chapter 2 Flashcards
Who is a promoter
- Before a company can be formed, there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation
- A promoter conceives an idea for the setting-up a business.
- He makes preliminary investigations and ensures about the future prospects of the business.
- He brings together various persons who agree to associate with him and share the business responsibilities.
- He prepares various documents and gets the company incorporated.
- He raises the required finances and gets the company going.
- Normally they are the first registered directors
Promoters – Companies Act 2016
(a) his consent to act as a promoter or for his appointment as director, as the case may be; and
(b) that he is not disqualified under the 2016 Act to act as a promoter or a director, as the case may be.
Duration of being a promoter
Erlanger v new Sombrero Phosphate Co (1878), a promoter may continue to be a promoter even after the company has been incorporated, for the purpose of procuring capital for the company.
In other words a promoter’s duties may well exist after even the board of directors have been appointed.
Thus, when the appointment of a promoter ceases is a question of fact.
Relationship between promoters and company
- Promoters owe fiduciary duties towards the company, not to the individual members of the company.
- If the promoter is in breach of his fiduciary duties, it is the company who may take legal action against the promoter.
- Promoters can be made liable for acts engaged in on behalf of the unformed company.
Promoter’s duties (A promoter owes fiduciary duties towards the company:)
Erlanger v New Sombrero Phosphate Co (1878), Lord Cairs: Promoters stand in a fiduciary position. The 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.
Fiduciary Duties
- Not to make a secret profit at the expense of the company;
- A duty to account to the company for the benefit for any property he might purchase with the intent of selling the property to Company for a profit later;
- A duty not to defraud the Company by active concealment of any affairs relating to the company;
- A duty not to disclose confidential information to outsiders;
- A duty not to hide his personal interests through a nominee.
Promoters – avoiding liability
Erlanger’s case illustrates the fiduciary nature of the promoter’s role, which puts him very much in the same position of quasi-trusteeship as a company director. A key feature of this status is that such a fiduciary must not make a secret profit. The promoter can avoid contravening this requirement in a number of ways.
By making a proper disclosure of any profit he has made (thus removing any element of secrecy) to either an independent board of directors or to the existing or prospective members of the company or
In the case of a public company, compliance with the rules on prospectus disclosure is sufficient.
Gluckstein v Barnes; Re Olympia Ltd, ex parte Gluckstein, HL 1900
Promoters of a company were under a duty to make explicit declarations of the profits already made
Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam & ORS (no. 2) [1998] 1 MLJ 110.
Promoters have a legal duty not to make a secret profit out of the promotion of the Company without the Company’s consent and also to disclose to the Company any interests the promoters have in any transaction proposed to be entered into by the Company”
So a promoter has to disclose any transaction entered, either by
disclosing in the constitution of the company; (Section 33(1) CA 2016 provides that the constitution of the company binds the company and its members).
by communicating to an independent Board of Directors;
By communicating to the existing and intended members of the company.
Consequences(Failure to disclose, the company has options)
Company may rescind the contract (Erlanger v New Sombrero Phosphate), and
In certain circumstances, company may be able to claim the secret profit obtained by the promoter (Gluckstein v Barnes),
Company may file suit for damages for the breach of fiduciary duties (Re Leeds & Hanley Theater)
Remedies - RESCISSION
If the Company has entered into a Contract with the promoter and it is later discovered there had been no transparency, the Company is entitled to rescind the contract. It is irrelevant that the promoter has made no profit from the contract. S17 Contracts Act states that non-disclosure amounts to a fraud and by Sect 19 the Contract becomes voidable.
Under Sect 34(1) Specific Relief Act 1950 the Company can apply to the Court to rescind the contract. Once the contract is rescinded, restitution has to take place. This is where the Company has to return whatever it received from the Promoter and the Promoter has to return all monies received from the company
ERLANGER v NEW SOMBRERO PHOSPHATE CO. (1878)
Remedies - RECOVERY OF THE SECRET PROFIT
Gluckstein v Barnes (1900)
The Court held that they were in breach of their duties as promoters and the Company was entitled to recover the profit from them. The Company can recover the secret profit even though they chose not to rescind the contract. The liability of the promoters is “joint or several”. A Promoter who is found liable may recover contributions from the other promoters
Damages for breach of fiduciary duty
In the case of Re Leeds & Hanley Theatres Of Varieties Ltd (1902)
The Court ordered the Promoter to pay damages to the Company. The Court held that the Promoters had fraudulently omitted to disclose the profit made by them on the sale of the property to the Company. The amount of damages was equivalent to the amount of profit made by the promoters.
Consequences
If the company elects to affirm the contract, company may have a cause of action against promoters for:
- deceit,
- fraud
- negligent misrepresentation
