Page 144 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 8: Formation of Company

Notes

How to make Secret Profi t?
A
promoter is not forbidden to make profit but to make secret profi t. 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 fi rst
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
suffi cient.
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.’
Liabilities of a promoter are:
1. For non-disclosure. In case a promoter fails to make full disclosure at the time the contract
was made, the company may either: (i) rescind the contract and recover the purchase

price where he sold his own property to the company, or (ii) recover the profit made, even
though rescission is not claimed or is impossible, or (iii) claim damages for breach of his

fiduciary duty. The measure of damages will be the difference between the market value of
the property and the contract price.
2. Under the Companies Act. (i) Promoter is liable to the original allottee of shares for the
mis-statements contained in the prospectus. It is clear that his liability does not extend to
subsequent allottees. He may also be imprisoned for a term which may extend to 2 years or

may be punished with fine upto ` 50,000 for such untrue statements in the prospectus (Ss.62
and 63). (ii) In the course of winding up of the company, on an application made by offi cial
Liquidator, the court may make a promoter liable for misfeasance or breach of trust (s.543).
The court may also order for the public examination of the promoter (Ss.478 and 519).
Where there are more than one promoter, they are jointly and severally liable and if one of them
is sued and pays damages, he is entitled to claim contribution from other or others. However, the
death of a promoter does not relieve his estate from liability arising out of abuse of his fi duciary
position.

8.1.2 Registration (Ss. 12 and 33)

Section 12 states that, “any seven or more persons or where the company to be formed will be a
private company, two or more persons, associated for any lawful purpose may, by subscribing
their names to a memorandum of association and otherwise complying with the requirements
of this Act in respect of registration form an incorporated company, with or without limited

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