DUTIES OF A COMPANY PROMOTER

A company can’t form itself. There must be a person (or persons) who take procedural steps to get the company incorporation or prospectus preparation of business. This person is called PROMOTER.

Section 4 defined (defines) promoter as a person who was a party to the preparation of a prospectus, but doesn’t included by reason of his acting in professional capacity. The solicitors, doctors or accountants who are in the preparation purely on a professional basis would not regarded as PROMOTER.

There are some possibility (possibilities) that promoters will abuse their position to make profit for themselves or having personal advantage at the expenses of company. ( breaching theFD)Therefore, the court has laid down fiduciary duties of promoters as below.

1) Not to make a secret profit.
2) To account to the company.
3) Not to defraud the company.
4) Not to disclose confidential information of the company.
5) A duty not to hide his interest through a nominee.

There are 3 remedies can be sought if the promoters is in breach of his fiduciary duties.

1) Rescission

When the company has entered into a contract with promoter and discover of breach by the promoter, the company has the right to rescind the contract.
In Enlarger’s case, Enlarger was headed a syndicate which bought an island for £55,000. Later Enlarger sold this property to a company for £110,000. All the directors of that company were Enlarger’s nominees. Later, the board of directors was replaced by a new board which brought an action to rescind the contract.

The court held that there had been no adequate disclosure of the sale & the company was entitled to rescind the contract.
However, sometime the rescission may be lost if :-

a) the company aware the breach after affirmed the contract or the company doesn’t rescind the contract within the reasonable time.

b) Restitution in “integrum” meant it is not possible to restore the parties to their original position. For example, if the property has undergone a substantial changes.

c) 3rd parties have acquired some interest (bona fide) in the property.

2) Recovery of secret profit

In the case of Gluckstein v. Barnes, the defendants bought debentures cheaply from a company at the time when company was in bad situation. Later, they bought over the company for £140,000. The debenture then redeemed at full and they made good profit of £20,000. Later they formed another new company and sold this company to new company at profit of £40,000. This profit was disclosed in the prospectus but not the profit of £20,000.

The court held that they were breach of their fiduciary duties as promoters and the company was entitled to recover the secret profit the made, even though the company chooses not to rescind the contract. The liabilities of the promoters are “joint & several”. A promoter who is liable may recover contribution from another promoter.

3) Obtain damages from breach of fiduciary duties

The promoters may pay damages to company for breach of their fiduciary duties apart from rescinding the contract.

Re Leeds & Hanley Theatres of Varieties Ltd., it was held that the promoters had fraudulently omitted to disclose the profit they made from disposed a property to the company. The damages here are the profit on disposal.

Always the fiduciary duties are owed by promoters to company. The court may also reserves some ground for action against the promoter for deceit, misrepresentation or negligence.