strength of the prospectus. The company may rescind the sale or recover the five lakh rupees as a secret profit. Investors who lost money may claim compensation from him under section 35. If the concealment was meant to deceive, his liability is unlimited, and he may be prosecuted under sections 34 and 447.
Liabilities at a glance
| Stage | Liability | Source |
|---|---|---|
| Before incorporation | Personal liability on contracts | Kelner v. Baxter |
| At incorporation | False filings; incorporation by fraud | Section 7(5) to (7), 447 |
| Prospectus | Compensation; unlimited for fraud; punishment | Sections 34 to 36 |
| After incorporation | Account, rescission, misfeasance, examination | Erlanger; sections 300, 339, 340 |
Conclusion. A promoter is the person who forms the company, described in Twycross v. Grant and defined in section 2(69). He has no statutory powers. He may take the steps needed to form the company, and claim pay only if the company agrees (Eley). He acts always as a fiduciary who must disclose his interest and make no secret profit (Erlanger). His liabilities follow each stage of promotion. He is personally bound on pre-incorporation contracts (Kelner v. Baxter) and liable for false incorporation papers and a misleading prospectus. After incorporation he must account for secret profits and answer for fraud and misfeasance.
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