Page 49 - DCOM106_COMPANY_LAW

Company Law

Notes 4.1.1 Promotion

Promotion is a term of wide import denoting the preliminary steps taken for the purpose of
registration and floatation of the company. The persons who assume the task of promotion are
called promoters. The promoter may be an individual, syndicate, association, partnership or
company.

Who is a Promoter?

This term has not been defined under the Act, although the term is used expressly in Ss. 62, 69, 76,
478 and 519.
Perhaps, the true test of whether a person is a promoter is whether he has a desire that the
company be formed and is prepared to take some steps, which may or may not involve other
persons, to implement it. However, persons assisting the promoters by acting in a professional
capacity do not thereby become promoters themselves. The solicitor; who drafts the Articles, or
the accountant who values assets of a business to be purchased, are merely giving professional
assistance to the promoters. If, however, he goes further than this, e.g., by introducing his client
to a person who may be interested in purchasing shares in the proposed company, he would be
regarded as promoter.
Duties and Liabilities of Promoters

Promoters have been described to be in fiduciary relationship (relationship of trust and
confidence) with the company. This relationship of trust and confidence requires the promoter
to make a full disclosure of all material facts relating to the formation of the company. He
should not make any secret profit at the expense of the company he promotes, without the
knowledge and consent of the company and if he does so, the company can compel him to
account for it.
A promoter is not forbidden to make profit but to make secret profit. In Gluckstein v. Barnes, a
Syndicate of persons was formed to buy a property called ‘Olympia’ and re-sell this Olympia to
a company to be formed for the purpose. The Syndicate first bought the debentures of the old
Olympia Company at a discount. Then they bought the company itself for £ 1,40,000. Out of this
money provided by themselves the debentures were repaid in full and a profit of £ 20,000 made
thereon. They promoted a new company and sold Olympia to it for £ 1,80,000. The profit £ 40,000
was revealed in the prospectus but not the profit of £ 20,000.
Held: Profit of £ 20,000 was a secret profit and the promoters of the company were bound to pay
it to the company because the disclosure of this profit by themselves in the capacity of vendors
to themselves in the capacity of directors of the purchasing company was not sufficient.
Disclosure to be made to whom? In Erlanger v. New Sombrera Phosphate Co., it was held that
the disclosure should be made to an independent and competent Board of Directors. This duty is
not discharged if he makes the disclosure to the Board of Directors who are mere nominees of
his own or are in his pay.
Where it is not possible to constitute an independent Board of Directors, the disclosure should
be made to the whole body of persons who are invited to become shareholders and this can be
done through the prospectus. Thus, the promoters have to ensure that ‘the real truth is disclosed
to those who are induced by the promoters to join the company.’

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