COMPANY LAW ON PROMOTORS

1. Company Law
Promoters
ABDULREHAMAN
3RD BBA.LLB
KLESLC,B’LORE

2. LEARNING OUTCOMES
- To be able to identify who is a promoter
in law.
- To be able to identify the duties of a
promoter
- Effect of pre incorporation contracts
entered into by promoters

3. Who is a promoter? –
(a) Definition by the Companies Act
Legal definition under the Companies Act 2013
• Section 2(69) of the Companies Act 2013 defines a promoter:
“in relation to prospectus issued by or in connection with a
corporation, means a promoter of the corporation who was a
party to the preparation of the prospectus or of any relevant
portion thereof; but does not include any person by reason only
for his acting in a professional capacity”

4. (b) Definition by case laws
• Twycross v Grant (1877) defines a promoter as a
purpose who takes the necessary steps towards the
incorporation of a company.
• Tengku Abdullah ibni Sultan Abu Bakar v Mohd
Latiff bin Shah Mohd [1996] A person who starts off
a venture not solely for himself but for others of
whom he may be one

5. • Also in the case of Emma Silver Mining Company v
Lewis as per the decision of Lindley J. (Note in the
same case, the courts have decided that there is no
definite definition of who a promoter is)- as long as
you can find that there is an assumption of duty from
the person he is considered as a promoter.
• Professionals such as solicitors and accountants who
have carried out their duties in their professional
capacity are NOT promoters per the case of Re Great
Wheal Polgooth Co (1883).

6. Liabilities of being a promoter.
1. Section 26 of the Companies Act, 2013 lay down matters to
be stated in a prospectus. A promoter may be held liable for
non-compliance of the provisions of the section.
2. Under section 34 and 35, a promoter may be held liable for
any untrue statement in the prospectus to a person who
subscribes for shares or debentures in the faith of such
prospectus. However, the liability of the promoter in such a
case shall be limited to the original allottee of shares and
would not extend to the subsequent allotters.

7. 3. According to section 300, a promoter may be liable to
examination like any other director or officer of the company if
the court so directs on a liquidator’s report alleging fraud in the
promotion or formation of the company.
4. A company may proceed against a promoter on action for
deceit or breach of duty under section 340, where the promoter
has misapplied or retained any property of the company or is
guilty of misfeasance or breach of trust in relation to the
company.

8. Duration of promotion
• There is no definite answer or time given as to the duration of
promotion and depended on the case to case basis.
• In the case of Erlanger v New Sombrero Phosphate Co, the company
held that a person ceases to be a promoter once the company is
incorporated. This includes the preparation of the documents for
incorporation.
• Contrast it with the case of Re Cape Breton Co where it was decided
that the promoter’s fiduciary duties will continue even after the
incorporation of the company. In this case the promoter bought a
piece of property and had intended to sell it to the company he was
promoting to make a profit.

9. Responsibilities
of Promoters
• Promoters are not agents because the principle is not in
existence. Despite the circumstances, the law imposes on
promoters a duty towards the corporation.
• The promoters have responsibilities to the corporation they
are promoting. Amongst the general duties of a promoter
would include:
a) Recruitment of members of company. Directors, Legal
Advisors, Company Secretary, Shareholder etc
b) Startup company with regards to the buying of assets,
stocks, lease, property and employment.
• The duty that promoters owed to a company is referred to as
a fiduciary duty.

10. What is the nature of duties and
types of duties of a promoter?
• Promoters owe the company a fiduciary duty on the
basis that promoters have direct and indirect control on
the company they are promoting and have the potential
of abusing their position which may not be beneficial to
the company and the shareholders. This position was
supported in the case of Erlanger v New Sombrero
Phosphat Co.
• Fiduciary duties therefore would include the need for
promoters to act with utmost good faith and to not make
secret profits out of their position per the case of
Fairview Schools v Rajaratham (No 2)

11. • The duties of promoters would include the
following:
a) Fiduciary duty not to avoid a conflict of interest
b) Fiduciary duty to not make and take any secret
profits.
c) To avoid the above, the promoter must
therefore adhere to the duty of disclosure of
interest in dealings.

12. a) Fiduciary to avoid a conflict of interest.
- Promoter is expected to act in the interest of the company alone
(fiduciary duty) and must avoid a conflict of interest.
- A conflict of interest arises when the promoter is placed in a
position where the interest of the company may be compromised.
- Erlangerv New Sombrero Phosphate per Lord Cains:
“ Promoters 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”.

13. b) Fiduciary duty not to make and take any secret profit.
- A promoter is under the fiduciary duty not to make any profits also known
as secret profits.
- This was again reiterated in the case of Erlanger v New Sombrero
Phosphate Co. (Would it make a difference if there is disclosure?)
Facts: The case involved the purchase of an island and a company was
formed for the purposes of the said purchase. The first directors of the
company was nominated and the newly established company purchased
the island and have adopted the contract. It was discovered later that the
island was worth less than the purchase price the company has paid and
the promoters have made a significant profit at the expense of the interest
of the company and the shareholders.
Held: The House of Lords decided that the company can claim for
rescission which resulted into the cancellation of the contract.

14. c) Duty of disclosure of interests in dealings.
- It is not the law that promoters cannot profit from
their own promotion.
- What the law seeks to prohibit therefore are profits
of which the promoters have not disclosed. Disclosure
is important to allow the company decide if they
would want to accept of reject the offer.
- A non disclosure by the promoter will result into the
company having the right to cancel the contract

15. - Disclosure here means full, frank and explicit
disclosure. These are material information. Any partial
or half truths will defeat the legal duty per the case of
Gluckstein v Barnes
- Disclosure must be made to a independent board of
directors, if however the disclosure to the board of
directors is impossible, promoters may disclose it to
the shareholders

16. Remedies for Breach of Duty as
Promoter
• If the promoters have breach their duties, the company
has the following remedies:
a) The right to rescind the contract (cancel) and recover
monies
- Recession is available to the company in which the
promoter has not made any disclosure. An example can
be seen in the case of Erlanger v The New Sombrero
Phosphate Co, of which the company was successful in
rescinding a contract for the purchase of an island and
recovered the amount of 11,000 Pound sterlings from
the promoters.

17. b) The right to recover any secret profits obtained by the
company promoter.
- Here the company may choose not to rescind the contracts
but may choose to make the promoter account for the
secret profit he has made at the expense of the company
unless the promoter has already disclosed it to the
company.

18. PRE-INCORPORATION CONTRACTS
• A pre-incorporation contract – a contract
entered into on behalf of a company before its
incorporation.
• Until the company is incorporated, the
company therefore is non existent.
• A non existent company is incapable to enter
into contracts by itself and equally is unable
to hire agents on its accord.

19. • Therefore the issue arises as to the validity of
the pre incorporation contracts and the
liability of those who have entered into a pre
incorporation contract.
Kelner v Baxter (1886)

20. Status under Common Law
Kelner v Baxter (1886)
• Facts: Promoters of a hotel company entered
into a contract on behalf the company for the
purchase of wine. The contract was ratified
(consent to be bound). Wine was consumed
before the payment was made and the
company subsequently went into liquidation.
The issue therefore is who is responsible for
the debts incur in the purchase of the wine.

21. • Held: The company was not inexistence
at the time the contract was entered into
and therefore do not have the right to
enter into contracts. The promoters were
therefore liable.

22. CONCLUSIONS
1. A promoter is personally liable for the pre-incorporation
contract, because at the time of formation of pre -
incorporation contract, the company does not come in
existence, so neither the principle agent relationship exist
not the company become the party.
2. Company is not liable for the pre-incorporation contract
when it come in existence, but under the arrangement of
section 15(h) and 19(e) of the Specific Relief Act 1963,
company can take the rights and liability of promoter.
3. It is also found that promoter is personally liable for the
pre-incorporation contract in American Law, English Law
and Indian Law.