Page 209 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 8.1.1 Who is a Promoter?

Perhaps, the true test of whether a person is a promoter, whether he has a desire that the
company be formed and is prepared to take some steps necessary, therefore, which may or may
not involve other persons and implements his plans to form the company. 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, a
professional 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 a promoter.

Did u know? Sections that uses term promoter
This term has not been defined under the Act, although the term is used expressly in Ss.62,
69, 76, 478 and 519.

8.1.2 Duties and Liabilities of Promoters

(Promoters’ Legal position) Promoters have been described to be in fiduciary relationship
(relationship of trust and confidence) with 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 vs. Barnes (1900) AC 240, a syndicate of persons was formed to buy a property
called ‘Olympia’ and resell it 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 of £ 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 vs New Sombrero Phosphate Co., (39 LT 269), it was
held that the disclosure should be made to an independent and competent Board of directors.
This duty is not discharged if the disclosure is made to the Board of directors who are mere
nominees of the majority shareholders/promoters, 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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Caution The relationship of trust and confidence requires the promoter to make a full
disclosure of all material facts relating to the formation of 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

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